Legislature(2015 - 2016)BILL RAY CENTER 208

06/17/2016 09:00 AM FINANCE


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11:06:52 AM Start
11:07:57 AM SB138
12:37:03 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to a 11:00 a.m. Today --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= SB 128 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Failed to Move Out of Committee
CS FOR SENATE BILL NO. 128(FIN)                                                                                               
                                                                                                                                
     "An  Act   relating  to   the  Alaska   Permanent  Fund                                                                    
     Corporation,  the  earnings  of  the  Alaska  permanent                                                                    
     fund,  and the  earnings reserve  account; relating  to                                                                    
     management of  the budget reserve  fund (art.  IX, sec.                                                                    
     17, Constitution of the State  of Alaska) by the Alaska                                                                    
     Permanent Fund Corporation;  relating to procurement by                                                                    
     the Alaska Permanent Fund  Corporation; relating to the                                                                    
     mental  health trust  fund; relating  to deposits  into                                                                    
     the  dividend  fund;  relating to  the  calculation  of                                                                    
     permanent  fund  dividends;  relating  to  unrestricted                                                                    
     state   revenue   available  for   appropriation;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
11:07:57 AM                                                                                                                   
                                                                                                                                
}Randall Hoffbeck,  Commissioner, Department of  Revenue{ he                                                                    
remarked  that  the  legislation  was  the  cornerstone  for                                                                    
fiscal   stability.  The   administration   had  worked   to                                                                    
accommodate the  interest in hearings and  private meetings.                                                                    
He remarked  that the original proposal  included a one-year                                                                    
guarantee  of  a $1000  Permanent  Fund  Dividend (PFD).  He                                                                    
shared that the  Senate had changed that  guarantee to three                                                                    
years. He  shared that that  the current bill had  two years                                                                    
guaranteed at $1500 and a  formula adjustment that would put                                                                    
the PFD  to $1000 and keep  it stable moving forward  as oil                                                                    
prices and revenues  grow in the Permanent Fund.  He noted a                                                                    
provision that allowed for additional  sharing on the upside                                                                    
with  production  taxes greater  than  $2.3  billion, so  10                                                                    
percent of the  taxes above that amount would  go toward the                                                                    
PFD. He shared that the  bill allowed for greater sharing of                                                                    
the PFD  at higher  oil prices. He  noted that  the original                                                                    
bill had the  PFD as a royalty dividend.  Some believed that                                                                    
the royalty was  too volatile, because of the  low price and                                                                    
declining production  of oil. He  announced that  the Senate                                                                    
had added  a provision that  tied the PFD tied  partially to                                                                    
the (percentage  of market value)  POMV draw,  and partially                                                                    
to  royalties. The  PFD would  then  be close  to $1000  per                                                                    
year.  He  stated  that  the   bill  increased  the  royalty                                                                    
provision to allow for more  certainty in the $1000 zone. He                                                                    
remarked that the legislature had  hoped for flexibility, so                                                                    
the bill was  adjusted to a POMV draw. He  remarked that the                                                                    
draw had a revenue cap that  allowed for a dollar for dollar                                                                    
offset of the  permanent fund draw. The Senate  felt that it                                                                    
limited growth and  opportunity, so that was  adjusted to an                                                                    
80 cents  on the  dollar draw to  allow for  money available                                                                    
for appropriation. The change  added a provision provides an                                                                    
opportunity to turn off the  revenue limits in times of high                                                                    
oil prices  and high oil  production. He announced  that the                                                                    
administration had worked hard  to accommodate as many needs                                                                    
as  possible.  He  assumed  that  everyone  had  made  great                                                                    
efforts to come  to a compromise. He understood  that no one                                                                    
was comfortable with  everything in the bill,  but felt that                                                                    
the  bill  accommodated  as  many   needs  as  possible.  He                                                                    
stressed that the  bill must be passed, because  there was a                                                                    
continued budget deficit.                                                                                                       
                                                                                                                                
Co-Chair Thompson  wanted to clarify  that the bill  was the                                                                    
governor's bill rather than his.                                                                                                
                                                                                                                                
11:14:02 AM                                                                                                                   
                                                                                                                                
Representative Gara  suggested that much  of the bill  was a                                                                    
compromise.  He wondered  about the  commissioner's comments                                                                    
about  the pressure  to  pass  the bill  as  related to  the                                                                    
change in status quo.                                                                                                           
                                                                                                                                
Commissioner Hoffbeck stated that  the bill would spend less                                                                    
than the status quo. The  bill would save about $350 million                                                                    
in the current  year, and stressed that there was  no way to                                                                    
replace that money.                                                                                                             
                                                                                                                                
Representative Gara  asked about  waiting for the  next year                                                                    
to  take  action. He  wondered  about  the ramifications  of                                                                    
waiting to  pass the  bill. He surmised  that the  payout of                                                                    
any bill  in the  following year would  be smaller  than the                                                                    
payout of the current year.                                                                                                     
                                                                                                                                
Commissioner Hoffbeck replied in the affirmative.                                                                               
                                                                                                                                
Representative  Gara asked  about the  revenue limit  in the                                                                    
former version  of the  bill. He  remarked that  the current                                                                    
version  had a  revenue limit.  He stated  that the  current                                                                    
version  of  the bill  outlined  that  every dollar  in  oil                                                                    
revenue resulted in  the loss of ability to use  80 cents of                                                                    
POMV payouts. He felt that it was a strict revenue cap.                                                                         
                                                                                                                                
Commissioner Hoffbeck  agreed, but  asserted that  there was                                                                    
still room for growth.                                                                                                          
                                                                                                                                
Representative Munoz  asked the  commissioner to  comment on                                                                    
the  effect of  the  sustainable draw  with the  substantial                                                                    
withdrawal of $3.2 billion.                                                                                                     
                                                                                                                                
Commissioner  Hoffbeck stated  that the  biggest change  was                                                                    
the payout of the dividend.  The biggest issue that the bill                                                                    
solved  was removing  most of  the  volatility. He  remarked                                                                    
that  the math  did  not matter  between  the two  different                                                                    
reserves.                                                                                                                       
                                                                                                                                
11:20:34 AM                                                                                                                   
                                                                                                                                
Representative  Munoz asked  about the  financial impact  of                                                                    
not investing the CBR.                                                                                                          
                                                                                                                                
Commissioner Hoffbeck  stated that  the 7.25  percent return                                                                    
was $150 million.                                                                                                               
                                                                                                                                
Representative Munoz  surmised that  the $150  million would                                                                    
be lost as a result of not adopting the legislation.                                                                            
                                                                                                                                
Commissioner  Hoffbeck replied  in the  affirmative, because                                                                    
there  would  be a  requirement  to  invest differently.  He                                                                    
stressed that  the bill moved  the management of the  CBR to                                                                    
the  Permanent Fund.  He stated  that Department  of Revenue                                                                    
(DOR)  did  not  have  that flexibility  under  the  current                                                                    
structure.                                                                                                                      
                                                                                                                                
Representative  Edgmon wondered  whether the  governor would                                                                    
veto the  PFD full  amount in the  operating budget,  if the                                                                    
legislature passed the bill.                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck would  not  need to  veto the  budget                                                                    
immediately.  He remarked  that the  bill would  dictate the                                                                    
PFD  payout and  there  would  be excess  funds  in the  PFD                                                                    
account. The question would be  raised the following year to                                                                    
veto the money from the PFD appropriation amount.                                                                               
                                                                                                                                
11:24:05 AM                                                                                                                   
                                                                                                                                
Representative Edgmon  stated that even though  the bill was                                                                    
the  cornerstone of  the  fiscal plan;  he  wondered if  the                                                                    
administration  would come  back  in the  following year  to                                                                    
revisit other items to address the budget deficit.                                                                              
                                                                                                                                
Commissioner Hoffbeck  stated there  would continue to  be a                                                                    
downward  pressure to  cut spending.  He  reported that  the                                                                    
state's reliance  on revenues  from oil  would reduce  to 25                                                                    
percent.                                                                                                                        
                                                                                                                                
Vice-Chair  Saddler asked  about the  impact of  the state's                                                                    
cost of  borrowing with a  one downtick in the  state's bond                                                                    
rating.                                                                                                                         
                                                                                                                                
Commissioner Hoffbeck replied that  there would be an impact                                                                    
and agreed to provide that information.                                                                                         
                                                                                                                                
Co-Chair  Thompson  remarked  that  there would  be  a  $150                                                                    
million bond  in the fall.  He recalled that  the difference                                                                    
in the bond rating was a cost of approximately $37,000.                                                                         
                                                                                                                                
Co-Chair Neuman  added 1  percent of  $150 million  was $1.5                                                                    
million. He  furthered that one-quarter of  $1.5 million was                                                                    
$375,000; therefore the effect of delay was $375,000.                                                                           
                                                                                                                                
Commissioner  Hoffbeck  shared   that  the  downgrade  would                                                                    
result  in 25  basis points  issued. He  looked at  the 2012                                                                    
Transportation  Act,   and  noted   that  there   was  still                                                                    
approximately  $265  million  of authorization  for  general                                                                    
obligation bonds. He remarked  that the downgrade would cost                                                                    
the state upwards of $6.6 million.                                                                                              
                                                                                                                                
Vice-Chair Saddler understood the CBR  had been managed as a                                                                    
liquid asset.  He wondered  if the  money had  been invested                                                                    
differently, wheat the extra gain would have been.                                                                              
                                                                                                                                
Commissioner Hoffbeck responded that  the Permanent Fund was                                                                    
returning less than 1 percent currently.                                                                                        
                                                                                                                                
Vice-Chair  Saddler wondered  what  would  occur should  the                                                                    
bill not  pass, and  whether the  governor would  veto money                                                                    
from the operating budget.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck replied  that he  could not  speak to                                                                    
the governor's actions.  He felt that the  governor had made                                                                    
it clear that he had a  duty to have a fiscally sound budget                                                                    
that was in line with long-term revenue forecasts.                                                                              
                                                                                                                                
11:30:47 AM                                                                                                                   
                                                                                                                                
Representative  Wilson  asked  for clarification  about  the                                                                    
bonds. She wondered if the bonds were state bonds.                                                                              
                                                                                                                                
Commissioner Hoffbeck in the affirmative.                                                                                       
                                                                                                                                
Representative Wilson  assumed that  some bonds  belonged to                                                                    
the municipalities.                                                                                                             
                                                                                                                                
Commissioner Hoffbeck replied that  she was correct and that                                                                    
there were other bonds.                                                                                                         
                                                                                                                                
Representative Wilson  asked if  the only  way to  touch the                                                                    
corpus of the permanent fund by a vote of the people.                                                                           
                                                                                                                                
Commissioner Hoffbeck responded in the affirmative.                                                                             
                                                                                                                                
Representative Wilson asked why  the governor would not want                                                                    
the voters to determine the fate  of the PF. She wondered if                                                                    
the governor had discussed taking a vote to the people.                                                                         
                                                                                                                                
Commissioner  Hoffbeck  responded  that perhaps  it  was  an                                                                    
ideological  question.  The  people   were  expected  to  be                                                                    
represented by the legislature.                                                                                                 
                                                                                                                                
Representative  Wilson stated  that  the money  from the  PF                                                                    
belonged  to  the people  and  she  thought that  the  issue                                                                    
warranted a people's vote.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck replied  that  the current  structure                                                                    
allowed for access to the PFD and the earnings reserve.                                                                         
                                                                                                                                
Co-Chair   Thompson  had   heard  and   read  that   if  the                                                                    
legislature  depleted  its savings  and  could  not pay  its                                                                    
bills - the  federal government could come in  and take from                                                                    
the PF.                                                                                                                         
                                                                                                                                
Commissioner  Hoffbeck  replied  that, at  some  level,  the                                                                    
state would not be able to protect the corpus of the fund.                                                                      
                                                                                                                                
Representative   Wilson   stressed   that   government   was                                                                    
receiving their share of the oil money.                                                                                         
                                                                                                                                
11:37:19 AM                                                                                                                   
                                                                                                                                
Representative  Gara stated  that  one of  his problems  had                                                                    
been that  the state  was not  given its  fair share  of oil                                                                    
revenues. He  wondered if the  current bill had  the largest                                                                    
PFD payout.                                                                                                                     
                                                                                                                                
Commissioner Hoffbeck responded in the affirmative.                                                                             
                                                                                                                                
                                                                                                                                
Representative Gara surmised  that increasing production tax                                                                    
revenue  could  reach  a  $2000  that  would  increase  with                                                                    
inflation.                                                                                                                      
                                                                                                                                
Commissioner Hoffbeck  replied that  the provision  would be                                                                    
inflation-proofed, so there would not be a restriction.                                                                         
                                                                                                                                
Representative Gara asked about  the dividend formulas based                                                                    
on royalty projections.                                                                                                         
                                                                                                                                
Commissioner Hoffbeck  replied that it depended  more on the                                                                    
value of the Permanent Fund rather than the price of oil.                                                                       
                                                                                                                                
Representative Edgmon  asked about the downward  pressure on                                                                    
investment.  He  asked  for   a  statement  of  the  overall                                                                    
economic health of the state.                                                                                                   
                                                                                                                                
11:41:58 AM                                                                                                                   
                                                                                                                                
Representative   Munoz   expressed   the   impact   of   the                                                                    
sustainable draw of the PF  over time. She remarked that the                                                                    
CBR  savings  could extend  to  seven  or eight  years.  She                                                                    
stressed that  not passing the  legislation would take  a $3                                                                    
billion from  the CBR  in the  current and  following years.                                                                    
She  also asserted  that  the legislation  was  not able  to                                                                    
maintain savings.                                                                                                               
                                                                                                                                
Commissioner Hoffbeck  stated that she was  correct that the                                                                    
CBR would be totally depleted.                                                                                                  
                                                                                                                                
Vice-Chair Saddler asked about some accounting questions.                                                                       
                                                                                                                                
Commissioner Hoffbeck replied that they were outlays.                                                                           
                                                                                                                                
Co-Chair  Thompson   thanked  the  commissioner   for  being                                                                    
available for questions.                                                                                                        
                                                                                                                                
11:44:36 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
11:46:19 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Thompson relayed that all  of the fiscal notes were                                                                    
informational.                                                                                                                  
                                                                                                                                
11:47:06 AM                                                                                                                   
                                                                                                                                
Co-Chair  Neuman explained  that he  was  a no  vote on  the                                                                    
bill.  His  constituents  have expressed  their  opposition.                                                                    
However, he felt  that the bill should come  before the full                                                                    
body to  have the opportunity  to vote. He relayed  that the                                                                    
bill  was the  governor's  bill and  that  the governor  had                                                                    
relayed that  the legislature  would have  to come  back, if                                                                    
they did  not pass this  bill. He  did not believe  that the                                                                    
bill would  pass before  the full  body. The  governor would                                                                    
have  to come  back with  a bill  in a  special session.  He                                                                    
emphasized  the  need  to   continue  to  reduce  government                                                                    
spending. He  noted the  $3.2 billion draw  on the  CBR. The                                                                    
CBR would  be down,  and only available  for one  more draw.                                                                    
The people had asked for  further reductions prior to taking                                                                    
their dividends.                                                                                                                
                                                                                                                                
11:52:09 AM                                                                                                                   
                                                                                                                                
Co-Chair   Neuman  continued   that  his   constituents  had                                                                    
expected  legislators   to  make  difficult   decisions.  He                                                                    
thought there  was additional  required to  fully understand                                                                    
the impact of the bill. He  would be voting to move the bill                                                                    
out of committee  because he felt that the  full body should                                                                    
vote on the bill.                                                                                                               
                                                                                                                                
11:53:44 AM                                                                                                                   
                                                                                                                                
Vice-Chair Saddler emphasized the  importance of the current                                                                    
bill.  He would  not  be  voting to  move  the  bill out  of                                                                    
committee.  He  thought  the budget  needed  to  be  reduced                                                                    
further. He did  not want to take the chance  of putting the                                                                    
bill on the floor and having  it amended in a negative form.                                                                    
He reviewed many of the cuts  he thought could be deeper for                                                                    
the state  overall. He mentioned union  salary increases and                                                                    
the  additional   money  for  education.  In   his  district                                                                    
constituents were  in favor of  cutting the  budget further.                                                                    
He also thought  the legislation was based on  fear which he                                                                    
was unsure  was true.  He thought  it might  be a  crisis of                                                                    
convenience. He was concerned what  the bill would look like                                                                    
at the end of the floor session  and he did not want to take                                                                    
that risk. He thought  it was the committee's responsibility                                                                    
to fully amend  and correct the bill, and  engage in further                                                                    
conversations.                                                                                                                  
                                                                                                                                
11:59:06 AM                                                                                                                   
                                                                                                                                
Representative Edgmon  thanked Governor Walker  for bringing                                                                    
a package  forward. He  thought in  looking into  the future                                                                    
that  the  support  might  not be  looking  He  thought  the                                                                    
legislature would  be faced with using  the earnings reserve                                                                    
in the near  future. He thought constituents  needed to have                                                                    
a   full   say  in   the   situation.   He  encouraged   the                                                                    
administration to get more public  buy in. He stated that in                                                                    
his district that  there was a lot of  support for continued                                                                    
budget reductions.  He relayed  that it  had taken  almost a                                                                    
decade to get  the dividend in place, so he  did not want to                                                                    
make any hasty decisions. He  thought maybe more work needed                                                                    
to be  done to educate  the public.   He would be  voting to                                                                    
move the bill out of committee  to see the bill on the floor                                                                    
before the  whole body.  He would  question if  the governor                                                                    
called the  legislature back into  session on June  22nd. He                                                                    
knew that  everyone around  the table  wanted to  reduce the                                                                    
budget.                                                                                                                         
                                                                                                                                
12:04:16 PM                                                                                                                   
                                                                                                                                
Representative Gattis  did not  believe the bill  was "ready                                                                    
for prime time."  She thought that while  people were seeing                                                                    
teachers get  raises, this  was not  an appropriate  time to                                                                    
take money  from the people of  the state. She would  not be                                                                    
voting to move  the bill out of committee. She  spoke of the                                                                    
difficulty of  conveying the fiscal  severity the  state was                                                                    
facing. She would be a no vote.                                                                                                 
                                                                                                                                
Representative  Guttenberg would  be voting  no to  move the                                                                    
bill out  of committee.  He thought the  budget was  too big                                                                    
but  for different  reasons. He  thought that  before asking                                                                    
people to give  up part of their dividends  the state should                                                                    
not be  paying out tax  credits. He  thought it was  time to                                                                    
reevaluate and stop the hemorrhaging  by giving out credits.                                                                    
The benefit of giving out  the credits was small and closing                                                                    
the budget with  them was small. He did not  feel the policy                                                                    
call  was spreading  the burden  to all  Alaskans in  a fair                                                                    
way. He claimed  that his constituents wanted  a broad based                                                                    
solution.                                                                                                                       
                                                                                                                                
12:10:49 PM                                                                                                                   
                                                                                                                                
Representative Kawasaki  shared many of the  same objections                                                                    
as Representative Guttenberg. He  applauded the governor for                                                                    
the work  to balance the  budget. He relayed  the difficulty                                                                    
in decreasing the  budget by $500 million and  also the drop                                                                    
in the  capital budget  over the  previous two  years. There                                                                    
had been  some deep  cuts. The  state would  not be  able to                                                                    
balance the  budget with  such extreme  efforts. He  did not                                                                    
think the  bill was  comprehensive or  fair. He  thought the                                                                    
committee was  looking at the  most regressive piece  of the                                                                    
fiscal  plan. He  felt that  the dividend  cut, which  would                                                                    
impact many  jobs. He  opined that it  was the  worst option                                                                    
that could be done out of the comprehensive budget.                                                                             
                                                                                                                                
12:16:26 PM                                                                                                                   
                                                                                                                                
Representative Pruitt  stated that it was  tough. He equated                                                                    
the situation  to an individual  who had been saving  all of                                                                    
their life,  and then not  having access to those  funds. He                                                                    
thought it  would be a  huge shift for Alaska.  He commented                                                                    
that  once the  state put  its hand  in the  cookie jar  the                                                                    
state would  not be able to  pull its hand out.  He provided                                                                    
an  example of  a  constituent  that had  lost  his job.  He                                                                    
expressed his frustration with  being threatened about being                                                                    
elected. He cared about Alaska.  He indicated he had planned                                                                    
to  offer an  amendment that  would make  three changes.  He                                                                    
mentioned not having the ability  to have a conversation. He                                                                    
would be a no vote. He did  not believe he had not given the                                                                    
people  the  opportunity  to  weigh in.  He  did  not  think                                                                    
constituents  would  support the  bill.  He  asked that  the                                                                    
committee's  decision  through   the  process  be  respected                                                                    
because legislators were closest to the people of Alaska.                                                                       
                                                                                                                                
12:24:33 PM                                                                                                                   
                                                                                                                                
Representative Wilson  wanted to  remind the  committee that                                                                    
they had  already done many  hard things  including Medicaid                                                                    
reform. There  would be other  issues that would have  to be                                                                    
addressed. She  had heard that  the governor would  pull the                                                                    
legislature  back in  session, if  they did  not follow  his                                                                    
desires.  She thanked  the  chairman  for having  additional                                                                    
public testimony.  She did  not believe  the bill  was ready                                                                    
and she did  not have the buy in from  her constituents. She                                                                    
thought much  more conversation had  to be  conducted before                                                                    
the  bill could  advance. One  of  the largest  hits to  the                                                                    
economy  would  be  to  use  the PFD  to  solve  the  fiscal                                                                    
process.  She would  be returning  home  to have  additional                                                                    
conversations with her constituents.                                                                                            
                                                                                                                                
12:28:52 PM                                                                                                                   
                                                                                                                                
Representative Gara  would be  voting affirmatively  to move                                                                    
the bill from  committee. He agreed with  his caucus members                                                                    
that there was more balance needed by changing the credit                                                                       
structures. He discussed the budget issues facing the                                                                           
state.                                                                                                                          
                                                                                                                                
12:32:48 PM                                                                                                                   
                                                                                                                                
Co-Chair   Thompson   commended   the   administration   for                                                                    
attempting to balance the budget with creative efforts.                                                                         
                                                                                                                                
Co-Chair Neuman MOVED to REPORT HCS CSSB128 (FIN) out of                                                                        
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal notes.                                                                                                      
                                                                                                                                
Representative Wilson OBJECTED.                                                                                                 
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR: Gara, Munoz, Edgmon, Thompson, Neuman                                                                                 
OPPOSED: Gattis, Guttenberg, Kawasaki, Pruitt, Saddler,                                                                         
Wilson                                                                                                                          
                                                                                                                                
The MOTION FAILED (5/6).                                                                                                        
                                                                                                                                
HCS CSSB 128(FIN) FAILED to MOVE OUT of committee.                                                                              
                                                                                                                                

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