Legislature(2017 - 2018)HOUSE FINANCE 519

03/28/2017 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 26 APPROP LIMIT & PER FUND:DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
Presentation by Commissioner Randall Hoffbeck,
Dept. of Revenue
Modeling by David Teal, Director, Legislative
Finance Div.
+= HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME TELECONFERENCED
Heard & Held
Presentation: AK's Economy by Mike Navarre,
Kenai Borough Mayor
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR SENATE BILL NO. 26(FIN)                                                                                                
                                                                                                                                
     "An Act  relating to  an appropriation  limit; relating                                                                    
     to  the   budget  responsibilities  of   the  governor;                                                                    
     relating to the Alaska  permanent fund, the earnings of                                                                    
     the  Alaska permanent  fund, and  the earnings  reserve                                                                    
     account;  relating to  the  mental  health trust  fund;                                                                    
     relating to  deposits into the dividend  fund; relating                                                                    
     to  the  calculation  and  payment  of  permanent  fund                                                                    
     dividends; and providing for an effective date."                                                                           
                                                                                                                                
9:05:55 AM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
addressed a  PowerPoint presentation titled  "Permanent Fund                                                                    
Protection Act CSSB 26 (FIN)"  dated March 28, 2017 (copy on                                                                    
file).  He  relayed that  much  of  the information  in  the                                                                    
presentation  was previously  presented therefore,  he would                                                                    
skip  over slides.  He  read  from slide  3  related to  the                                                                    
intended use of Permanent Fund earnings.                                                                                        
                                                                                                                                
     USE OF PERMANENT FUND EARNINGS                                                                                             
                                                                                                                                
           "This  proposal,  if  approved, would  amend  the                                                                    
          Constitution  of   the  State   of  Alaska   by  …                                                                    
          establish[ing]  a  constitutional  permanent  fund                                                                    
          into  which at  least 25  percent of  all [mineral                                                                    
          royalties] received  by the  State would  be paid.                                                                    
          The principal of  the fund would be  used only for                                                                    
          income-producing investments permitted  by law and                                                                    
          the  income from  the fund  would be  deposited in                                                                    
          the general fund of the  State and be available to                                                                    
          be  appropriated  for  expenditure  by  the  State                                                                    
          unless otherwise provided by law."                                                                                    
                                                                                                                                
          Ballot Proposition No. 2                                                                                              
          Permanent   Fund   from   Non-Renewable   Resource                                                                    
          Revenue Constitutional Amendment                                                                                      
                                                                                                                                
Co-Chair  Foster  noted  that  Representative  Kawasaki  had                                                                    
joined  the  meeting. He  asked  committee  members to  hold                                                                    
questions until the end of the presentation.                                                                                    
                                                                                                                                
Commissioner Hoffbeck  turned to  slide 4  and spoke  to the                                                                    
question "Why use Permanent Fund earnings?"                                                                                     
                                                                                                                                
     FY18 Budget         $4.2 billion                                                                                           
     FY18 Budget Gap     $2.8 billion                                                                                           
                                                                                                                                
     Potential Tools to Close the Gap                                                                                           
                                                                                                                                
     Motor Fuels Tax Increase      $0.1                                                                                         
     Broad Based Tax               $0.6                                                                                         
     Oil Tax Credit Reform         $0.1                                                                                         
     Max. Cuts Proposed (over 3 years) $0.75                                                                                    
     SB26 (net dividend)           $1.9                                                                                         
                                                                                                                                
9:08:57 AM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck addressed  slide 5  titled "Structure                                                                    
for using the Permanent Fund":                                                                                                  
                                                                                                                                
     1. Rule-Based Framework (Saving, Spending, Dividend)                                                                       
                                                                                                                                
     2. Stabilize the Budget                                                                                                    
                                                                                                                                
     3. Protect the Dividend                                                                                                    
                                                                                                                                
     4. Protect the Permanent Fund                                                                                              
                                                                                                                                
     5. Maximize the use of the Earnings Reserve                                                                                
                                                                                                                                
Commissioner  Hoffbeck  moved to  slide  6  titled "CSSB  26                                                                    
Structure Review"  that addressed  the bill structure  via a                                                                    
chart. He  relayed that the status  quo did not meet  any of                                                                    
the five  key points listed on  slide 5. He added  that SB26                                                                    
alone would  eventually degrade the corpus  of the Permanent                                                                    
Fund (PF)  and risk  depleting the Earnings  Reserve Account                                                                    
(ERA) over  time. He voiced  that SB  26 with a  full fiscal                                                                    
plan met all the five  elements of the defined structure for                                                                    
use of the fund.                                                                                                                
                                                                                                                                
Co-Chair Foster noted that  Representative Pruitt had joined                                                                    
the meeting.                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck turned to the  chart on slide 7 titled                                                                    
"CSSB26 Revenue  Review." He reported  that SB  26 contained                                                                    
an appropriation spending cap  of $4.1 billion that excluded                                                                    
the   Capital  budget   and  debt.   In   FY  18,   existing                                                                    
undesignated general  fund (UGF) revenues were  $1.6 billion                                                                    
and the  planned ERA draw  would be $1.9 billion,  leaving a                                                                    
deficit of $0.6  billion. He turned to the graph  on slide 8                                                                    
titled  "Median UGF  Revenue and  Budget" that  depicted the                                                                    
state's deficit over time.                                                                                                      
                                                                                                                                
9:11:50 AM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 20  titled "CSSB 26                                                                    
Scenario Modeled":                                                                                                              
                                                                                                                                
     Deposits: 25% of royalties deposited into the                                                                              
     permanent fund.                                                                                                            
                                                                                                                                
     Draw Calculation                                                                                                           
          Maximum POMV:                                                                                                         
                                                                                                                                
          For first 3 years, 5.25% of the average value of                                                                      
          the fund in the first 5 of the last 6 years.                                                                          
                                                                                                                                
          Beginning in FY 2021, 5% of the average value of                                                                      
          the fund in the first 5 of the last 6 years.                                                                          
                                                                                                                                
     Draw Limit: The maximum POMV amount is reduced by $1                                                                       
     for every $1 that UGF royalties and production taxes                                                                       
     exceed $1.2 billion.                                                                                                       
     Dividend Calculation:                                                                                                      
                                                                                                                                
          25% of the maximum POMV calculation (before                                                                           
          applying the draw limit).                                                                                             
                                                                                                                                
          Overwriting the  above calculation,  the dividends                                                                    
          for  CY2017,  CY2018  and CY2019  are  $1,000  per                                                                    
          person (the  fund starting value accounts  for the                                                                    
          CY17 dividend).                                                                                                       
                                                                                                                                
     Inflation Proofing: Any ERA balance over 4 times the                                                                       
     full POMV calculation (after the current year draw) is                                                                     
     transferred to the corpus.                                                                                                 
                                                                                                                                
Commissioner Hoffbeck  addressed the difference  between the                                                                    
current version of the bill  and the original bill. He noted                                                                    
that the  original version  of the  bill specified  that the                                                                    
POMV  was 5.25  percent for  the life  of the  plan. In  the                                                                    
original  version, the  Permanent  Fund  Dividend (PFD)  was                                                                    
calculated  at 20  percent of  the maximum  POMV calculation                                                                    
plus 20  percent of  the royalty revenue.  A $1,000  PFD was                                                                    
guaranteed for two years.  Additionally, the current version                                                                    
extended the  $1,000 dividend  another year  for a  total of                                                                    
three  years.  He  turned  to   slide  21  titled  "CSSB  26                                                                    
Scenarios Modeled."                                                                                                             
                                                                                                                                
     SB26 with Full Fiscal Plan (full deficit closure, no                                                                     
     additional draws)                                                                                                          
                                                                                                                                
     The model assumes that the permanent fund framework is                                                                     
     immune to any UGF deficit                                                                                                  
                                                                                                                                
     This means that there are no unplanned withdrawals                                                                         
     from the ERA                                                                                                               
                                                                                                                                
     SB26 with no other Measures (structural deficit                                                                          
     remains, requires additional draws)                                                                                        
                                                                                                                                
     The model uses the $4.1 billion appropriation limit in                                                                     
     SB 26 plus OMB's capital and debt payment budgets as                                                                       
     the budget assumption                                                                                                      
                                                                                                                                
     Any deficit remaining after the planned withdrawal                                                                         
     from the ERA is filled first from the CBR; after the                                                                       
     CBR is depleted, budget deficits are filled by                                                                             
     unplanned withdrawals from the ERA                                                                                         
                                                                                                                                
     SB26 with $750 million in cuts over 3 years                                                                                
                                                                                                                                
     The model uses the $4.1 billion appropriation limit in                                                                     
     SB 26 plus OMB's capital and debt payment budgets as                                                                       
     the budget assumption                                                                                                      
                                                                                                                                
     Deficits are reduced incrementally by $300, $250, and                                                                      
     $200 million. Any deficit remaining after the planned                                                                      
     withdrawal from the ERA is filled first from the CBR;                                                                      
     after the CBR is depleted, budget deficits are filled                                                                      
     by unplanned withdrawals from the ERA                                                                                      
                                                                                                                                
Commissioner  Hoffbeck moved  to  slide 22  and  spoke to  a                                                                    
graph  titled  "Budget  Assumptions." He  relayed  that  the                                                                    
graph depicted  the difference in the  budget assumptions of                                                                    
the three  scenarios. The  gold bar  represented SB  26 with                                                                    
$750 million in cuts, the  green dash represented the budget                                                                    
under  Office of  Management and  Budget's (OMB)  10 -  year                                                                    
plan,  and the  blue dash  line represented  SB 26  plus the                                                                    
capital budget  and debt  service. The  spending cap  in the                                                                    
bill mirrored the budget forecast provided by OMB.                                                                              
                                                                                                                                
9:15:39 AM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  turned  to   slide  27  titled  "UGF                                                                    
Revenue  with POMV  and Draw  Limit" and  addressed a  graph                                                                    
titled "UGF Revenue & Oil Price."                                                                                               
                                                                                                                                
     A formula that includes a draw limit:                                                                                      
                                                                                                                                
          Gradually reduces the amount drawn from the ERA                                                                       
          as oil revenues increase                                                                                              
                                                                                                                                
          Stabilizes UGF revenue through a range of oil                                                                         
          prices                                                                                                                
                                                                                                                                
          Grows the fund more, producing larger draws and                                                                       
          dividends in the future                                                                                               
                                                                                                                                
Commissioner Hoffbeck  moved to slide 28  titled " SCENARIO:                                                                    
UGF  Revenue without  Draw  Limit" and  spoke  to the  graph                                                                    
depicting   the  scenario.   He  pointed   to  the   revenue                                                                    
volatility created without  a draw limit. He  moved to slide                                                                    
29  and spoke  to the  scenario showing  UGF revenue  with a                                                                    
draw  limit. He  noted  that the  revenue volatility  evened                                                                    
out. He turned  back to slide 28 and noted  that the draw in                                                                    
2041 was $5.6  billion under a volatile  structure without a                                                                    
draw  limit compared  to $7  billion reported  on slide  29,                                                                    
which "turned off  the use of the fund"  and preserved funds                                                                    
when revenues where high. He  added that over time, the draw                                                                    
limit also had an impact on available revenues.                                                                                 
                                                                                                                                
9:18:18 AM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck advanced to  slide 32 titled "CSSB 26,                                                                    
Full  Fiscal Plan."  He noted  that the  graph depicted  the                                                                    
unrestricted general  fund (UGF) available from  the ERA. He                                                                    
reported that  with a  full fiscal plan  the draw  grew from                                                                    
$1.867 billion in FY 18  to $3.296 nominal or $1.954 billion                                                                    
real dollars  in 2041.  He turned to  slide 33  titled "CSSB                                                                    
26, No  Fiscal Plan" and  pointed out that the  graph showed                                                                    
the 2041 value  at $2.489 billion nominal  or $1.475 billion                                                                    
and  represented a  loss.  Slide 34  included  a line  graph                                                                    
showing  UGF revenue  titled "CSSB  26 Modeling  Comparison:                                                                    
UGF Revenue  - Funds Available for  Services." He summarized                                                                    
that the  status quo  line over time  without a  fiscal plan                                                                    
depicted  the money  available for  government services  was                                                                    
degraded. He  skipped to slide 37  that illustrated dividend                                                                    
durability  under  CSSB  26  with a  full  fiscal  plan.  He                                                                    
explained that  in FY 18,  the median value of  the dividend                                                                    
was $1000  and by 2041  was $1,606  nominal or $941  in real                                                                    
dollars, which  grew at  a rate close  to inflation  but did                                                                    
represent  6 percent  less purchasing  power  over time.  He                                                                    
scrolled to slide  39 titled "CSSB 26, No  Fiscal Plan" that                                                                    
included a line  graph showing the status quo  effect on the                                                                    
dividend declining  to $1,277 nominal  or $749  real dollars                                                                    
in  2041. He  moved to  slide  39 titled  "CSSB 26  Modeling                                                                    
Comparison: Dividend"  that graphed  the dividend  over time                                                                    
under  the different  plans. He  observed that  the Senate's                                                                    
plan for SB  26 with $750 million in cuts  equated to a full                                                                    
fiscal  plan,  but whether  that  number  of cuts  could  be                                                                    
achieved  was questionable.  He pointed  to the  dotted line                                                                    
that  represented  the  status quo  precipitously  declining                                                                    
beginning in  2024; at that point  the Constitutional Budget                                                                    
Reserve (CBR) and excess revenues  in the ERA were depleted,                                                                    
which threatened  a dividend payment. The  graph also showed                                                                    
the degradation of the dividend over time                                                                                       
                                                                                                                                
9:22:40 AM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  addressed CSSB 26  inflation proofing                                                                    
and fund  durability in the  following slides. He  turned to                                                                    
slide 43 titled "CSSB 26, Full  Fiscal Plan - Fund Size." He                                                                    
indicated that  the corpus of  the PF was  approximately $54                                                                    
billion which  grew to $111  billion nominal or  $65 billion                                                                    
in real dollars by 2041 under  the full fiscal plan. The ERA                                                                    
failure rate  over 24  years was less  than one  percent. He                                                                    
characterized the  full plan as  "close to a slam  dunk." He                                                                    
reviewed  Slide 44  titled "CSSB  26, No  Fiscal Plan"  that                                                                    
showed  the  scenario  losing  real  value  at  $78  billion                                                                    
nominal or $46 billion in real  dollars by 2041 and that the                                                                    
ERA failure rate  slid to 46 percent. Slide  45 titled "CSSB                                                                    
26  Modeling Comparison:  Fund Size  -  Nominal Fund  Value"                                                                    
included  a line  graph showing  representations of  various                                                                    
plans including  the status quo  and the  different versions                                                                    
of SB 26. He concluded on  slide 49 that contained a summary                                                                    
of the bill.                                                                                                                    
                                                                                                                                
     CSSB 26                                                                                                                    
                                                                                                                                
     1. Provides a rule-based framework for use of permanent                                                                    
        fund earnings                                                                                                           
                                                                                                                                
     2. Stabilizes UGF revenues from petroleum and permanent                                                                    
        fund earnings; also limits spending from all revenue                                                                    
        sources                                                                                                                 
     3. Protects the dividend                                                                                                   
                                                                                                                                
     4. Protects the inflation-adjusted value of the                                                                            
        permanent fund                                                                                                          
                                                                                                                                
     5. Robust use of the earnings reserve                                                                                      
                                                                                                                                
9:25:24 AM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  spoke to the  revenue limit  and referenced                                                                    
charts  in previous  testimony. He  asked the  department to                                                                    
provide  the  data   he  referenced.  Commissioner  Hoffbeck                                                                    
replied that he  did not have the data, but  would follow up                                                                    
later.  Co-Chair Seaton  asked whether  the model  contained                                                                    
data that associated the real  economy with what would occur                                                                    
with implementation of $750 million  in cuts in terms of job                                                                    
loss,  slowing  the  economy, and  other  effects  versus  a                                                                    
revenue  scenario.  Commissioner  Hoffbeck answered  in  the                                                                    
negative. The  model was largely  a numbers formula  and did                                                                    
not include feedback loops on the various plans.                                                                                
                                                                                                                                
Representative Pruitt  spoke to  a royalty  reduction change                                                                    
from 50 percent  to 25 percent on new oil.  He asked whether                                                                    
the  governor endorsed  the change.  He  wondered about  the                                                                    
thought process  if oil production  increased in  the future                                                                    
and  maintaining reduced  royalty money  deposited into  the                                                                    
PF.  Commissioner  Hoffbeck  answered   that  the  plan  was                                                                    
intended to  be permanent. The  choice had been  made during                                                                    
revenue surpluses  to deposit more  royalty into  the corpus                                                                    
of the Permanent  Fund, but that was no longer  the case and                                                                    
the plan reverted to the constitutionally mandated amount.                                                                      
                                                                                                                                
9:29:28 AM                                                                                                                    
                                                                                                                                
Representative Pruitt  suggested maximizing  the use  of the                                                                    
Permanent  Fund  earnings.  He felt  that  limiting  the  PF                                                                    
deposit did  not account for  the fact that the  state would                                                                    
never  gain more  into its  savings even  if oil  production                                                                    
increased. He  envisioned a time when  throughput increased.                                                                    
In 20 years he  did not want to try to  account for why more                                                                    
savings  were  not  deposited  into   the  PF  in  times  of                                                                    
increased  throughput. Commissioner  Hoffbeck answered  that                                                                    
because  the  bill cut  off  the  PF draw  it  automatically                                                                    
"flipped  the  revenue into  the  corpus  of the  fund."  He                                                                    
related that if  the ERA grew to four times  the size of the                                                                    
draw the appropriation would go  back into the corpus of the                                                                    
fund. He  cautioned against harvesting  the revenue  in high                                                                    
revenue  years  and  not following  the  plan,  which  would                                                                    
reduce  future savings.  He warned  that higher  revenue may                                                                    
lead  to  some  situations  where the  long-term  goals  for                                                                    
durability were not  met. He felt that a few  years spike in                                                                    
revenue did  not warrant  changing the  plan. Representative                                                                    
Pruitt asked  about the  four times  draw. He  wondered when                                                                    
the  commissioner expected  that the  draw would  take place                                                                    
and what estimated amount would be moved into the corpus.                                                                       
                                                                                                                                
9:34:09 AM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  replied that  the answer  was elusive                                                                    
and depended  on volatile  factors. He  noted that  the plan                                                                    
would be  starting with a  much higher than  anticipated ERA                                                                    
due  to   market  returns,  but  the   answer  was  unknown.                                                                    
Representative Pruitt  referred to the modeling  provided to                                                                    
the committee and the three  options for moving forward with                                                                    
a fiscal  plan. He  commented that the  fiscal plan  did not                                                                    
address  the priority  of  the options  that  he stated  as;                                                                    
preserving the  PF, amount  of PFD,  or ensuring  enough for                                                                    
government spending.  He asked  what stood  out as  the most                                                                    
important of the three concepts  when considering the fiscal                                                                    
plan.  Commissioner Hoffbeck  did  not believe  there was  a                                                                    
hierarchy but  shared that all options  were considered when                                                                    
developing  the plan.  He  thought  that funding  government                                                                    
services  was  a "very  important  component"  and the  sole                                                                    
reason for  a fiscal plan.  He offered that  after traveling                                                                    
around the state  and listening to public  testimony, it had                                                                    
become clear that  the dividend had to be  preserved at some                                                                    
level. The  amount that could be  drawn from the fund  on an                                                                    
annual  basis   for  services  and   the  PFD   while  still                                                                    
maintaining the real value of the  ERA over time had to be a                                                                    
significant consideration.                                                                                                      
                                                                                                                                
Representative   Wilson  referred   to   slide   4  of   the                                                                    
presentation. She  spoke to  the FY  18 $2.8  billion budget                                                                    
gap  and the  $1.9  billion  ERA draw  under  the bill.  She                                                                    
commented  that   the  budget  gap  was   either  filled  by                                                                    
generating  revenue   via  a  broad-based  tax   or  cutting                                                                    
government services  by $750 million.  Commissioner Hoffbeck                                                                    
replied that  the gap  could be filled  by a  combination of                                                                    
cuts and taxes.                                                                                                                 
                                                                                                                                
9:39:59 AM                                                                                                                    
                                                                                                                                
Representative  Wilson voiced  that  the administration  had                                                                    
already talked  about shared services creating  savings. She                                                                    
spoke to  the possibility  of taxes and  smarter government.                                                                    
She  surmised   that  the   different  options   would  have                                                                    
different  impacts on  the economy  and asked  whether there                                                                    
was  a hierarchy  related  to the  impacts  on the  economy.                                                                    
Commissioner  Hoffbeck  agreed  that  the  options  all  had                                                                    
impacts  on  the  economy  that could  not  be  avoided.  He                                                                    
communicated  that  the  "true  measure  was  what  was  the                                                                    
relative difference  between the  impacts." The  only option                                                                    
that did not  have an impact in the  short-term was spending                                                                    
savings  but   eventually  depleting  savings   resulted  in                                                                    
consequences.  Representative Wilson  did  not think  anyone                                                                    
thought only using money from  savings or the status quo was                                                                    
an  option. She  spoke  to the  impact on  the  rest of  the                                                                    
state. She  believed the relevant  question was how  each of                                                                    
the options  impacted the  state's economy  and how  to keep                                                                    
the  economy  operating   optimally.  Commissioner  Hoffbeck                                                                    
answered that  her statement  was the  reason a  fiscal plan                                                                    
was necessary. The government had  less money to infuse into                                                                    
the  economy  therefore,  it  was  important  to  rely  more                                                                    
heavily on  private sector investment.  A fiscal  plan would                                                                    
act  as  an  inducement  to  private  sector  investment  by                                                                    
creating certainty.                                                                                                             
                                                                                                                                
9:43:01 AM                                                                                                                    
                                                                                                                                
Co-Chair  Foster  noted  Vice-Chair   Gara  had  joined  the                                                                    
committee meeting.                                                                                                              
                                                                                                                                
Representative  Ortiz  asked  whether the  anticipated  $1.2                                                                    
billion  in   oil  revenue  was   included  in   the  model.                                                                    
Commissioner   Hoffbeck   replied    in   the   affirmative.                                                                    
Representative  Ortiz asked  whether he  modeled where  $750                                                                    
million  in  cuts  would  come   from.  He  thought  it  was                                                                    
important to  know the  answer to  determine the  effects on                                                                    
the state's economy. Commissioner  Hoffbeck replied that the                                                                    
model did not include the  specific information. He spoke to                                                                    
the intent  voiced by  the Senate  about cuts  to education,                                                                    
the   university,   health    and   social   services,   and                                                                    
transportation. He  mentioned modeling  broad based  cuts in                                                                    
prior testimony  and showing that  the impact was  passed on                                                                    
to  local  communities. He  stated  that  any cut  had  some                                                                    
specific  "collateral  damage." Representative  Ortiz  asked                                                                    
whether  there was  any consensus  from Institute  of Social                                                                    
and Economic  Research (ISER) or other  groups showing which                                                                    
model would least impact  the economy. Commissioner Hoffbeck                                                                    
replied that ISER and other  economist had "pontificated" on                                                                    
how the various options would impact the economy.                                                                               
Vice-Chair Gara spoke  to SB 26 without a  full fiscal plan.                                                                    
He asked about the  administration's position on the success                                                                    
of  the SB  26 only  option. Commissioner  Hoffbeck answered                                                                    
that  the administration  believed the  state needed  a full                                                                    
fiscal plan.  The administration  felt that  the bill  was a                                                                    
good  structure for  using  the Permanent  Fund  but was  an                                                                    
incomplete solution.                                                                                                            
                                                                                                                                
Co-Chair  Seaton corrected  that the  FY 18  draw in  HB 115                                                                    
Income Tax; PFD Payment/Credit was the  same as in SB 26. He                                                                    
spoke to  a gross  tax versus  a net  profits tax.  He asked                                                                    
whether budget cuts  were coming out of  the economy upfront                                                                    
and where  an income tax,  based on profits after  money had                                                                    
been  generated,  made a  difference  in  the reaction  from                                                                    
industry. He noted that the  oil industry strongly favored a                                                                    
net profits tax. He stated that  he was not hearing the same                                                                    
argument regarding up front cuts versus an income tax.                                                                          
                                                                                                                                
9:48:41 AM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  answered that the answer  depended on                                                                    
what  a business  believed about  its  profits; what  amount                                                                    
could  be  reinvested  in  the business  and  how  much  was                                                                    
"harvested" back  into the economy. He  suggested that money                                                                    
that could be  reinvested to grow the  business could impact                                                                    
economic growth over  time. Much of it depended  on what the                                                                    
assumptions were regarding the  ultimate use of the profits.                                                                    
He added that  if programs were cut that served  a need they                                                                    
would need  to be fulfilled  somewhere else. He  voiced that                                                                    
the  equation  was  complex.  Co-Chair  Seaton  referred  to                                                                    
slides 28  and 29 related  to the  draw limit. He  asked for                                                                    
further detail on the  slides. Commissioner Hoffbeck replied                                                                    
that  the dark  green  area on  slide  28 represented  other                                                                    
existing UGF revenues  and was stable. The  light green area                                                                    
represented other new UGF revenues  implemented to close the                                                                    
fiscal gap.  The gold area  was the  POMV draw from  the PF.                                                                    
The light blue area represented  royalties and the dark blue                                                                    
areas represented production taxes.  The graph contained all                                                                    
the  revenue   sources  available  for   funding  government                                                                    
sources and  the PFD. He  remarked that  investment earnings                                                                    
could  be  volatile  but  using  the  five-year  average  on                                                                    
earnings   removed  the   volatility.  He   delineated  that                                                                    
instituting a  draw limit "absorbed"  the volatility  in the                                                                    
price of  oil at high oil  prices by reducing the  draw from                                                                    
the  ERA.  He  surmised  that  the  draw  limit  essentially                                                                    
putting the volatility  in the PF draw on  the downside: the                                                                    
draw was  decreased at higher  oil prices but  not increased                                                                    
at low oil prices.  The volatility would consequently reside                                                                    
in  the gold  section [slide  29]  of the  POMV draw,  which                                                                    
"dramatically  smoothed   out  the  revenue   available  for                                                                    
government services."                                                                                                           
                                                                                                                                
9:52:34 AM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  remained  curious about  the  "other"  UGF                                                                    
revenues. He  asked whether  the plan  was equating  cuts to                                                                    
the other  revenues and if  cuts would have to  be recurring                                                                    
to  reach   a  full   fiscal  plan  with   reductions  only.                                                                    
Commissioner Hoffbeck  answered that the graph  assumed that                                                                    
a  revenue  package was  adopted.  A  plan based  solely  on                                                                    
decreased expenditures  would shift everything down  and use                                                                    
reduced numbers. Co-Chair Seaton  looked at the inclined new                                                                    
revenues line in FY 18 and FY 19.  He asked if it was due to                                                                    
the  ramp up  time  required prior  to  generating the  full                                                                    
amount  of new  revenue. Commissioner  Hoffbeck answered  in                                                                    
the affirmative.  He stated the  chart on slide 29  had been                                                                    
based on HB 115's inclusion of an income tax.                                                                                   
                                                                                                                                
9:55:05 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
10:00:09 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster invited Mr. Teal  to walk through the fiscal                                                                    
modeling.                                                                                                                       
                                                                                                                                
10:00:29 AM                                                                                                                   
                                                                                                                                
DAVID   TEAL,   DIRECTOR,  LEGISLATIVE   FINANCE   DIVISION,                                                                    
provided a  dynamic Excel fiscal  model [Note: two  pages of                                                                    
the fiscal model  titled "LFD Fiscal Model"  dated March 27,                                                                    
2017  (copy  on  file)  were  static  representations.].  He                                                                    
indicated  there   had  been  a  few   questions  about  the                                                                    
difference between SB 26 and HB 115.                                                                                            
                                                                                                                                
Representative  Wilson referred  to the  top left  corner of                                                                    
the model  graph titled "UGF Revenue\Budget".  She asked him                                                                    
to  model   the  $750  million  in   budget  cuts  including                                                                    
increases for inflation proofing over the next three years.                                                                     
Mr. Teal relayed that the  model was "fairly simplistic." He                                                                    
noted that the  cut reduced the budget by  $750 million each                                                                    
year   resulting   in    growing   the   state's   reserves.                                                                    
Representative Wilson asked that  as the line was increasing                                                                    
what percentage was  the increase versus a  flat budget. She                                                                    
voiced uncertainty  over using the 10-year  plan provided by                                                                    
OMB. Mr. Teal  responded that the 10-year  plan showed OMB's                                                                    
expectations and  was a  new version.  He reported  that OMB                                                                    
expected a  flat budget for FY  18 and FY 19  and subsequent                                                                    
budgets    that   grew    2.2   percent    with   inflation.                                                                    
Representative  Wilson asked  how the  model looked  without                                                                    
the cuts but with implementation  of an income tax. Mr. Teal                                                                    
modeled a  $750 million  income tax  versus $750  million in                                                                    
spending  reductions resulted  in  graphs  that looked  very                                                                    
similar.  Representative Wilson  asked when  the income  tax                                                                    
grew to $750  million. She thought that the  proposal was to                                                                    
collect $668 million  in income tax. Mr.  Teal answered that                                                                    
roughly the  tax was  rounded up to  $700 million.  He noted                                                                    
that the  $50 million did  not affect the  model. Reductions                                                                    
or revenue had the same impact on the model.                                                                                    
                                                                                                                                
Representative Guttenberg  asked whether the top  left chart                                                                    
included  inflation  proofing  and   the  budget.  He  asked                                                                    
whether the $750 million in  cuts were built into the graph.                                                                    
Mr.  Teal  answered  in  the  negative.  He  explained  that                                                                    
reductions were  not part  of the model,  but was  an option                                                                    
that could be selected.                                                                                                         
                                                                                                                                
10:06:51 AM                                                                                                                   
                                                                                                                                
Representative Guttenberg wondered  what relation cutting 13                                                                    
thousand jobs  out of  the economy  had on  the size  of the                                                                    
budget  or  the  payout  of the  Permanent  Fund.  He  asked                                                                    
whether the data  was included in the model or  if the model                                                                    
was  "just numbers."  Mr.  Teal answered  that  it was  just                                                                    
numbers.  He  indicated  that  determining  the  effects  of                                                                    
unspecified budget  cuts was a very  difficult endeavor. The                                                                    
easiest cuts  for state government  to make  were reductions                                                                    
that  transferred  costs  to  municipalities.  The  scenario                                                                    
looked like a  cut, but residents would  pay increased local                                                                    
taxes. He stated that "there was no easy answer."                                                                               
                                                                                                                                
10:09:23 AM                                                                                                                   
                                                                                                                                
Vice-Chair Gara  appreciated the  charts but  qualified that                                                                    
the  state   had  many  expenses   that  rose   higher  than                                                                    
inflation; e.g. healthcare costs.  He asked whether a budget                                                                    
built  on the  general inflation  index would  need cuts  to                                                                    
make up for  the expenses that rose higher than  the rate of                                                                    
inflation. Mr.  Teal replied in the  affirmative. Currently,                                                                    
the  biggest driver  for inflation  in state  government was                                                                    
the cost  of living increases.  He noted that  current state                                                                    
employee  contracts  contained  no  increases.  He  did  not                                                                    
expect costs to go up at  the rate of inflation. He reported                                                                    
that  the  contracts  were three-year  items  and  when  the                                                                    
contracts  were renegotiated  inflation may  rise and  might                                                                    
affect  the 10-year  plan. If  the state  did not  keep pace                                                                    
with inflation,  it was the  equivalent to a  real reduction                                                                    
in expenditures.                                                                                                                
                                                                                                                                
Co-Chair Seaton  looked at the  chart and asked Mr.  Teal to                                                                    
factor in the $750 million [in  cuts] in the model. He asked                                                                    
about  the  size of  the  Permanent  Fund  under the  SB  26                                                                    
scenario in  2026. Mr. Teal  replied the Permanent  Fund was                                                                    
roughly $70  billion. Co-Chair Seaton  observed that  it was                                                                    
$67.5   billion.  He   asked  about   the  meaning   of  the                                                                    
information on the  chart. Mr. Teal explained  that the data                                                                    
meant that the  Permanent Fund was one percent  above the FY                                                                    
18  value inflated  by 2.25  percent in  FY 26.  The PF  was                                                                    
doing slightly better than keeping  pace with inflation. Co-                                                                    
Chair Seaton  requested that the  model inputs switch  to HB                                                                    
115  with the  income tax  and  remove the  $750 million  in                                                                    
cuts. Mr.  Teal replied there  would be higher  dividends up                                                                    
to $1,400 instead of $1,000 and  the PF was roughly the same                                                                    
level  at $69  billion  ($2 billion  higher)  and was  doing                                                                    
better  than  the  rate  of   inflation  (103  percent).  He                                                                    
cautioned  that  the  results were  "very  similar"  with  a                                                                    
margin of error factored in.                                                                                                    
                                                                                                                                
10:14:18 AM                                                                                                                   
                                                                                                                                
Representative Wilson  clarified she was not  advocating for                                                                    
either bill. She  stated that under the HB  115 scenario she                                                                    
would receive  a higher PFD  but would  pay some or  all the                                                                    
dividend   back  in   taxes.   Mr.  Teal   replied  in   the                                                                    
affirmative.   Representative   Wilson  thought   that   the                                                                    
comparisons were  not apples-to-apples  and depended  on tax                                                                    
brackets;  a   dividend  could   be  completely   wiped  out                                                                    
depending on  what kind of  income tax an individual  had to                                                                    
pay.                                                                                                                            
                                                                                                                                
Representative  Guttenberg   discussed  that  if   the  $750                                                                    
million in cuts  were added, the costs  would be transferred                                                                    
to  the  local communities.  He  thought  that teachers  and                                                                    
healthcare would  be affected.  Costs did  not go  away they                                                                    
were  just  moved  around. To  get  to  an  apples-to-apples                                                                    
comparison the issues needed to be factored in.                                                                                 
                                                                                                                                
Representative Pruitt  spoke to  a difference between  SB 26                                                                    
and HB 115. He asked when  the draws from the ERA began from                                                                    
the  Permanent Fund  in  SB  26. He  asked  if  there was  a                                                                    
difference in  the effect either  bill had on  the Permanent                                                                    
Fund.                                                                                                                           
                                                                                                                                
10:17:07 AM                                                                                                                   
                                                                                                                                
Mr. Teal answered  that the Permanent Fund  balance would be                                                                    
roughly the  same in both  bills because the payout  was the                                                                    
same  and earnings  were assumed  at 6.95  percent for  both                                                                    
bills. The payout was 5.25  percent in the first three years                                                                    
in SB  26 and  for two  years in  HB 115;  subsequently, the                                                                    
payout  became   5  percent.  The  almost   identical  draws                                                                    
resulted in  a similar balance. Representative  Pruitt asked                                                                    
whether SB  26 began the process  in FY 18. He  believed the                                                                    
intent  of HB  115 from  the perspective  of the  budget had                                                                    
assumed that  the bill  had been passed  the prior  year, FY                                                                    
17.  He did  not  believe  SB 26  had  the  same effect.  He                                                                    
remarked  that   the  difference  created  a   $1.6  billion                                                                    
difference  in  earning  potential   of  the  PF.  Mr.  Teal                                                                    
answered that  the difference  was approximately  $2 billion                                                                    
in the  ending fund balance.  He explained that HB  115 took                                                                    
$1.7 billion from  the Permanent Fund in FY 17.  Under SB 26                                                                    
there was no  scheduled FY 17 payout. The  money remained in                                                                    
the Permanent Fund  and resulted in the  higher end balance.                                                                    
The  FY 17  draw transferred  money  from the  ERA into  the                                                                    
corpus and  left a  balance under the  four times  limit. He                                                                    
furthered that  the market value  of the  PF or ERA  did not                                                                    
change,  therefore, the  payout  did not  change.  It was  a                                                                    
question of whether the legislature  wanted the money in the                                                                    
ERA or  the corpus.  Representative Pruitt thought  that the                                                                    
size of  the CBR played a  role in the PF  balance. Mr. Teal                                                                    
replied in the  affirmative. He detailed that  the amount of                                                                    
deficit  that  remained  and  how   the  gap  was  addressed                                                                    
affected  the  outcome.  The legislature  had  a  choice  of                                                                    
either removing  money from the  CBR, ERA or hold  funds out                                                                    
the  corpus;  i.e., "transferring  money  to  the corpus  or                                                                    
not."                                                                                                                           
                                                                                                                                
CSSB 26(FIN)  was HEARD  and HELD  in committee  for further                                                                    
consideration.                                                                                                                  
                                                                                                                                
10:22:39 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:23:24 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                

Document Name Date/Time Subjects
SB 26, OMB Budget.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB 26, Flat Budget.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB26 Sectional Analysis - S(FIN)CS - 3.28.17.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
HB 115 Kenai Borough Mayor Mike Mayor presentation for House Finance 3-28-17.pdf HFIN 3/28/2017 9:00:00 AM
HB 115
SB26 Supporting Document - DOR Presentation on CSSB26 - 3.28.17.pdf HFIN 3/28/2017 9:00:00 AM
SB 26
SB 26 Sponsor Statement - Governor's Transmittal Letter 01.17.2017.pdf HFIN 3/28/2017 9:00:00 AM
SB 26