Legislature(2003 - 2004)
03/29/2004 09:04 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 374
"An Act relating to calculation of the amount to offset the
effect of inflation on the principal of the Alaska permanent
fund, and to transfers of money from the earnings reserve
account; and providing for an effective date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by Senator B. Stevens,
"establishes a mechanism to repay the Constitutional Budget Reserve
(CBR) after Permanent Fund dividends and inflation proofing and
maintaining a $250 million balance in the earnings reserve account,
any excess moneys are transferred to the CBR. In addition, Senate
Bill 374, new deposits from natural resources [deposited] into the
corpus of the Permanent Fund are considered when calculating the
amount needed to inflation proof."
Senator B. Stevens testified this legislation would maintain the
current dividend payout calculation, and ensure dividend payouts as
the first priority of distribution of earnings of the Permanent
Fund, as has occurred since the year 1980. This bill would amend
statutes pertaining to the procedures for inflation proofing. The
existing inflation proofing calculation takes the market value of
the Permanent Fund and multiplies it by the average of two years'
Consumer Price Index figures. The product would be transferred from
the Permanent Fund's earnings reserve account to the principal of
the Permanent Fund. The proposed method would deduct annual royalty
deposits from the inflation proofing calculated amount. This method
guarantees that inflation-proofing requirements are met and also
provides a "baseline balance" in the earnings reserve account. Over
the history of the earnings reserve account the legislature has
made approximately six modifications to the balance, and in each
instance at least $100 million was retained. This balance
consistently provided for "ample" dividends. This legislation would
require a conservative minimum balance in the earnings reserve
account of $250 million allowing for the account's first priority,
annual dividend distribution, to be achieved.
Senator B. Stevens continued that this legislation proposes the
balance of the earnings reserve account after dividends, inflation
proofing, and less the $250 million balance, be deposited into the
Constitutional Budget Reserve (CBR) fund. The balance swept into
the CBR would serve to repay the debt incurred by withdrawals made
from that fund to balance the State budget. If the deposits into
the CBR eventually come to equal withdrawals, then the proposed
statues will be repealed and the original statutes reinstituted.
Senator B. Stevens expressed that the intent of this legislation is
to repay the CBR when excess funds remain in the earnings reserve
account, thus "maintaining the life of the Constitutional Budget
Reserve".
Senator Bunde noted this legislation would provide repayment to the
CBR until the existing debt is settled. This bill would not provide
a long-term solution to restoring the CBR because future
withdrawals could be made.
Senator B. Stevens explained that once deposits into the fund equal
the amount of withdrawals, the repayment plan proposed in this
legislation would cease. However, he remarked that future
legislatures would have the ability to make appropriations from the
Constitutional Budget Reserve. While in affect, this legislation
would provide the ability to repay funds withdrawn from the CBR in
the past and in the future.
Senator Bunde characterized this proposal as a revolving line of
credit the legislature would provide itself. This plan would
"bridge our [State legislatures'] current problems" and meet the
criteria of a long-range fiscal plan to fund State services.
Senator B. Stevens restated that the objective of this legislation
would be to provide a long-range plan to replenish the CBR. The
future use of the CBR would be determined by future legislatures.
Co-Chair Wilken commented that the proposal to include royalty
income in the inflation-proofing amount is a major component of
this legislation.
Senator B. Stevens stated this legislation is comprised of two
major components, one being the method used to meet the obligation
of inflation proofing the Permanent Fund. The other major component
is a minimum balance requirement for the earnings reserve account
and the allowance of a transfer of funds into the CBR. If a State
savings account is to be kept, it should be within the CBR, not the
earnings reserve account.
ROB CARPENTER, Fiscal Analyst, Division of Legislative Finance,
testified that the projections included in the series of
spreadsheets prepared by the Legislative Finance Division dated
3/22/2004 9:32 am [copy on file] were conservative at Senator B.
Stevens' request. The data on the spreadsheet titled "Model
Concept/Parameters" assumes a general fund budget growth rate of
two-percent from FY 05, a three-percent rate of inflation,
population figures from the Department of Labor and Workforce
Development and information relating to the Permanent Fund from the
Permanent Fund Corporation monthly models.
Senator Hoffman asked the reason why the spreadsheet listed a
negative growth rate for FY 04.
Mr. Carpenter explained this rate reflects the reduction in general
fund spending between the FY 03 to FY 04 enacted budgets.
Co-Chair Wilken asked for clarification on the "Model
Concept/Parameters" spreadsheet data, and using FY 05 as an
example. He asked if the formula used in the "Statutory Net Income"
column was the same formula used in the "Statutory Net Income"
column of the spreadsheet titled "Alaska Permanent Fund Financial
Projections 2004-2014 as of December 31, 2003" issued by the
Permanent Fund Corporation [copy on file].
Mr. Carpenter replied that yes, the two columns were referring to
the same concept. He added that the information on the series of
spreadsheets was based on the January 2004 monthly financials, and
did not take into account the February 2004 monthly financials.
Senator B. Stevens pointed out that the monthly financial
projections fluctuate significantly.
Co-Chair Wilken asked the definition of "MV".
Mr. Carpenter responded "MV" is an acronym for "market value".
Co-Chair Wilken clarified that the data referenced on the "Model
Concept/Parameters" spreadsheet represents a "snapshot in time".
Mr. Carpenter outlined the data in the spreadsheet included in the
packet prepared by the Legislative Finance Division titled "Status
Quo", using FY 05 as an example. He proceeded to detail the
information in the FY 05 column of this spreadsheet.
Senator Dyson asked for a definition of the phrase "reserved ending
balance".
Senator B. Stevens referenced the "Reserved Fund Balance" versus
"Unreserved Fund Balance" sections of the "Alaska Permanent Fund,
Financial Projections 2004-2014" spreadsheet. The unreserved fund
balance includes the earnings reserve account, and the reserved
fund balance consists of the Permanent Fund's unrealized gains and
the dedicated principal of the Fund, which includes deposits,
inflation proofing and realized gains.
Mr. Carpenter continued to detail the FY 05 data in the "Status
Quo" spreadsheet.
Co-Chair Wilken asked which figures were used to derive the
Permanent Fund's FY 05 market value ending balance of $29.443
billion.
Mr. Carpenter answered that the market value ending balance is the
sum of the Fund's principal ending balance, accumulated unrealized
earnings and the ending balance of the earnings reserve account.
Co-Chair Wilken clarified that the ending balance of the earnings
reserve account reflects the balance after dividend distribution,
inflation proofing, and potential withdrawals to compensate for the
State's fiscal gap.
Senator B. Stevens referred to the "Status Quo" spreadsheet in
pointing out that the ending balance of the CBR would be zero in FY
07 because withdrawals would exceed the balance. Following the
exhaustion of the CBR, the spreadsheet assumes that the earnings
reserve account would be the only resource available to fill the
State's fiscal gap. The projection predicts that the earnings
reserve account would reach a zero balance in FY 11.
Co-Chair Green asked if the projections included in the status quo
model are based on hypothetical evaluations of the actual price of
oil rather than outdated forecasts.
Senator B. Stevens answered no.
SFC 04 # 61, Side A 10:39 AM
Senator B. Stevens clarified, using the spreadsheet included in the
packet provided by the Legislative Finance Division titled "Model",
that the projected unrestricted general fund revenue amounts for FY
03, FY 04 and FY 05 are derived from the adjusted fall forecast oil
prices and current production levels. Beginning in FY 06 the
general fund revenue projection assumes a rate of $22 per barrel of
oil under current production levels.
Senator Bunde understood the status quo model demonstrates that,
after the CBR Fund is depleted and funds are appropriated from the
earnings reserve account to balance the State budget, adequate
funding remains in the earnings reserve account to issue dividends
and inflation proof the Permanent Fund.
Senator B. Stevens affirmed and added that dividend payouts and
inflation proofing are required statutorily.
Mr. Carpenter and Senator B. Stevens then outlined the spreadsheet
titled "Model", which assumes the implementation of this
legislation.
Senator B. Stevens explained that beginning in FY 05 the "Model"
spreadsheet demonstrates that transfers from the earnings reserve
account into the CBR are visible in the CBR ending balance. The
primary dissimilarity in the balance of the earnings reserve
account between the "Status Quo" and "Model" spreadsheets is the
amount "swept" into the Permanent Fund for inflation proofing: in
FY 05 the "Status Quo" spreadsheet reflects a transfer of $712
million whereas the "Model" spreadsheet reflects a transfer of $460
million. The divergence exists because in the "Model" spreadsheet
the Permanent Fund's dedicated revenue, consisting of royalty
deposits, is counted towards the inflation proofing calculation.
Thus, the inflation proofing calculation of $712 million is arrived
at by adding the Fund's dedicated revenue in FY 05, $252 million,
to the inflation proofing transfer from the earnings reserve
account: $460 million.
Senator B. Stevens clarified the amount of the transfer from the
earnings reserve account to the CBR in FY 05. He pointed out that
the balance of the CBR fund increases from FY 04 to FY 05, but
reduces after FY 05 until FY 12.
Senator Dyson referenced discussions and arguments made that the
Permanent Fund is currently double inflation proofed because the
value of the Fund's assets naturally increase with inflation, and,
in addition, money is transferred from the earnings reserve account
to compensate for inflation. He stated that this legislation would
not address this argument because it continues to inflation proof
the Fund using the current calculation.
Senator B. Stevens replied that under the proposed model the Fund
continues to be inflation proofed at the required amount; however,
by applying dedicated revenue towards the inflation calculation
amount, the actual inflation proofing deposit would be reduced.
Senator B. Stevens next explained the spreadsheet included in the
packet prepared by the Legislative Finance Division titled "Output
- Status Quo vs Model". According to the February 2004 Consumer
Price Index the rate of inflation in the State for 2004 was 2.15
percent. The inflation proofing calculation for the Permanent Fund
for FY 05 assumes an inflation rate of 4.2 percent. Thus, assuming
the FY 05 inflation rate is comparable to the FY 04 rate, the
Permanent Fund will be inflation proofed at approximately double
the rate of inflation. In addition, referring to Senator Dyson's
comments, the value of the Fund's assets naturally increases with
inflation. Therefore, it is arguable that the Permanent Fund is
actually being inflation proofed at three times the rate of
inflation. Under this legislation only the principal of the Fund
would be inflation proofed as required by statute.
Senator Dyson restated the inflation proofing method this
legislation would implement.
Senator Dyson addressed the discrepancies in the subtraction of
percentages in the "Effective Inflation Proofing" section of the
"Output - Status Quo vs Model" spreadsheet.
Mr. Carpenter specified the discrepancies are from a "rounding
error" in the spreadsheet computer program.
Senator Bunde asked, assuming this legislation is implemented, if
the fiscal gap would be zero until FY 12 at which time the CBR
would be fully funded and no longer used to fund fiscal shortfalls.
Senator B. Stevens corrected that no fiscal gap is represented in
the "Output - Status Quo vs Model" spreadsheet until FY 12 because
the CBR would be used to fill any fiscal gap until then. The CBR
would be drained as of FY 12.
Senator Bunde commented that this legislation does not prevent the
CBR from being exhausted, but rather delays the process.
PHELAN STRAUBE, staff to Senator B. Stevens, affirmed that the
model representing this legislation utilizes the assumption that
the average price of oil is $22 per barrel and that no new oil
sources are developed. The model also assumes that no new taxes are
imposed.
Senator B. Stevens furthered that the model assumes that the
State's only means of satisfying the fiscal gap would be the CBR.
The model also presumes an actual growth rate in the budget.
Senator Hoffman noted that in the "Output - Status Quo vs Model"
spreadsheet the status quo projects the market value of the
Permanent Fund in FY 14 at $40.2 billion, whereas the model
projects a market value that is approximately $2.25 billion less.
He asked what the dividends would be under both the status quo and
model projections.
Senator B. Stevens replied that appropriations to the Permanent
Fund would begin to decline in FY 06 under both the status quo and
the model projections. The dividend would continue to grow under
the model, but not as rapidly as under the status quo. Despite
efforts to accurately project realized earnings, actual amounts are
the result of management decisions for the Fund and could not be
precisely forecasted.
Co-Chair Wilken requested a chart detailing the dividend transfers
from the earnings reserve account, as listed on line 26 of the
"Model" spreadsheet.
Senator B. Stevens referred to the "Output - Status Quo vs Model"
spreadsheet, specifically the "Per Capita Dividends" section, in
highlighting the comparison between the dividend transfer in the
status quo and model projections.
Co-Chair Green asked if this legislation would increase scrutiny of
funds available to balance the State budget by reclassifying
funding. She suggested the reclassification would require a three-
quarters majority vote of the legislature to appropriate funds
rather than the current simple majority vote requirement.
Senator B. Stevens affirmed.
Co-Chair Wilken ordered the bill HELD in Committee.
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