Legislature(2017 - 2018)SENATE FINANCE 532

03/06/2017 09:00 AM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 21 PERMANENT FUND: INCOME; POMV; DIVIDENDS TELECONFERENCED
Heard & Held
*+ SB 26 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
+= SB 70 APPROP. LIMIT/BUDGET PROCESS/PERM FUND TELECONFERENCED
Scheduled but Not Heard
SENATE BILL NO. 21                                                                                                            
                                                                                                                                
     "An Act  relating to appropriations from  the income of                                                                    
     the Alaska permanent fund;  relating to the calculation                                                                    
     of  permanent  fund  dividends; and  providing  for  an                                                                    
     effective date."                                                                                                           
                                                                                                                                
9:46:24 AM                                                                                                                    
                                                                                                                                
SENATOR  BERT  STEDMAN,   SPONSOR,  introduced  himself  and                                                                    
stated he would  be presenting a bill he was  very proud of.                                                                    
He  asked  for  the  committee's  support.  He  thought  the                                                                    
committee would  observe that there  had been no  other bill                                                                    
on  the topic  of the  Permanent Fund  with the  same unique                                                                    
aspects.  He  relayed  that  he  would  be  giving  a  short                                                                    
presentation,  after  which   he  would  invite  Legislative                                                                    
Finance Division (LFD) staff to  display some different data                                                                    
inputs to further illustrate the  provisions of the bill. He                                                                    
stated  that  the bill  had  a  basic  structure and  was  a                                                                    
starting point. He emphasized that  the bill was not an all-                                                                    
inclusive  solution,  and  did  not endeavor  to  solve  the                                                                    
fiscal gap.                                                                                                                     
                                                                                                                                
Senator Stedman  thought that  members could  recognize that                                                                    
forecasts  were  not correct  and  with  luck could  provide                                                                    
direction   and  magnitude.   He   referenced  the   pension                                                                    
obligations of the state, and  the recession of 2008-2009 as                                                                    
examples.  He noted  that the  focus  of the  bill was  much                                                                    
shorter; and was  a different way of  approaching the fiscal                                                                    
issue at  hand, rather than  looking at filling  the deficit                                                                    
as quickly as possible.                                                                                                         
                                                                                                                                
Senator Stedman  remarked that the state  was very fortunate                                                                    
to have  a large savings  account in the Permanent  Fund. He                                                                    
thought that it was important  to take affirmative action to                                                                    
protect the fund for future  generations. He stated that the                                                                    
approach  of the  bill considered  what  the Permanent  Fund                                                                    
could reasonably  do to aid  in the problem of  the deficit,                                                                    
and how to eliminate the structural deficit.                                                                                    
                                                                                                                                
9:50:13 AM                                                                                                                    
                                                                                                                                
Senator Stedman  discussed the  presentation, "SB  21 (2017)                                                                    
"'GUARD  and  GROW' THE  ALASKA  PERMANENT  FUND," (copy  on                                                                    
file). He showed slide 2:                                                                                                       
                                                                                                                                
     Issue:                                                                                                                     
     Structuring the Permanent Fund to Guard It from Being                                                                      
     Raided.                                                                                                                    
                                                                                                                                
     Opportunity:                                                                                                               
     Build a New Fiscal Framework                                                                                               
     • Continues the Proper Management of the Fund,                                                                             
     • Provides a Fair Dividend,                                                                                                
     • Allows for Transfers Back to Principle of Fund, and                                                                      
     • Limits Use For Public Services.                                                                                          
                                                                                                                                
Senator  Stedman commented  that  the Permanent  Fund was  a                                                                    
sensitive  subject; and  thought the  risk to  the fund  lie                                                                    
with the legislature that had  the power of appropriation to                                                                    
destroy,  hinder, protect  or build  the fund.  He commented                                                                    
onthe  cartoon depicted  on the  slide,  which depicted  the                                                                    
legislature  as  a  wolf  that  would  devour  the  earnings                                                                    
capability and  erode the purchasing  power of the  fund (or                                                                    
not). He  commented on  the successful  track record  of the                                                                    
Permanent Fund,  and posited that  the bill would  leave the                                                                    
important pieces intact.                                                                                                        
                                                                                                                                
Senator Stedman  noted that  the people  of the  state owned                                                                    
the  subsurface  rights,  unlike  other states.  He  made  a                                                                    
special   note   that   there  were   multiple   generations                                                                    
represented  at   the  table.  He  emphasized   that  future                                                                    
Alaskans had  just as  much right to  the Permanent  Fund as                                                                    
people already in the state.                                                                                                    
                                                                                                                                
9:54:15 AM                                                                                                                    
                                                                                                                                
Senator  Stedman  stated  that  the bill  would  allow  fair                                                                    
dividends  to the  owners of  the resource.  The bill  would                                                                    
also allow  (in the case  of additional income) back  to the                                                                    
Permanent Fund  for future growth,  to be added back  to the                                                                    
dividend, or  used for public services.  He thought everyone                                                                    
recognized  that it  was not  possible to  solve the  fiscal                                                                    
problem without the  help of the Permanent  Fund. He thought                                                                    
that looking forward to increased  oil production, the state                                                                    
would  be in  the position  to add  money back  to help  the                                                                    
Permanent Fund grow at a faster rate.                                                                                           
                                                                                                                                
Senator Stedman  discussed slide 3, "CURRENT  PRINCIPLES FOR                                                                    
THE PERMANENT FUND":                                                                                                            
                                                                                                                                
   · A "Permanent" Savings Account: The fund should                                                                             
     conserve part of the state's revenue from resources to                                                                     
     benefit all generations. AS 37.13.020(1)                                                                                   
                                                                                                                                
   · The Fund's Principle Should Be Protected While                                                                             
     Prudently Invested The fund should be managed to                                                                           
     protect the principal while maximizing total return.                                                                       
     AS 37.13.020(2)                                                                                                            
                                                                                                                                
   · The Fund's Purchasing Power Over Time Should Be                                                                            
     Preserved While Maximizing Return AS 37.13.120(a)                                                                          
                                                                                                                                
Senator  Steadman discussed  the  history  of the  Permanent                                                                    
Fund.  He cautioned  against discussing  the  concept of  an                                                                    
"average dividend,"  which was  contingent upon the  size of                                                                    
the fund.                                                                                                                       
                                                                                                                                
Senator Stedman  showed slide 4, "CURRENT  PRINCIPLES WORK -                                                                    
8.66% ANNUALIZED  RETURNS FOR LAST  32.5 YEARS  ($734,000 IN                                                                    
1977 TO $57,304,500,000 2/21/17),"  which showed a bar graph                                                                    
entitled  'Fund's  Long-Term   Investment  Performance."  He                                                                    
reiterated that the bill would  not solve the state's entire                                                                    
fiscal problem.  He thought  the safety  of the  fund should                                                                    
come before solving the state's fiscal problem.                                                                                 
                                                                                                                                
9:58:04 AM                                                                                                                    
                                                                                                                                
Senator Stedman showed  slide 5, "SB 21  (2017) PROTECTS THE                                                                    
PERMANENT FUND  UNDER CURRENT PRINCIPLES:  INVEST PRUDENTLY,                                                                    
PROVIDES  A  FAIR  DIVIDEND, ALLOWS  FOR  REINVESTMENT,  AND                                                                    
LIMITS THE AMOUNT FOR GOVERNMENT!":                                                                                             
                                                                                                                                
     · Sets up a 4.5% payout based on a rolling 5 year                                                                          
        average. (Uses first 5 of the last 6 fiscal years)                                                                      
                                                                                                                                
     · Splits the 4.5% payout and sets a minimum 2.25%                                                                          
        allocation for dividends                                                                                                
                                                                                                                                
     · The remaining 2.25% of the payout can be allocated                                                                       
        towards increased dividends, returned to the                                                                            
        permanent fund for investment, or to the general                                                                        
        fund for state services.                                                                                                
                                                                                                                                
     · Sets a maximum of 2.25% on the amount of the payout                                                                      
        that can be used for government services.                                                                               
                                                                                                                                
Senator  Stedman reiterated  that the  bill was  not a  holy                                                                    
grail of  bill solutions,  and was  targeted to  protect the                                                                    
Permanent Fund. He discussed the  closures of pulp mills and                                                                    
saw mills  in Sitka,  Wrangell, and Ketchikan.  He recounted                                                                    
that at  the time of the  closure Sitka had a  fund that was                                                                    
all bonds.  In the late 1980s  he had a discussion  with the                                                                    
administrator in  city hall about  converting the fund  to a                                                                    
balanced  approach of  stocks  and bonds  with  a POMV.  The                                                                    
community had  converted the  fund to a  POMV with  a payout                                                                    
rate of  6 percent, and  the configuration had  been running                                                                    
for   over  20   years.  He   drew  parallels   between  the                                                                    
generations of Sitkans that had  an interest in Sitka's fund                                                                    
and the  many generations of Alaskans  who deserved benefits                                                                    
from  the  Permanent  Fund.  He stated  that  the  city  was                                                                    
considering lowering the payout rate of the fund.                                                                               
                                                                                                                                
Senator Stedman  continued discussing  the fund of  the city                                                                    
of  Sitka,  which  had  experienced   a  slight  erosion  of                                                                    
purchasing power  over the previous two  decades. He thought                                                                    
the bill  was not dissimilar  to how the community  of Sitka                                                                    
had dealt  with its fiscal  impact. He stated that  the bill                                                                    
was  set with  a  4.5  percent payout  and  had a  smoothing                                                                    
mechanism much  like the other  bills of the same  topic. He                                                                    
thought it  was wrong to  set the payout by  considering the                                                                    
size of the  deficit rather than what could be  borne by the                                                                    
fund portfolio. He  hoped to engage in  discussion about the                                                                    
4.5 percent  rate of  payout and  examine stress  points. He                                                                    
considered  that  a  6 percent  payout  would  erode  future                                                                    
purchasing power over time.                                                                                                     
                                                                                                                                
10:03:15 AM                                                                                                                   
                                                                                                                                
Senator von Imhof looked at  slide 5, and addressed the last                                                                    
bullet point,  which showed  a maximum  of 2.25  percent for                                                                    
the  amount   the  payout  could  be   used  for  government                                                                    
services. She noted  that the bullet above  showed there was                                                                    
flexibility for the 2.25 percent  portion that could be used                                                                    
for  dividends,   returning  to  the  fund,   or  for  state                                                                    
services.   She  wondered   how  to   reconcile  the   extra                                                                    
flexibility  with  the  language  in the  bill  that  had  a                                                                    
maximum payout for government services.                                                                                         
                                                                                                                                
Senator stated  that the 4.5  percent payout was  split with                                                                    
one half  for dividends (for  the owners of the  asset); and                                                                    
the state  had the  ability to  use one  half of  the payout                                                                    
rate  to   help  with  the  state's   fiscal  situation.  He                                                                    
explained  that if  there were  strong  fiscal returns,  the                                                                    
remaining   2.25  percent   could  be   used  in   the  ways                                                                    
illustrated on the slide. He  argued that the best course of                                                                    
action would be  to put the funds back to  the corpus of the                                                                    
fund for future generations.                                                                                                    
                                                                                                                                
Sentator Stedman  thought that if  there was less than  a 50                                                                    
percent split to the public,  it would erode public support.                                                                    
He thought going above 50  percent for the dividend would be                                                                    
a  fiscal strain.  He observed  that taking  the entire  4.5                                                                    
percent  of the  draw would  solve the  fiscal problem,  but                                                                    
would create a political problem.  If the entire payout went                                                                    
to  dividends,  the state  would  not  be  able to  fix  the                                                                    
deficit. He thought a balance  was necessary, and noted that                                                                    
the bill  was not prescriptive  with regard to  dispersal of                                                                    
the  payout. He  thought it  was important  to give  policy-                                                                    
makers  the  ability  to make  the  necessary  decisions  to                                                                    
increase  the  dividend  or  route the  funds  back  to  the                                                                    
Permanent   Fund.  He   thought  that   the  provision,   in                                                                    
combination with  a spending limit that  had been discussed,                                                                    
was an attractive solution to help control government.                                                                          
                                                                                                                                
10:06:55 AM                                                                                                                   
                                                                                                                                
Senator Stedman  showed slide 6,  "SB 21 (2017)  - PROJECTED                                                                    
4.5% DRAW, DIVIDEND AMOUNTS, AND  OTHER FUNDS," which showed                                                                    
a table.  He pointed out  that the dividend amount  for 2018                                                                    
would   be   roughly   $1700  (for   approximately   650,000                                                                    
dividends) under the  proposed plan in the  bill. He thought                                                                    
some might consider it to  be an excessively large dividend;                                                                    
and reminded  that the  size of  the dividend  was dependent                                                                    
upon the size of the  Permanent Fund. He thought flexibility                                                                    
would be needed from the  public to solve the fiscal crisis.                                                                    
He wanted  to see the  payout set  at 50/50, which  could be                                                                    
adjusted up  or down  if the  need arose.  In using  the two                                                                    
combinations,  in conjunction  with spending  restraints and                                                                    
possible revenue enhancements, it  was possible to eliminate                                                                    
the  structural  deficit   without  hindering  the  earnings                                                                    
capability of the Permanent Fund in perpetuity.                                                                                 
                                                                                                                                
10:09:23 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  turned  to  slide   7,  "SB  21  (2017)  -                                                                    
SAFEGUARDS  THE   FUND  SO   IT  CAN   GROW  AND   LAST  FOR                                                                    
GENERATIONS":                                                                                                                   
                                                                                                                                
     · SB 21 (2017) is not intended to fill the entire                                                                          
        fiscal gap.  It's  primary  focus  is  guarding  the                                                                    
        permanent fund so it can grow for future generations                                                                    
        while  keeping   downward  pressure   on  government                                                                    
        spending.                                                                                                               
                                                                                                                                
     · Other pieces that address the fiscal gap, like                                                                           
        budget   reductions,   efficiencies,   and   revenue                                                                    
        enhancements may be bolted onto the fiscal framework                                                                    
        in the near future.                                                                                                     
                                                                                                                                
Senator Stedman  reiterated that  SB 21  was straightforward                                                                    
and simple. He commented that  the bill had taken two months                                                                    
to draft, as  earlier versions had been  too complicated. He                                                                    
thought that the  public would be in support  if the changes                                                                    
to the  Permanent Fund were  transparent. He  commented that                                                                    
the primary  goal of the  bill was to protect  the Permanent                                                                    
Fund for future  generations of Alaskans. He  thought it was                                                                    
possible  for   the  current   generation  to   address  the                                                                    
problems.                                                                                                                       
                                                                                                                                
Senator Stedman thought  the politics of the  bill might beg                                                                    
the question as  to why there was a  statutory change rather                                                                    
than a  constitutional amendment. He thought  the bill would                                                                    
show  that  the   POMV  worked,  and  enshrine   it  in  the                                                                    
constitution with  a requirement for public  support. He did                                                                    
not  think there  was sufficient  time for  a constitutional                                                                    
amendment. He asked  the committee to look  at the statutory                                                                    
framework for  a POMV,  and work with  the levers  to payout                                                                    
the  dividend  split for  two  years,  ending with  a  50-50                                                                    
split.  He  wanted  to  confine  the  ERA  and  require  the                                                                    
legislature to deal with the issue of the deficit.                                                                              
                                                                                                                                
10:13:38 AM                                                                                                                   
                                                                                                                                
Co-Chair Hoffman  thought the people of  Alaska were looking                                                                    
toward the  legislature to come up  with financial solutions                                                                    
to address  the deficit. He  stated that SB  70 accomplished                                                                    
the task  in the out years.  He thought the dilemma  was how                                                                    
to   address  the   deficit,  while   Senator  Stedman   was                                                                    
addressing  how  to  protect  the  Permanent  Fund  and  the                                                                    
dividend. He  thought the dividend  was protected by  SB 70.                                                                    
He  thought that  Senator Stedman  asserted  there could  be                                                                    
some form of SB 70 for  ten years, during which the dividend                                                                    
would  be  static.  He  wondered   if  Senator  Stedman  had                                                                    
considered how  such a  change might  work towards  a fiscal                                                                    
solution.                                                                                                                       
                                                                                                                                
Senator  Stedman commented  that the  members in  the Senate                                                                    
did not always  agree. He did not necessarily  agree that it                                                                    
was  fair to  the people  of Alaska  to use  the average  to                                                                    
conclude a  dividend rate. He  thought the  dividend outflow                                                                    
should be tied to the size of the fund.                                                                                         
                                                                                                                                
10:16:51 AM                                                                                                                   
                                                                                                                                
Senator  Stedman   addressed  Co-Chair   Hoffman's  question                                                                    
regarding  freezing the  dividend  for ten  years. He  noted                                                                    
that there  would be five different  legislative groups over                                                                    
the period of time being  discussed, with varied agendas and                                                                    
opinions. His thought  that the problem could be  fixed at a                                                                    
more  rapid  rate.  He  thought   the  focus  should  be  on                                                                    
solutions for the next three  to five years. He commented on                                                                    
the  unpredictability of  fiscal projections,  and used  the                                                                    
example of the state retirement system.                                                                                         
                                                                                                                                
Co-Chair MacKinnon asked if  the legislature had statutorily                                                                    
contributed  about $24  billion of  additional funds  to the                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Senator Stedman  was not  aware of  the precise  amount that                                                                    
had been  contributed, but  he knew that  from time  to time                                                                    
the  legislature  had   appropriated  earnings  reserves  to                                                                    
protect  the corpus  of the  Permanent  Fund. He  emphasized                                                                    
that he would be shocked if the legislature let the ERA                                                                         
continually grow. He had seen projections in which the ERA                                                                      
was $20 billion to $30 billion.                                                                                                 
                                                                                                                                
Co-Chair MacKinnon stated that the legislature had                                                                              
contributed $17 billion and inflation proofing.                                                                                 
                                                                                                                                
Co-Chair MacKinnon asked if Senator Stedman was prepared to                                                                     
give an overview of the bill.                                                                                                   
                                                                                                                                
Senator Stedman stated that there was only one paragraph in                                                                     
the bill.                                                                                                                       
                                                                                                                                
Co-Chair MacKinnon observed that the bill was three pages.                                                                      
                                                                                                                                
10:19:58 AM                                                                                                                   
                                                                                                                                
Senator Stedman read from the Sectional Analysis (copy on                                                                       
file):                                                                                                                          
                                                                                                                                
     SECTION 1                                                                                                                  
     Deletes language  from AS  37.13.140 related  to income                                                                    
     available for distribution.                                                                                                
                                                                                                                                
     SECTION 2                                                                                                                  
     Deletes   references   in   AS   37.13.145(d)   to   AS                                                                    
     37.13.145(b) and (c), which are repealed by section 5.                                                                     
                                                                                                                                
     SECTION 3                                                                                                                  
     Adds a  new subsection to AS  37.13.145 that authorizes                                                                    
     the legislature  use 4.5%  of the  average fiscal-year-                                                                    
     end market  value of  the balance of  the fund  for the                                                                    
     first five of the last  six fiscal years, including any                                                                    
     unrealized  gains  and  losses.  The  legislature  must                                                                    
     allocate a  minimum of 2.25%  for dividends.  The other                                                                    
     2.25%  of  the  payout   can  be  appropriated  towards                                                                    
     increased  dividends,  reinvested  into  the  Permanent                                                                    
     Fund, or  to the  General Fund  for public  services. A                                                                    
     maximum of 2.25% can be used for public services.                                                                          
                                                                                                                                
     SECTION 4                                                                                                                  
     Makes  conforming  amendment   to  AS  43.23.025(a)  to                                                                    
     change  a   reference  from   AS  37.13.145(b)   to  AS                                                                    
     37.13.145(e)(1).                                                                                                           
                                                                                                                                
     SECTION 5                                                                                                                  
     Repeals AS 37.13.145(b) and AS 37.13.145(c).                                                                               
                                                                                                                                
     SECTION 6                                                                                                                  
     Provides an effective date of July 1, 2017.                                                                                
                                                                                                                                
Senator  Stedman added  that the  bill  was structurally  so                                                                    
basic  that implementation  would necessitate  additions for                                                                    
several items.                                                                                                                  
                                                                                                                                
10:21:53 AM                                                                                                                   
AT EASE                                                                                                                         
                                                                                                                                
10:23:46 AM                                                                                                                   
RECONVENED                                                                                                                      
                                                                                                                                
Senator Stedman wanted to  review interactive scenarios with                                                                    
the assistance of  LFD to illustrate the dynamics  of SB 21.                                                                    
He wanted  to change  variables and discuss  deficit issues.                                                                    
He addressed  the spreadsheet "LFD Fiscal  Model," which was                                                                    
previously used in committee to  discuss SB 70 [copy on file                                                                    
under Senate Finance meeting 2/27/17].                                                                                          
                                                                                                                                
Co-Chair   MacKinnon  commented   that  the   committee  had                                                                    
previously  modelled  and  tested fiscal  plans  through  an                                                                    
interactive graph  from LFD. When reviewing  different bills                                                                    
and  fiscal  models,  the  committee  first  considered  the                                                                    
Undesignated General Fund (UGF).  She referred to Designated                                                                    
General  Funds (DGF),  and used  the  example of  University                                                                    
receipts and  tuition, which were  designated to go  back to                                                                    
the University. The  committee would not want  to hamper the                                                                    
University from  being able to  take care of  itself through                                                                    
revenues of its own. She  used the example the Department of                                                                    
Fish and  Game's designated funds that  went toward managing                                                                    
resources. She discussed federal  funds and perceived budget                                                                    
growth.  She relayed  that the  state had  used limited  UGF                                                                    
dollars to leverage  as many federal dollars  as possible to                                                                    
fight the recession.                                                                                                            
                                                                                                                                
10:26:22 AM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon   detailed  that  the   previous  year's                                                                    
capital  budget  had  approximately  $115  million  to  $117                                                                    
million  used  to  leverage   approximately  $1  billion  in                                                                    
federal funds to invest across  the state to care for ports,                                                                    
roads,  and airports.  She looked  at the  graph on  the top                                                                    
left  of the  fiscal model  and  pointed out  that the  blue                                                                    
represented projected revenue  from FY 16 to FY  26, and the                                                                    
green represented anticipated draws  from state savings. She                                                                    
noted  that the  orange color  on  the graph  denoted a  CBR                                                                    
draw,  or  a  Statutory   Budget  Reserve  (SBR)  draw.  She                                                                    
specified   that  there   was  approximately   $288  million                                                                    
remaining  in the  SBR.  The red  on  the chart  represented                                                                    
unanticipated  draws. If  the ERA  was  depleted (where  the                                                                    
current dividend  calculation was  from) the  dividend would                                                                    
be  at  risk.  She  communicated  that  when  the  committee                                                                    
considered the  dividend it  had to  consider it  in balance                                                                    
with funding services provided to communities.                                                                                  
                                                                                                                                
Co-Chair  MacKinnon  recalled  that  the  Senate  Labor  and                                                                    
Commerce  Committee  had  reviewed  economic  research  that                                                                    
alledged one  in three dollars  in local spending  came from                                                                    
the state.  She observed  that under  SB 21,  state reserves                                                                    
were  moving  in a  downward  pattern.  She reiterated  that                                                                    
Senator Stedman's plan  was not to close the  fiscal gap but                                                                    
rather  protect the  corpus of  the Permanent  Fund and  the                                                                    
dividend. She  noted that there  were two  additional graphs                                                                    
on the  model pertaining  to the  Permanent Fund,  and there                                                                    
was  a  table  depicting  payout dollars  as  well  as  fund                                                                    
growth. In the middle of the  fiscal model there was a table                                                                    
of scenarios and assumptions  being considered. She reviewed                                                                    
the assumptions considered by the provisions of SB 21.                                                                          
                                                                                                                                
10:29:42 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  directed attention  to  the  graph on  the                                                                    
upper   left,   "UGF   Revenue/Budget,"   and   thought   it                                                                    
demonstrated that  the state would  be using the  ERA, which                                                                    
he  thought  was  indicative of  a  structural  deficit.  He                                                                    
reviewed the  lower left-hand  graph "Budget  Reserves," and                                                                    
observed the diminishment of the  SBR and the CBR. He argued                                                                    
that  the  Permanent  Fund could  produce  revenues  of  4.5                                                                    
percent annually, which would  not solve the fiscal problem.                                                                    
He thought additional measures were needed.                                                                                     
                                                                                                                                
                                                                                                                                
Senator Stedman  changed variable assumptions on  the fiscal                                                                    
model,  including  a  POMV  payout   of  4.75  percent,  and                                                                    
observed that with the structural  deficit appeared again in                                                                    
2023.  He discussed  different payout  rates and  considered                                                                    
the  lower right-hand  graph, which  showed  the payout  for                                                                    
dividends.  He thought  there would  need  to be  discussion                                                                    
with  the public.  He  considered the  fiscal  model with  a                                                                    
combination of  $300 million in reductions  and tax changes;                                                                    
and observed  the CBR extending  to 2025. He thought  it was                                                                    
important  to  continually  work   so  that  the  structural                                                                    
deficit would not re-appear in the future.                                                                                      
                                                                                                                                
Senator  Stedman emphasized  that the  Permanent FUnd  could                                                                    
aid in  getting out of  the budget deficit. He  thought that                                                                    
if  the public  gave  the legislature  some flexibility,  it                                                                    
could be  done with  minimum disruption.  He thought  it was                                                                    
possible to do more revenue  enhancements, but that it would                                                                    
necessitate  political  discussion.  He  considered  options                                                                    
such  as  flattening the  dividend  for  four years  or  six                                                                    
years. He  stressed that  the Permanent  Fund should  not be                                                                    
subordinate to the budget deficit.                                                                                              
                                                                                                                                
10:34:59 AM                                                                                                                   
                                                                                                                                
Senator von  Imhof referred  to the  rate of  Permanent Fund                                                                    
investment  return.  She pointed  out  that  there were  two                                                                    
funds (the ERA  and the corpus of the fund),  which had been                                                                    
invested in  the same  manner. She  thought it  was arguable                                                                    
that if the state started  taking predictable draws from the                                                                    
ERA,  its investment  mix  would need  to  be reviewed.  She                                                                    
observed  that the  CBR growth  earnings were  2.89 percent,                                                                    
and reminded that  the CBR had to be  kept relatively liquid                                                                    
to enable access  to the funds. She thought  it was arguable                                                                    
that  the ERA  as  well  had to  be  kept  more liquid.  She                                                                    
thought  increased liquidity  would  not enable  the ERA  to                                                                    
reach the  proposed 6.95 percent  rate of return.  She asked                                                                    
if the  sponsor could look at  the fiscal model with  a 6.25                                                                    
percent rate of return for the Permanent Fund.                                                                                  
                                                                                                                                
Senator Stedman  thought Senator von  Imhof had made  a good                                                                    
point. He remarked at the  diminishment of the CBR. He noted                                                                    
that the  model did not  take into account  a constitutional                                                                    
amendment  for  a  POMV,  and  a shutdown  of  the  ERA.  He                                                                    
reminded  that the  fiscal model  was not  all-encompassing,                                                                    
but  would provide  an idea  of  magnitude when  considering                                                                    
some of the fiscal provisions  being proposed. He added that                                                                    
the  bill  would not  require  a  structural change  to  the                                                                    
permanent fund,  but would try  to keep the  legislature out                                                                    
of the  ERA so  that the  Permanent Fund  would not  have to                                                                    
diminish its risk tolerances.                                                                                                   
                                                                                                                                
10:37:40 AM                                                                                                                   
                                                                                                                                
Senator  von Imhof  observed  that with  the  change to  the                                                                    
fiscal model,  it was possible  to see the CBR  maintain its                                                                    
value over time,  even when the Permanent  Fund returns were                                                                    
slightly less.                                                                                                                  
                                                                                                                                
Senator Micciche asked if the model was flat.                                                                                   
                                                                                                                                
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
explained  that the  model currently  showed a  flat budget,                                                                    
but could be changed to show other scenarios.                                                                                   
                                                                                                                                
Senator Micciche commented that all  the changes made to the                                                                    
fiscal model  moved the bill closer  to SB 70 and  SB 26. He                                                                    
discussed modelling  various assumptions for SB  70, and the                                                                    
effect on  the state reserves.  He thought all  the proposed                                                                    
plans  ensured the  health of  the corpus  of the  Permanent                                                                    
Fund. He  pointed out that  some plans preserved  savings in                                                                    
perpetuity. He considered  that SB 70 (as opposed  to SB 21)                                                                    
allowed response  time if there  was a dramatic  increase or                                                                    
decrease in  the price  of oil in  accordance with  the fall                                                                    
revenue forecast.  He was uncomfortable  with the  amount of                                                                    
reserves, and thought  that SB 21 did not  have a structural                                                                    
comprehensive  solution that  provided a  level of  comfort;                                                                    
and thought the  state would quickly need to  look at either                                                                    
dramatic cuts or  new revenue measures. He  wondered how the                                                                    
sponsor felt about the health of the state's reserves.                                                                          
                                                                                                                                
10:42:19 AM                                                                                                                   
                                                                                                                                
Senator  Stedman strongly  disagreed with  Senator Micciche,                                                                    
and  thought  the other  plans  put  too much  reliance  and                                                                    
pressure on  the Permanent Fund.  He noted that SB  70 would                                                                    
take $4.9  billion from  the ERA.  He discussed  other bills                                                                    
and provisions  to take  funds from the  ERA. He  thought it                                                                    
was  unsustainable to  rely overmuch  on  the portfolio.  He                                                                    
thought  the Permanent  Fund should  be isolated  before the                                                                    
legislature  dealt   with  other   fiscal  issues.   He  was                                                                    
concerned that  the easiest of  all the  legislative options                                                                    
would be to loot the Permanent  Fund. He thought there was a                                                                    
management problem when 9 percent  of the fund was taken out                                                                    
in one year.  He agreed that SB  21 left more work  to do in                                                                    
the future. He was adamantly  opposed to taking out billions                                                                    
from the  Permanent Fund just because  the legislature could                                                                    
not make hard decisions as a group.                                                                                             
                                                                                                                                
Senator  Micciche   pointed  out   that  experts   from  the                                                                    
Permanent  Fund had  testified in  committee to  ensure that                                                                    
the payout of 5.25 percent  did not compromise the corpus or                                                                    
health of the fund. He agreed  that it was not acceptable to                                                                    
risk the  corpus of the  fund, but thought that  experts had                                                                    
concurred that an  effective draw rate of  4.56 percent draw                                                                    
rate the  following year  was extremely  unlikely to  find a                                                                    
failure rate over time. He  thought Senator Stedman might be                                                                    
more conservative in his analysis.                                                                                              
                                                                                                                                
Senator Stedman  commented that the current  year's dividend                                                                    
in combination with  draws from the ERA  was significant. He                                                                    
informed   that   the   4.5   percent  in   the   bill   was                                                                    
coincidentally at  the same rate that  Callan and Associates                                                                    
had considered a  reasonable draw rate. He  urged members to                                                                    
look at  the numbers and  consider what was  sustainable for                                                                    
the Permanent Fund.  He thought there was  a better solution                                                                    
that  included  action to  isolate  the  Permanent Fund.  He                                                                    
stated  that he  would  support SB  21 as  a  draft for  the                                                                    
committee to consider changes.                                                                                                  
                                                                                                                                
SB  21  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  MacKinnon discussed  the agenda  for later  in the                                                                    
day.                                                                                                                            
                                                                                                                                

Document Name Date/Time Subjects
SB 21 PP Edited.pdf SFIN 3/6/2017 9:00:00 AM
SB 21
SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf SFIN 3/6/2017 9:00:00 AM
SB 26
SB26 Supporting Document - Sectional Analysis (03.06.17).pdf SFIN 3/6/2017 9:00:00 AM
SB 26
SB26 Supporting Document - DOR White Paper 1.30.17.pdf SFIN 3/6/2017 9:00:00 AM
SB 26
SB26 Supporting Document - SFIN Permanent Fund Protection Act - 3.6.17.pdf SFIN 3/6/2017 9:00:00 AM
SB 26