Legislature(2017 - 2018)SENATE FINANCE 532

03/06/2017 09:00 AM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
Scheduled but Not Heard
SENATE BILL NO. 26                                                                                                            
     "An  Act   relating  to   the  Alaska   Permanent  Fund                                                                    
     Corporation,  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 of                                                                    
     permanent  fund  dividends;  relating  to  unrestricted                                                                    
     state   revenue   available  for   appropriation;   and                                                                    
     providing for an effective date."                                                                                          
9:02:47 AM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
wanted to  walk through SB  26, and  noted that many  of the                                                                    
slides were very similar to  what was discussed the previous                                                                    
week when the  committee considered SB 70.  He informed that                                                                    
he  would   highlight  the   differences  between   the  two                                                                    
presentations in slides 1 through 25.                                                                                           
Co-Chair  MacKinnon  asked  if Commissioner  Hoffbeck  could                                                                    
review the document for the benefit of the public.                                                                              
Commissioner Hoffbeck discussed  the presentation "Permanent                                                                    
Fund Protection Act," (copy on  file). He turned to slide 2,                                                                    
"BASIC ELEMENTS OF SB 26":                                                                                                      
     The Permanent Fund Protection Act proposes:                                                                                
     1.  A framework  for sustainable  withdrawals from  the                                                                    
     earnings reserve account (ERA) and                                                                                         
     2. A sustainable dividend formula.                                                                                         
Commissioner   Hoffbeck  noted   that  there   were  several                                                                    
companion  documents [a  5 critical  tests document,  a one-                                                                    
page overview  of the Alaska Permanent  Fund Protection Act,                                                                    
a 12-page narrative white paper,  and a sectional analysis].                                                                    
He  considered  that  the  two  points  on  the  slide  were                                                                    
critical for the durability of any plan.                                                                                        
Commissioner  Hoffbeck  looked  at  slide  3,  "PRESENTATION                                                                    
     Part I: The Permanent Fund's Role in a Solution                                                                            
     Part II: Structure for Using the Permanent Fund                                                                            
     Part III: Modeling Background                                                                                              
     Part IV: Draw Durability                                                                                                   
     Part V: Dividend Durability                                                                                                
     Part VI: Fund Durability & Inflation Proofing                                                                              
     Part VII: Fiscal Plan Impact                                                                                               
Commissioner Hoffbeck  informed that  there was  seven parts                                                                    
to the presentation.                                                                                                            
9:04:59 AM                                                                                                                    
Commissioner Hoffbeck read slide 4,  "Part I - THE PERMANENT                                                                    
FUND'S ROLE IN A SOLUTION."                                                                                                     
Commissioner Hoffbeck  spoke to  slide 5, "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                                                                    
     Ballot Proposition No. 2                                                                                                   
    Permanent Fund from Non-Renewable Resource Revenue                                                                          
     Constitutional Amendment                                                                                                   
Commissioner  Hoffbeck  highlighted  the last  line  of  the                                                                    
slide. He  thought there had  always been intent  within the                                                                    
structuring of  the Permanent Fund that  it would eventually                                                                    
be used for state expenditures.                                                                                                 
Commissioner Hoffbeck discussed slide  6, "WHY USE PERMANENT                                                                    
FUND EARNINGS,":                                                                                                                
     FY18 Budget $4.3 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) $2.0                                                                                                   
Commissioner  Hoffbeck expanded  that  SB  70 had  generated                                                                    
about $1.9 billion; the difference  between it and SB 26 was                                                                    
how  royalties were  treated between  the  dividend and  the                                                                    
income.  He  stated  that  the   governor  had  expressed  a                                                                    
preference for a  revenue solution, but was open  to a broad                                                                    
discussion  on revenues  versus expenditure  reductions. The                                                                    
governor  had expressed  in  an op-ed  piece  that he  would                                                                    
accept whatever the legislature  agreed upon within terms of                                                                    
a revenue solution.                                                                                                             
9:06:52 AM                                                                                                                    
Commissioner  Hoffbeck turned  to  slide  8, "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 relayed  that  the  slide listed  the                                                                    
five tests  the administration used for  reviewing any plans                                                                    
being presented  that involved changing the  Permanent Fund.                                                                    
The various plans  had a robust hearing  history. He thought                                                                    
SB  26 was  very similar  to SB  128 [legislation  from 2016                                                                    
dealing with the Alaska Permanent  Fund Corporation], and he                                                                    
would discuss  the differences in  a later slide.  There had                                                                    
been  many hearings,  community  meetings, and  a review  of                                                                    
global  best practices  as to  how a  sovereign wealth  fund                                                                    
should be used.                                                                                                                 
Commissioner  Hoffbeck looked  at  slide  9, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should be …                                                                                         
     1. Rule-Based (Saving, Spending, Dividend)                                                                                 
        · Greatest threat to long term fund durability is                                                                       
          unplanned withdrawals                                                                                                 
        · Withdrawals need to occur under a set of                                                                              
          statutory rules                                                                                                       
             o Designed to protect the fund and guard                                                                           
               against unsustainable uses                                                                                       
             o Ensure the ERA holds enough to bridge years                                                                      
               of low earnings ("ERA durability")                                                                               
Commissioner Hoffbeck  stated that  it was critical  to know                                                                    
how  much  could be  spent  in  order  to still  maintain  a                                                                    
sufficient balance  in the Permanent  Fund and  the Earnings                                                                    
Reserve Account (ERA).  He stated that a great  deal of time                                                                    
had been spent modelling various  bills to ensure that plans                                                                    
were durable and would last over time.                                                                                          
Commissioner  Hoffbeck  reviewed  slide 10,  "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should be …                                                                                         
        · Over the long term, economies that experience                                                                         
          repeated ups and downs grow slower than stable                                                                        
        · Because commodity prices are volatile, economies                                                                      
          dominated by a single commodity industry, like                                                                        
          the petroleum industry, experience more (and more                                                                     
          pronounced) cycles.                                                                                                   
        · Permanent Fund Earnings can play a central role                                                                       
          in reducing four decades of boom and bust                                                                             
          budgeting cycles.                                                                                                     
Commissioner  Hoffbeck noted  that stability  was associated                                                                    
with  economic growth.  He mentioned  the "resource  curse,"                                                                    
which described  a funding source  that was  primarily based                                                                    
on a volatile  and singular revenue stream,  which tended to                                                                    
slow economic growth  over time. He thought  it was critical                                                                    
to stabilize the government component  of the economy to the                                                                    
extent  it  was possible.  He  thought  it was  possible  to                                                                    
structure income  from investments and oil  together in such                                                                    
a way to reduce volatility  out of the budgeting process for                                                                    
state expenditures.                                                                                                             
9:09:33 AM                                                                                                                    
Commissioner  Hoffbeck looked  at slide  11, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should…                                                                                             
     3. Protect the Dividend                                                                                                    
        · Reflects   the   current   and   future   economic                                                                    
          realities of shrinking oil and gas tax revenue.                                                                       
        · Recognizes that too large a dividend limits                                                                           
          available options for full fiscal solutions.                                                                          
        · Provides for a sustainable dividend for all                                                                           
          generations of Alaskans.                                                                                              
Commissioner  Hoffbeck   discussed  the   one-page  document                                                                    
"Permanent  Fund Protection  Act,"  dated  February 6,  2017                                                                    
(copy on file).                                                                                                                 
Commissioner  Hoffbeck noted  that protecting  the Permanent                                                                    
Fund Dividend  (PFD) became a critical  issue after speaking                                                                    
around  the  state and  talking  with  constituents. He  had                                                                    
found  relative consensus  regarding  use  of the  Permanent                                                                    
Fund, but people  considered that the dividend  was part and                                                                    
parcel  of  the  economics  of   the  state  and  should  be                                                                    
preserved at some level.                                                                                                        
Commissioner  Hoffbeck  reviewed  slide 12,  "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should…                                                                                             
     4. Protect the Permanent Fund                                                                                              
        · Meant to provide for funding state expenditures                                                                       
          for all generations of Alaskans.                                                                                      
        · Maintain or grow the real (inflation-adjusted)                                                                        
          value of the permanent fund.                                                                                          
        · Withdrawing too much is unsustainable and risks                                                                       
          damaging the fund.                                                                                                    
Commissioner  Hoffbeck discussed  slide  13, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should …                                                                                            
    5. Maximize the use of the Permanent Fund Earnings:                                                                         
        · As  North Slope  production  declines, the  fund's                                                                    
          earnings will be increasingly important in                                                                            
          eliminating the fiscal imbalance in order to                                                                          
          sustain public services.                                                                                              
             o Similar to petroleum revenue, investment                                                                         
               earnings can be highly variable.                                                                                 
             o Unlike petroleum, our financial reserves are                                                                     
               a renewable resource.                                                                                            
        · Withdrawing too  little limits future  options for                                                                    
          full fiscal solutions.                                                                                                
        · Other proposed new revenues  and cuts could reduce                                                                    
          the deficit by millions, the fund can sustainably                                                                     
          contribute billions.                                                                                                  
Commissioner Hoffbeck  stated that in order  to maintain the                                                                    
durability  of  the  Permanent  Fund,  there  needed  to  be                                                                    
situation  where  there  was less  chance  of  an  unplanned                                                                    
unstructured draw.  In order to  do so, it was  necessary to                                                                    
put as  money as possible  in the structured portion  of the                                                                    
fund  in order  to  close  the fiscal  gap  to the  greatest                                                                    
extent possible.                                                                                                                
Commissioner   Hoffbeck   looked   at   slide   15,   "MODEL                                                                    
SOPHISTICATION and VETTING":                                                                                                    
     · Key aspects of the model                                                                                                 
        •Probabilistic  treatment   of   oil   prices,   oil                                                                    
        production, investment returns                                                                                          
        •Focus  on  detail   of  how  money   flows  between                                                                    
        permanent fund, general fund, and dividends                                                                             
        •Assumptions from objective sources                                                                                     
        •Monte Carlo simulations                                                                                                
     · Vetted by McKinsey last year                                                                                             
        •Found  no   major  mechanical   errors,  reasonable                                                                    
       •Approved of Monte Carlo probabilistic method                                                                            
        •Suggested   improvements,   some   of   which   the                                                                    
        Department of  Revenue (DOR)  has incorporated  (for                                                                    
        example,     probabilistic      oil      production,                                                                    
Commissioner  Hoffman relayed  that  there  had been  robust                                                                    
probabilistic modelling of production and price.                                                                                
9:13:02 AM                                                                                                                    
Commissioner  Hoffbeck reviewed  slide 16,  "METHOD, INPUTS,                                                                    
     · Permanent Fund Starting Value: $54.9 billion                                                                             
        •Realized portion of corpus: $37.9 billion                                                                              
        •Realized portion of earnings reserve account (ERA):                                                                    
        $9.7 billion                                                                                                            
        •Unrealized earnings held by the fund: $6.3 billion                                                                     
        •Starting value based on                                                                                                
          •APFC  forecast  for  end   of  fiscal  year  2017                                                                    
          (FY17),  without inflation  proofing transfer  for                                                                    
          •Because APFC accounts  for October 2017 dividends                                                                    
          in  FY17,  scenarios   starting  with  $1,000  per                                                                    
          person dividends begin with  a higher realized ERA                                                                    
          balance of $10.6 billion and  a total fund balance                                                                    
          of $55.8 billion.                                                                                                     
     · Investment Return: Callan Associates' 10-year                                                                            
        •Total return: 6.95% geometric, 12.32% standard                                                                         
        •Statutory return: 6.24% mean, 2.24% standard                                                                           
        •Inflation rate: 2.25%                                                                                                  
Commissioner  Hoffman  stated   that  the  base  assumptions                                                                    
discussed  in  the  slide  were   consistent  with  all  the                                                                    
Permanent  Fund bills  that the  department considered.  The                                                                    
assumptions were based on the  Permanent Fund's forecast for                                                                    
the end  of the year  FY 17. He  stated that the  numbers on                                                                    
the  slide were  lower  than what  actually  resided in  the                                                                    
fund, due to  an unexpectedly higher year  of returns; which                                                                    
resulted   in  another   level   of   conservatism  in   the                                                                    
projections. The department had  used Callan and Associates'                                                                    
ten-year forecast for total  returns, statutory returns, and                                                                    
an inflation rate.                                                                                                              
Commissioner Hoffbeck  discussed slide 17,  "METHOD, INPUTS,                                                                    
and ASSUMPTIONS":                                                                                                               
     · Petroleum Revenues:                                                                                                      
          o  Oil price:  Probabilistic analysis  of ANS  oil                                                                    
             prices using a PERT distribution from the fall                                                                     
             2016 price forecasting session.                                                                                    
          o  Production: Probabilistic  analysis of  ANS oil                                                                    
             prices using a PERT distribution from the DNR                                                                      
             forecast in Fall 2016 RSB                                                                                          
     · CBR: $4.4 billion beginning of year 2018 balance & a                                                                     
        2.25% rate of return.                                                                                                   
Commissioner  Hoffman   noted  that   the  probabilistically                                                                    
modelled  oil price  and production  and were  noted in  the                                                                    
Fall Revenue Forecast.                                                                                                          
Commissioner   Hoffbeck   displayed    slide   18,   "BUDGET                                                                    
ASSUMPTIONS," which  showed a  graph depicting  the baseline                                                                    
for  UGF  revenues  for  all  revenues  except  unrestricted                                                                    
royalties   and  production   taxes,  which   were  modelled                                                                    
separately.  The  blue  line  was  the  ten-year  Office  of                                                                    
Management  and Budget  (OMB) forecast,  which was  extended                                                                    
with inflation after ten years.                                                                                                 
Senator Micciche asked to go  back to slide 18, and inquired                                                                    
if the assumption for inflation was 2.25 percent.                                                                               
Commissioner Hoffbeck answered in the affirmative.                                                                              
Senator Micciche  asked if  the first  four years  were flat                                                                    
because of assumed reductions.                                                                                                  
Commissioner Hoffbeck  needed to look  at the details  as to                                                                    
why the years  were flat, and conveyed that  the first three                                                                    
years assumed some budgetary restraint.                                                                                         
Senator Micciche asked if the  commissioner would agree that                                                                    
the most  challenging part  of the  model was  assuming what                                                                    
the  future would  be, and  which plan  covered the  largest                                                                    
portion of  the gap.  He thought the  OMB ten-year  plan did                                                                    
not account  for revenues, and  was just a  comparison based                                                                    
on what was known of the past for growth.                                                                                       
Commissioner  Hoffbeck stated  that  there  was a  challenge                                                                    
both in forecasting  and the reality of some  of the formula                                                                    
programs that were currently in  statute, and that tended to                                                                    
grow  over  time. He  recounted  that  there had  been  $240                                                                    
million to $260  million in the current  budget between one-                                                                    
time  expenditures  and formula  growth  that  needed to  be                                                                    
stripped  from  the budget  to  get  to  a zero  budget.  He                                                                    
thought there were a lot  of issues to consider when holding                                                                    
the  line  on  expenditures,   and  even  more  issues  when                                                                    
reductions were considered. He also  thought there were many                                                                    
issues to consider when pondering new revenues.                                                                                 
9:17:00 AM                                                                                                                    
Commissioner Hoffbeck  looked at  slide 19,  "LAST SESSION'S                                                                    
     Last year, the 29th Legislature held 39 hearings on                                                                        
     the Permanent Fund Protection Act (SB128, HB245, and                                                                       
          · SSTA: 10 hearings, including 2 days of public                                                                       
          · SFIN: 10 hearings, including 1 days of public                                                                       
          · HFIN: 19 hearings, including 4 days of public                                                                       
     Other bills addressing the use of permanent fund                                                                           
     earnings were also considered:                                                                                             
          · SB114: 7 hearings in SSTA, 9 hearings in SFIN                                                                       
          · HB303: 4 hearings in HFIN                                                                                           
          · HB224: 4 hearings in HFIN                                                                                           
     SB26 is  a slimmed down  version of the  Permanent Fund                                                                    
     Protection Act  passed by the  Senate last year.  It is                                                                    
     the same  as the CS  for SB128, but  without provisions                                                                    
          · CBR management                                                                                                      
          · APFC procurement                                                                                                    
          · Spending cap                                                                                                        
Commissioner Hoffbeck noted that  the slide talked about the                                                                    
genesis for  SB 26, which  was largely  based on SB  128. He                                                                    
discussed  the provision  for  moving Constitutional  Budget                                                                    
Reserve  (CBR)  management  to  the  Alaska  Permanent  Fund                                                                    
Corporation (APFC),  which had  been left out  of SB  26. He                                                                    
recounted  that APFC  Executive Director  Angela Rodell  had                                                                    
testified that she would have  similar struggles in terms of                                                                    
investment returns  on the CBR  until there was  a structure                                                                    
around the timing of draws.                                                                                                     
Commissioner Hoffbeck showed slide 20, "PFPA: SCENARIO":                                                                        
          · Corpus Deposits:                                                                                                    
             o 25% of royalties                                                                                                 
             o Any ERA balance over 4 times the full POMV                                                                       
               calculation (after the current year draw) is                                                                     
               transferred   to    the   corpus   (inflation                                                                    
               proofing mechanism or "4 times" rule).                                                                           
          · Draw Calculation:                                                                                                   
             o Maximum POMV: 5.25% of the average fund                                                                          
               value in the first 5 of the last 6 years.                                                                        
             o Draw Limit: The maximum POMV amount is                                                                           
               reduced by $1 for every $1 that UGF                                                                              
               royalties and production taxes exceed $1.2                                                                       
          · Dividend Calculation:                                                                                               
             o 20% of the maximum POMV payout before                                                                            
               reductions, plus 20% of UGF royalties                                                                            
             o Overwriting the above calculation, the                                                                           
               October 2018 dividend is $1,000 per person                                                                       
               (the 2017 dividend is reflected in the                                                                           
               starting fund value)                                                                                             
Commissioner  Hoffbeck informed  that the  treatment of  the                                                                    
corpus deposits was the same as  under SB 70 as was the draw                                                                    
calculation  for  the  first  4 or  5  years.  The  dividend                                                                    
calculation under SB 70 was  25 percent of POMV, while under                                                                    
SB  26  the  dividend  calculation was  tied  to  investment                                                                    
returns and oil and gas development and success.                                                                                
Commissioner Hoffbeck  displayed slide  21, "Part IV  - DRAW                                                                    
Commissioner Hoffbeck turned to slide 22, "POMV DRAW,":                                                                         
     · 5.25% of the average fund value in the first 5 of                                                                        
        the last 6 years                                                                                                        
     · Example: draw calculation for fiscal year 2018                                                                           
        •Average fund value in the first 5 of the last 6                                                                        
        years = $48.1 billion                                                                                                   
        •5.25% of $48.1 = $2.5 billion                                                                                          
        •Effective POMV: = 4.7% of 2017 value                                                                                   
     · Aggressive, but sustainable … if the draw limit is                                                                       
Commissioner Hoffbeck stated that the  slide was a review of                                                                    
the POMV  draw at 5.25  percent, and  was the same  as shown                                                                    
under  SB 70.  The slide  showed the  net effect  of a  5.25                                                                    
percent draw  when using  five of the  prior six  years. The                                                                    
draw was effectively a 4.7 percent draw.                                                                                        
Commissioner  Hoffbeck  showed   slide  23,  "THE  EFFECTIVE                                                                    
     Based on  historic fund  values, these  "snapshot" POMV                                                                    
     calculations  demonstrate  that,  5.25 percent  of  the                                                                    
     fund's  average market  value  in the  first  5 of  the                                                                    
     preceding 6  years is generally less  than 5.25 percent                                                                    
     of the fund's current value.                                                                                               
Commissioner Hoffbeck stated that the  bar graph on slide 23                                                                    
showed the effective Percent of  Market Value (POMV) draw in                                                                    
five-year  increments  back  through   1995.  The  draw  was                                                                    
generally in  the 4 percent  to 4.5 percent range;  with the                                                                    
exception  of 2006-2010,  which was  at 5.32  percent. There                                                                    
would be  variation in the  POMV, but it appeared  as though                                                                    
it would be within the range  of 4.5 to 5 percent, which was                                                                    
modelled as durable.                                                                                                            
9:21:40 AM                                                                                                                    
Commissioner Hoffbeck discussed slide 24, "DRAWLIMIT                                                                            
     · Reduces the POMV draw by $1 for every $1 that UGF                                                                        
        production taxes and royalties exceed $1.2 billion.                                                                     
     · Does not apply to the portion of the POMV going to                                                                       
Commissioner  Hoffbeck  looked at  slide  25,  "POMV &  DRAW                                                                    
LIMIT,"  which graphically  showed the  ERA draw  started to                                                                    
reduce  over time.  He recalled  that  Senator Micciche  had                                                                    
posed some  questions about the location  of trigger points.                                                                    
The  oil  production  tax  reached  $1.2  billion  somewhere                                                                    
between $65/bbl and  $70/bbl. A reduction in  the draw could                                                                    
be seen at  about $72/bbl, and at around  $100/bbl there was                                                                    
no draw on the ERA.                                                                                                             
Commissioner  Hoffbeck displayed  slide 26,  which showed  a                                                                    
graph entitled "Median UGF Revenue  and Budget." He recalled                                                                    
a question  by Senator  Micciche about the  unfunded portion                                                                    
of government  expenditures under the plan,  which the green                                                                    
bars on  the graph  were trying to  forecast. The  dark blue                                                                    
represented status  quo revenue, the yellow  was the planned                                                                    
Permanent Fund withdrawals, and  the green were other fiscal                                                                    
measures necessary  to balance the  budget over the  life of                                                                    
the plan. He observed that  there was a short-term window of                                                                    
opportunity to close  the fiscal gap, but  a long-term issue                                                                    
to address as well.                                                                                                             
Co-Chair MacKinnon  asked for a footnote  to illustrate that                                                                    
the green  bars representing  "Other Fiscal  Measures" could                                                                    
include any combination of budget cuts.                                                                                         
Commissioner  Hoffbeck agreed  with Co-Chair  MacKinnon, and                                                                    
indicated that the wordage had  signified it could be either                                                                    
cuts or new revenues.                                                                                                           
Commissioner  Hoffbeck  turned  to  slide  27,  "STATUS  QUO                                                                    
UNRESTRICTED  GENERAL FUND  REVENUE," which  showed a  chart                                                                    
depicting   the   impact   of  additional   production   and                                                                    
additional  price on  the amount  of  revenue available  for                                                                    
government  expenditures.  The  slide  reflected  total  UGF                                                                    
revenue, and included all of  the revenues including oil and                                                                    
gas  taxes  and  royalties.  He   noted  that  income  taxes                                                                    
adjusted with  oil price and production  changes. He thought                                                                    
it was possible to see where  the fiscal gap could be closed                                                                    
with increased production and oil price.                                                                                        
Commissioner   Hoffbeck  turned   to  slide   29,  "DIVIDEND                                                                    
     · $1,000 per person for the first 2 years, then                                                                            
     · 20% of UGF royalties (15% of all royalties), plus                                                                        
        20% of the 5.25% POMV draw (about 1% POMV)(expected                                                                     
      to be about $1,000 per person into the future)                                                                            
Commissioner Hoffbeck  stated that the dividend  formula was                                                                    
slightly different than what was under SB 70.                                                                                   
9:25:42 AM                                                                                                                    
Commissioner  Hoffbeck  looked  at  slide  30,  "PFPA,  FULL                                                                    
FISCAL  PLAN,"   which  showed  a  graph   illustrating  the                                                                    
dividend per person under the  Permanent Fund Protection Act                                                                    
(PFPA). He  stated that the  median was the  intersection of                                                                    
the  yellow  and  blue  bars,  which  was  the  most  likely                                                                    
occurrence  of the  dividend amount.  The  graph showed  the                                                                    
2041 median  value of the  dividend to be $1,468  in nominal                                                                    
dollars. The  dividend's real buying power  would be reduced                                                                    
over  time.   He  compared  the  value   with  the  dividend                                                                    
projection under SB 70, which  had a nominal dollar value of                                                                    
$1,603. The dividend  grew faster under SB 70  than under SB                                                                    
Commissioner Hoffbeck  turned to  slide 31,  "20/20 DIVIDEND                                                                    
(OCT. 2017),"  which was  a new slide  to show  the relative                                                                    
impacts at higher oil production and higher price.                                                                              
Commissioner   Hoffbeck  discussed   slide  33,   "INFLATION                                                                    
PROOFING TRANSFERS":                                                                                                            
     · AS 37.13.145(c) currently provides for annual                                                                            
        inflation proofing transfers from the ERA to corpus.                                                                    
     · The ERA needs a sufficient balance to be able to                                                                         
        meet the draw each year ("ERA durability" concern).                                                                     
     · To address this concern, the bill provides that the                                                                      
        ERA balance over 4 times the maximum draw (after                                                                        
        current year draw) is transferred to corpus instead.                                                                    
     · This "4 times" rule is designed to grow the corpus                                                                       
        in pace with inflation over time.                                                                                       
Commissioner  Hoffbeck  looked  at  slide  34,  "PFPA,  FULL                                                                    
FISCAL  PLAN," which  showed a  graph that  demonstrated how                                                                    
much the  Permanent Fund  itself would  grow under  the full                                                                    
fiscal plan,  with no unplanned  draws against the  fund. He                                                                    
pointed  out that  the graph  started  out at  approximately                                                                    
$54.9 billion as  an assumed fund balance,  which would grow                                                                    
to  $61 billion  during the  24 years  of the  modelling. He                                                                    
pointed  out  that the  ERA  fail  rate  over 24  years  was                                                                    
approximately 1.52  percent. He  recalled that under  SB 70,                                                                    
the real  value of the fund  grew to about $66  million. The                                                                    
fund grew slightly higher under SB  70 than under SB 26, and                                                                    
the failure rate  under SB 70 was less than  1 percent. Both                                                                    
rates of  failure were  within the  errors of  the modelling                                                                    
and indicated that there was  little chance of either of two                                                                    
plans having a failure during the life of the modelling.                                                                        
Commissioner  Hoffbeck   presented  slide  36,   "FUND  SIZE                                                                    
COMPARISON,"  which showed  a line  graph that  compared the                                                                    
relative fund value  over time for SB 26, SB  70, SB 21, and                                                                    
the status  quo. He observed that  the fund value grew  in a                                                                    
very  similar  fashion  over  time for  all  the  plans.  He                                                                    
commented  that  all  were substantially  greater  than  the                                                                    
growth from the status quo.                                                                                                     
9:30:33 AM                                                                                                                    
Commissioner   Hoffbeck  showed   slide  37,   "UGF  REVENUE                                                                    
COMPARISON," which showed a line  graph depicting the amount                                                                    
of monies  available for  government expenditures  under the                                                                    
three  plans.  He  observed  that   the  PFPA  yielded  just                                                                    
slightly more  than SB 70.  He considered that there  was an                                                                    
issue  with SB  21 in  that it  provided substantially  less                                                                    
money available  for government  expenditures, and  in doing                                                                    
so  created  a greater  risk  of  unplanned draws  from  the                                                                    
Permanent Fund.                                                                                                                 
Commissioner Hoffbeck  showed slide 39,  "Conclusion," which                                                                    
was a  narrative comparison  of plans shown  on a  table. He                                                                    
stated that it was similar to  the chart used for SB 70, but                                                                    
with  a  few changes  reflecting  some  of the  comments  by                                                                    
members at  the committee hearing.  He pointed out  that all                                                                    
of the plans had substantial  risk if the fiscal problem was                                                                    
not fully  dealt with. He  reiterated the risk  of unplanned                                                                    
draws. If  there weren't a sufficient  amount of expenditure                                                                    
reductions or sufficient additional  revenue, the only other                                                                    
source of income after the CBR was depleted was the ERA.                                                                        
Commissioner Hoffbeck summarized that  the three bills being                                                                    
considered in the meeting were  all rules-based, and all had                                                                    
a five-year  averaging of the  POMV and had  some investment                                                                    
income  stabilization.  He  continued  that  SB  21  had  no                                                                    
defined  plan as  to  how  to deal  with  the total  revenue                                                                    
issues, while the PFPA had  a partial stabilization of total                                                                    
revenues with  the four-times  draw and  the turning  off of                                                                    
the ERA  flows from  oil price increases.  The bill  did not                                                                    
deal with volatility of other revenues within the system.                                                                       
Commissioner  Hoffbeck continued  to discuss  slide 39,  and                                                                    
pointed out that  SB 70 had a spending cap,  and had more of                                                                    
an  ability to  deal with  other revenues.  All three  plans                                                                    
protected the dividend.  Both SB 26 and SB  70 protected the                                                                    
corpus of  the Permanent Fund.  Under SB 21, the  fund would                                                                    
grow and keep it's buying power  over time, but there was no                                                                    
process  for moving  monies back  into  the corpus.  Without                                                                    
such a process  the corpus would remain flat and  all of the                                                                    
growth would reside  in the ERA. He did not  feel SB 21 used                                                                    
enough money  to close the  fiscal gap by maximizing  use of                                                                    
the  ERA.  The  PFPA  maintained   a  5.25  draw,  which  he                                                                    
considered  the maximum  draw; while  SB 70  maintained a  5                                                                    
percent draw over time.                                                                                                         
9:34:20 AM                                                                                                                    
Commissioner  Hoffbeck  looked  at slide  40,  "Conclusion,"                                                                    
which  showed  another table  that  examined  the amount  of                                                                    
money  actually available  for  government expenditures  and                                                                    
providing  government  services.  He acknowledged  that  the                                                                    
state was in  the position of needing to  use Permanent Fund                                                                    
earnings for government services,  and must examine how much                                                                    
could  be taken  under each  of the  plans. He  reviewed the                                                                    
potential  dividends under  the various  plans. He  reviewed                                                                    
the  assumed   budget  under  each  plan,   and  highlighted                                                                    
Unrestricted General  Fund (UGF)  revenues under  the plans.                                                                    
The revenues were a bit higher  under SB 70, as there was no                                                                    
draw  on the  royalties.  He addressed  the  ERA draws;  and                                                                    
observed  that while  there was  no planned  draw under  the                                                                    
status quo, there was various draws under the under plans.                                                                      
Commissioner  Hoffbeck  continued  discussing the  table  on                                                                    
slide 40. He addressed  the bottom row, 'Additional Measures                                                                    
Required for a  Full Fiscal Plan,' noting  that under status                                                                    
quo, $2.8 billion  was needed. Under SB 21  $1.5 billion was                                                                    
needed,  and  under both  SB  26  and  SB  70 there  was  an                                                                    
approximately  700 million  gap to  close. He  found it  was                                                                    
significant that  to close the  $1.5 deficit under SB  21 it                                                                    
would  require all  of the  cuts proposed  by the  Senate as                                                                    
well  as all  of  the  revenues proposed  by  the House.  By                                                                    
paying the  larger dividend and  having a lower  draw, there                                                                    
would be a  need for substantially more pieces  to achieve a                                                                    
Commissioner Hoffbeck looked at slide 41, "PFPA (SB 26)":                                                                       
     · Provides a rule-based framework for use of the fund                                                                      
     · Stabilizes UGF revenues                                                                                                  
     · Protects the dividend                                                                                                    
     · Protects the permanent fund                                                                                              
     · Maximizes the use of the earnings reserve                                                                                
Co-Chair  MacKinnon  noted that  there  had  been a  similar                                                                    
presentation  the previous  week,  which  was available  for                                                                    
review by  the public. There had  been substantial questions                                                                    
from the committee at the previous presentation.                                                                                
Senator Dunleavy  asked if the  governor was able to  veto a                                                                    
dividend under SB 26.                                                                                                           
Commissioner Hoffbeck answered in the affirmative.                                                                              
Senator Olson asked if there were any bills being                                                                               
considered that would preclude the governor's ability to                                                                        
veto the PFD.                                                                                                                   
Commissioner Hoffbeck understood that the governor would                                                                        
have veto authority under all the bills being considered.                                                                       
9:38:31 AM                                                                                                                    
EMMA POKON, ATTORNEY, DEPARTMENT OF LAW, discussed the                                                                          
sectional analysis for SB 26 (copy on file):                                                                                    
     Section 1 - Legislative Intent                                                                                             
     Section  1 expresses  legislative intent  to reevaluate                                                                    
    the use of permanent fund earnings in three years.                                                                          
     Section 2 - Dedicated Mineral Royalties                                                                                    
     Section  2   amends  AS  37.13.010(a)  to   reduce  the                                                                    
     percentage  of   mineral  royalties  directed   to  the                                                                    
     principal (or corpus) of the  permanent fund from about                                                                    
     30%  of all  mineral  royalties received  by the  state                                                                    
     (25% from  pre-1980 leases and  50% from  later leases)                                                                    
     to 25% of the total.                                                                                                       
     Section 3 - Conforming Amendment                                                                                           
     Section 3  deletes the definition of  "income available                                                                    
     for   distribution"  in   AS   37.13.140.  An   amended                                                                    
     definition  of   this  term  will   appear  in   a  new                                                                    
     subsection, AS  37.13.140(b), created  by section  4 of                                                                    
     this bill.                                                                                                                 
     Section  4 -  Draw formula  (the amount  to appropriate                                                                    
     from the ERA to the general fund)                                                                                          
     Replacing the language removed in  section 3, section 4                                                                    
     adds  new  subsections (b)  and  (c)  to AS  37.13.140.                                                                    
     These  new  subsections  contain the  new  formula  for                                                                    
     determining  "the  amount  available  for  distribution                                                                    
     each  year" from  the earnings  reserve account  (ERA).                                                                    
     This "draw  formula" has  two parts:  (1) a  percent of                                                                    
     market  value  (POMV)  calculation   and  (2)  a  "draw                                                                    
     Contained in  new subsection (b), the  POMV calculation                                                                    
     is  5.25% of  the average  value  of the  fund for  the                                                                    
     first 5  of the  last 6  years. The  5.25% POMV  is the                                                                    
     maximum amount that  would be taken from  the ERA under                                                                    
     the plan. This amount may  be reduced by the draw limit                                                                    
     contained in new subsection (c).                                                                                           
     New subsection (c) provides  that after calculating the                                                                    
     5.25% POMV, the  draw limit reduces that  amount by one                                                                    
     dollar for  every dollar  by which  unrestricted (i.e.,                                                                    
     non-dedicated) production  taxes and  mineral royalties                                                                    
     exceed $1.2  billion. Basically,  when oil  revenues go                                                                    
     up the draw from the permanent fund goes down.                                                                             
     Together,  the  POMV  calculation and  the  draw  limit                                                                    
     create  a draw  formula  that:  (1) stabilizes  general                                                                    
     fund   revenues;  (2)   avoids  using   permanent  fund                                                                    
     earnings when oil revenues are  high; (3) allows larger                                                                    
     withdrawals  (larger  than  what would  be  sustainable                                                                    
     under a  simple POMV)  when oil  revenues are  low; and                                                                    
     (4) creates  more opportunities for the  permanent fund                                                                    
     to  grow,  resulting  in   larger  dividends  and  more                                                                    
     funding available for the general  fund when it is most                                                                    
     Section 5 - Conforming Amendment                                                                                           
     This conforming amendment  updates a cross-reference to                                                                    
     the   calculation   of   the  "amount   available   for                                                                    
     distribution"  or   the  "draw  formula."   The  cross-                                                                    
     reference is  in AS  37.13.145(d) which  exempts income                                                                    
     from  the Amerada  Hess portion  of the  fund from  the                                                                    
     calculation of  the amount available  for distribution,                                                                    
     directing  it   to  the  Alaska  capital   income  fund                                                                    
     Section 6 - Appropriations out of the ERA                                                                                  
     Defining two  types of appropriations  out of  the ERA,                                                                    
     one  to the  general  fund and  one  to the  principal,                                                                    
     section  6  adds new  subsections  (e)  and (f)  to  AS                                                                    
     To the  general fund:  New subsection  (e) contemplates                                                                    
     an appropriation  from the ERA  to the general  fund of                                                                    
     the amount  determined by the  draw formula  in section                                                                    
     4. This  provision specifies that the  appropriation is                                                                    
    "up to" the amount determined by the draw formula.                                                                          
     To the principal: New subsection  (f) amends the timing                                                                    
     and  amount of  transfers from  the ERA  to the  corpus                                                                    
     (the  inflation  proofing  mechanism) currently  in  AS                                                                    
     37.13.145(c). The current  inflation proofing mechanism                                                                    
     in    AS    37.13.145(c)   contemplates    an    annual                                                                    
     appropriation  from the  ERA to  the  principal of  the                                                                    
     amount necessary  to offset the effect  of inflation in                                                                    
     the prior  year. AS 37.13.145(c)  would be  repealed by                                                                    
     section 13 of this bill.                                                                                                   
     To replace AS 37.13.145(c),  new subsection (f) instead                                                                    
     contemplates appropriating any balance  of the ERA that                                                                    
     exceeds four  times the maximum 5.25%  POMV draw (after                                                                    
     the transfer  to the general  fund contemplated  in new                                                                    
     subsection (e)).  In other words, when  the ERA reaches                                                                    
     21% of  the total value  of the fund  (5.25% multiplied                                                                    
     by  four) any  money in  the account  over that  amount                                                                    
     goes to the principal.  Over time, these transfers will                                                                    
     inflation proof  the principal  (grow the  principal in                                                                    
     pace with inflation). This new  formula also means that                                                                    
     the  timing  of  inflation proofing  transfers  changes                                                                    
     from a  fixed annual  event to a  more flexible  "as we                                                                    
     can" schedule.                                                                                                             
     of  protecting the  permanent fund.  However, depleting                                                                    
     the  ERA  would  create pressure  to  realize  earnings                                                                    
     based  on  general  fund  needs  rather  than  on  good                                                                    
     investment   policy.   Thus,   to   ensure   investment                                                                    
     decisions     remain    independent     of    political                                                                    
     considerations,   the  ERA   should   hold  a   balance                                                                    
     sufficient to  bridge several years of  low or negative                                                                    
     investment returns  (and low  oil revenues).  This more                                                                    
     flexible  inflation  proofing mechanism  helps  bolster                                                                    
     the ERA  balance to prepare for  that possibility while                                                                    
     keeping  a mechanism  for transfers  to  the corpus  in                                                                    
     Section  7 -  Appropriations from  the General  Fund to                                                                    
     the Dividend Fund                                                                                                          
     Adding  a   new  section  (AS  37.13.146),   section  7                                                                    
     effectively amends  AS 37.13.145(b) (which  is repealed                                                                    
     in section 13) to  change the dividend calculation. The                                                                    
     new  formula   has  two   parts.  It   contemplates  an                                                                    
     appropriation  from the  general fund  to the  dividend                                                                    
     fund of an amount equal to:                                                                                                
     (1) 20% of non-dedicated  royalties (which is about 15%                                                                    
     of all royalties), plus                                                                                                    
     (2) 20%  of the  POMV calculation (or  about 1%  of the                                                                    
     total value of the fund).                                                                                                  
     This only relates to the  total amount appropriated for                                                                    
     dividends.  The  rest of  the  formula  for per  person                                                                    
     dividend check is in the dividend fund statute.                                                                            
     Section 8 - Conforming Amendment                                                                                           
     Like  the  conforming  amendment  in  section  5,  this                                                                    
     provision  updates  a  cross-reference to  the  "amount                                                                    
     available for distribution" or  the "draw formula." The                                                                    
     update  is in  AS  37.13.300(c),  which exempts  income                                                                    
     from the mental health  trust fund from the calculation                                                                    
     of the amount available for distribution.                                                                                  
     Section 9 - Conforming Amendment                                                                                           
     This conforming amendment  updates a cross-reference to                                                                    
     the  formula  for  the amount  to  appropriate  to  the                                                                    
     dividend fund.                                                                                                             
     Section 10 - 2018 and 2019 Dividends                                                                                       
     Section  10  specifies  that, notwithstanding  the  new                                                                    
     dividend  formula, dividend  checks  in  2018 and  2019                                                                    
     will be $1,000 per person.                                                                                                 
     Section 11 - Conforming Amendment                                                                                          
     Section  11 updates  AS  43.23.045(a), specifying  that                                                                    
     the dividend fund consists of  money appropriated to it                                                                    
     under the new section AS 37.13.146 (section 7 above).                                                                      
     Section 12 - Conforming Amendment                                                                                          
     Amends  AS 43.23.055  to clarify  that, once  funds are                                                                    
     appropriated to  the dividend  fund under  AS 37.13.146                                                                    
     (section 7  above) to pay  dividends the  Department of                                                                    
     Revenue    may    pay   dividends    without    another                                                                    
     Section 13 - Repeals                                                                                                       
     Section   13  repeals   three  provisions   in  current                                                                    
     1. AS 37.10.430(c), which creates  a CBR subaccount and                                                                    
     requires that  the main account be  invested short-term                                                                    
     if  the Department  of Revenue  anticipates a  need for                                                                    
     those funds within 5 years;                                                                                                
     2. AS 37.13.145(b), which  contains the current formula                                                                    
     for appropriations  to the dividend fund  that would be                                                                    
    replaced by the formula in section 7 of this bill;                                                                          
     3.   AS  37.13.145(c),   which  contains   the  current                                                                    
     inflation proofing  formula that  would be  replaced by                                                                    
     the new mechanism in section 6 of this bill.                                                                               
     Section 14 - Repeal                                                                                                        
     Section 14  repeals AS 42.23.025(c)  on June  30, 2020.                                                                    
     Created by  section 10 (above), this  provision applies                                                                    
     to dividends in 2018 and 2019 and will be superfluous                                                                      
     after the October 2019 dividend distribution.                                                                              
     Section 15 - Immediate effective date                                                                                      
Co-Chair MacKinnon  asked if there  was a reason  that there                                                                    
was not a severability clause in the bill.                                                                                      
Ms. Pokon had not previously discussed the issue.                                                                               
Co-Chair MacKinnon  thought that  dividends were  very close                                                                    
and  personal to  Alaskans and  expected that  someone could                                                                    
take the state  to court after any changes of  any kind were                                                                    
made to the dividend. She referenced past litigation.                                                                           
SB  26  was   HEARD  and  HELD  in   committee  for  further                                                                    
9:42:58 AM                                                                                                                    
AT EASE                                                                                                                         
9:46:13 AM                                                                                                                    

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