Legislature(2017 - 2018)SENATE FINANCE 532

03/10/2017 09:00 AM FINANCE

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Audio Topic
09:08:17 AM Start
09:09:48 AM SB26
10:21:05 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Scheduled but Not Heard
Moved CSSB 26(FIN) Out of Committee
Scheduled but Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
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."                                                                                          
9:09:48 AM                                                                                                                    
Vice-Chair Bishop  looked at FN  1, which was a  zero fiscal                                                                    
note  from  the  Department   of  Administration  (DOA).  He                                                                    
highlighted FN  2 from the Department  of Corrections (DOC),                                                                    
which had fiscal impact.                                                                                                        
9:11:32 AM                                                                                                                    
JERRY  BURNETT,  DEPUTY   COMMISSIONER,  TREASURY  DIVISION,                                                                    
DEPARTMENT OF REVENUE, addressed FN  3, which was drafted by                                                                    
the  Tax Division  in the  Department of  Revenue (DOR).  He                                                                    
explained that the note showed  the change from undesignated                                                                    
general fund (UGF)  to non-UGF, because of  the 5.25 percent                                                                    
draw,  and  the  reduction  in  the  funding  going  to  the                                                                    
principal  of the  permanent fund  due to  the change  of 50                                                                    
percent to the constitutional  25 percent. He delineated the                                                                    
changes  in  revenue over  the  next  three-year period.  He                                                                    
stated that  the note would  need to  be updated for  FY 21,                                                                    
22,  and  23,  because  of  the  changes  in  the  committee                                                                    
substitute (CS).                                                                                                                
9:13:00 AM                                                                                                                    
Vice-Chair Bishop  addressed FN 4,  which was zero  from the                                                                    
Department of  Revenue (DOR). He  continued to FN 5,  a zero                                                                    
fiscal note from DOA.                                                                                                           
9:13:56 AM                                                                                                                    
Mr. Burnett offered an analysis of FN 6, prepared by DOR:                                                                       
     This  legislation   would  modify  how   dividends  are                                                                    
     calculated  and  funded.   The  annual  Permanent  Fund                                                                    
     Dividend  to  eligible  Alaskans  would  be  funded  by                                                                    
     appropriation  from the  General  Fund,  instead of  by                                                                    
     appropriation from  the Earnings Reserve.  Therefore, a                                                                    
     portion  of the  additional General  Fund revenue would                                                                    
     be used to pay annual  dividends. The appropriation for                                                                    
     dividends would  be based  on a  combination of  20% of                                                                    
     the  transfer from  the Permanent  Fund to  the General                                                                    
     Fund,  plus  20%  of the  value  of  mineral  royalties                                                                    
     received  during the  year. Over  the  time horizon  of                                                                    
     this  fiscal  note,   the  expected  appropriation  for                                                                    
     dividends  under  the  stated assumptions  would  range                                                                    
     from $706 million to $844 million annually.                                                                                
Co-Chair MacKinnon  solicited amendment from  the committee;                                                                    
no amendments were offered.                                                                                                     
9:15:30 AM                                                                                                                    
Senator   Dunleavy   offered   his  understanding   of   the                                                                    
legislation.   He  understood   that  25   percent  of   the                                                                    
percentage  of market  value  (POMV) would  be  used to  pay                                                                    
dividends to Alaskans.                                                                                                          
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
9:16:15 AM                                                                                                                    
Senator Dunleavy wondered why  the word, "transfer" had been                                                                    
changed to "appropriation."                                                                                                     
9:16:29 AM                                                                                                                    
Co-Chair  MacKinnon replied  that the  change constituted  a                                                                    
technical amendment  for consistency  in state  statute. She                                                                    
added that the change would  not change the authority of the                                                                    
governor to veto the bill.                                                                                                      
9:16:43 AM                                                                                                                    
Senator Dunleavy surmised that it  did not change the nature                                                                    
of  the  dividend or  its  relationship  with the  permanent                                                                    
Co-Chair MacKinnon agreed.                                                                                                      
9:16:57 AM                                                                                                                    
Senator Dunleavy  surmised that under the  bill the dividend                                                                    
would be $1000, for the next three years.                                                                                       
Commissioner Hoffbeck replied in the affirmative.                                                                               
9:17:10 AM                                                                                                                    
Senator Dunleavy surmised that the  bill would be a statute,                                                                    
which  would  not   constitutionally  protect  the  earnings                                                                    
reserve   of   the   fund  from   exploitation   by   future                                                                    
Commissioner Hoffbeck  replied in the affirmative.  He added                                                                    
that the  legislation would put  a structure around  the use                                                                    
of the earning reserved that  would prevent an overdraw, but                                                                    
that   the   legislature   would   retain   the   power   of                                                                    
9:18:09 AM                                                                                                                    
Senator Dunleavy  noted that  there was  a mechanism  in the                                                                    
bill for when oil revenue grew  enough to mitigate a draw on                                                                    
the permanent fund. He said  that theoretically, there could                                                                    
be so  much oil revenue that  there would be no  draw on the                                                                    
permanent fund.                                                                                                                 
Commissioner Hoffbeck responded in the affirmative.                                                                             
9:18:37 AM                                                                                                                    
Senator  Dunleavy  asked  whether   a  zero  draw  from  the                                                                    
permanent fund would bring the dividend to zero.                                                                                
Commissioner   Hoffbeck  replied   that  the   dividend  was                                                                    
calculated  on  the  maximum  draw,  which  meant  that  the                                                                    
reduction in  the amount used  on government  services would                                                                    
not affect the size of the dividend.                                                                                            
9:19:00 AM                                                                                                                    
Senator Dunleavy understood that there  could be a zero draw                                                                    
for  government  spending,  but  dividends  would  still  be                                                                    
Commissioner Hoffbeck agreed.                                                                                                   
9:19:10 AM                                                                                                                    
Senator Olson  wondered how much  the dividend  amount could                                                                    
be in the future as oil revenues increased.                                                                                     
Commissioner  Hoffbeck replied  that the  first three  years                                                                    
would be  $1000, and  as oil  revenue increased  and tripped                                                                    
the  provision  that  reduced  the  size  of  the  draw  for                                                                    
government  services,   the  size  of  the   dividend  would                                                                    
9:20:15 AM                                                                                                                    
Co-Chair Hoffman  spoke to Page  3, section 7, of  the bill.                                                                    
He wondered whether the draw amount was too high.                                                                               
Commissioner  Hoffbeck stated  that  extensive modeling  had                                                                    
been  done to  determine  what the  maximum  draw could  be,                                                                    
which still protecting  the corpus of the  fund and assuring                                                                    
its growth  at a rate of  inflation over time. He  said that                                                                    
the  5.25 percent  had been  determined a  comfortable limit                                                                    
over time. He noted that in  three years the draw would drop                                                                    
to  5   percent;  additionally,  the  percentage   would  be                                                                    
periodically reviewed and adjusted as necessary.                                                                                
9:22:09 AM                                                                                                                    
Co-Chair Hoffman  queried how the department  would approach                                                                    
the legislature  if the draw were  to be deemed too  high in                                                                    
the future.                                                                                                                     
Commissioner  Hoffbeck  replied the  intent  was  to put  in                                                                    
place  a  system  for  use  of the  earnings  reserve  in  a                                                                    
sustainable fashion. He said that  the department would come                                                                    
to the  legislature, if necessary, with  suggestions to make                                                                    
the draw  sustainable. He  stressed that  the idea  was that                                                                    
the permanent fund should  be multigenerational, which meant                                                                    
that it had to grow with inflation.                                                                                             
9:23:28 AM                                                                                                                    
Co-Chair Hoffman asked whether  any modeling had reflected a                                                                    
failure of the fund.                                                                                                            
Commissioner Hoffbeck  replied that  the modeling  under the                                                                    
legislation had a less than 1 percent failure rate.                                                                             
9:23:52 AM                                                                                                                    
Co-Chair  MacKinnon asked  whether  it would  be  up to  the                                                                    
legislature   to    appropriate   the   funds    after   the                                                                    
administration calculated the draw.                                                                                             
Commissioner Hoffbeck replied yes.                                                                                              
Co-Chair MacKinnon  asserted that  the legislature  would be                                                                    
prudent with any transfers.                                                                                                     
Commissioner Hoffbeck hoped that was the assumption.                                                                            
9:24:21 AM                                                                                                                    
Co-Chair MacKinnon she wondered  whether the amount could be                                                                    
an  "up to"  amount because  the legislature  would need  to                                                                    
make the transfer each year.                                                                                                    
Commissioner Hoffbeck  replied in  the affirmative.  He felt                                                                    
that the bill  listed the maximum that should  be drawn, but                                                                    
that drawing less was certainly an option.                                                                                      
9:25:27 AM                                                                                                                    
Senator Olson expressed concern  for the possible actions of                                                                    
future  legislatures and  the  potential  lack of  political                                                                    
will to decrease the draw if necessary.                                                                                         
Commissioner Hoffbeck  replied that the best  way to address                                                                    
the concern  was to reflect  on the history of  the earnings                                                                    
reserve. He said  that the earnings reserve  had always been                                                                    
available  for  appropriation, and  for  over  30 years  the                                                                    
legislature had  followed the statues  that dictate  the use                                                                    
of  the   earnings  reserve  for  dividends   and  inflation                                                                    
9:26:16 AM                                                                                                                    
Senator  von Imhof  remarked  that  generating returns  more                                                                    
than 5.25 percent put pressure  on the permanent fund, which                                                                    
was difficult  in down markets.  She stressed that  the time                                                                    
value  of  money would  make  a  difference over  time.  She                                                                    
thought that  5.25 percent  was high,  and relayed  that she                                                                    
would be  more comfortable with  4.75 percent. She  spoke to                                                                    
Section  7(c). She  understood that  the inflation  proofing                                                                    
mechanism would  allow more money  to go back into  the fund                                                                    
over time, but she questioned  whether the practice kept the                                                                    
state  dependent on  oil.  She felt  that  the spending  cap                                                                    
provision in  the bill  would keep  the operating  budget in                                                                    
check, and  if oil revenue  did increase the state  would be                                                                    
able  to  utilize  the  growth   for  capital  for  deferred                                                                    
maintenance, PERS and TRS, and other government expenses.                                                                       
Commissioner Hoffbeck  replied that  the primary  reason for                                                                    
the dollar  for dollar  reduction once  $1.2 billion  in oil                                                                    
and gas tax  and royalty revenue was realized  was to remove                                                                    
volatility   out  of   revenue   available  for   government                                                                    
expenditures. He added that by  beginning to turn the use of                                                                    
the earnings reserve off when  it was no longer necessary to                                                                    
fund government  services would prevent the  issue of "super                                                                    
heating"  government  expenditures.  He explained  that  the                                                                    
section  prioritized where  money  was spent  at  a time  of                                                                    
excess revenue.                                                                                                                 
9:29:50 AM                                                                                                                    
Senator von  Imhof felt that  the provision inside  the bill                                                                    
with  a   spending  cap  helped  stave   any  super  heating                                                                    
9:30:19 AM                                                                                                                    
Senator Dunleavy  asserted that the decades  old legislative                                                                    
practice  of  not using  the  earnings  reserve to  pay  for                                                                    
government had  ended in 2017.  He noted that the  house was                                                                    
currently  vetting legislation  that would  use billions  of                                                                    
earnings reserve dollars. He felt  that the status quo would                                                                    
work for the  next few years, and he  expressed concerns for                                                                    
the  protection of  the earnings  reserve. He  lamented that                                                                    
the people of  Alaska were at the mercy of  the decisions of                                                                    
the  legislature.  He concluded  that  the  only thing  that                                                                    
would  protect   Alaskans  from  the  legislature   was  the                                                                    
9:32:47 AM                                                                                                                    
Co-Chair  Hoffman   cited  Page  11  of   the  presentation,                                                                    
"Permanent Fund Protection Act,  Monday, March 6, 2017"(copy                                                                    
on file). He felt that  it would behoove the commissioner to                                                                    
address specific protections of the fund.                                                                                       
Commissioner  Hoffbeck replied  that  the  people of  Alaska                                                                    
viewed  the  fund  as a  multigeneration  fund  that  needed                                                                    
protection,  and  that  the dividend  needed  protection  as                                                                    
well.  He relayed  that  the plan  was  structured with  the                                                                    
intention  that  the  fund  would  grow  with  the  rate  of                                                                    
inflation,  or greater,  so  that the  buying  power of  the                                                                    
permanent fund would not be  reduced over time. He said that                                                                    
the  dividend  had to  be  preserved,  even  if it  meant  a                                                                    
smaller dividend that lasted into perpetuity.                                                                                   
9:36:04 AM                                                                                                                    
Co-Chair Hoffman thought that if  action was not taken soon,                                                                    
the  dividend would  disappear  entirely.  He believed  that                                                                    
inaction  by the  legislature, such  as not  passing SB  26,                                                                    
could put the dividend in jeopardy.                                                                                             
9:36:31 AM                                                                                                                    
Senator Dunleavy  wondered why the dividend  would disappear                                                                    
if the legislature failed to act soon.                                                                                          
Commissioner  Hoffbeck  explained  that  the  constitutional                                                                    
budget  reserve (CBR)  would eventually  run  out, at  which                                                                    
time  the earnings  reserve would  be tapped.  As the  state                                                                    
spent down  the earnings  reserve, the  money that  paid for                                                                    
dividends  would be  used for  government services.  He said                                                                    
that  once  it  got  to  the  point  where  the  state  paid                                                                    
dividends, or  paid bills, bills  would need to be  paid and                                                                    
the dividend would not be distributed.                                                                                          
9:37:58 AM                                                                                                                    
Senator  Dunleavy  appreciated  the explanation.  He  warned                                                                    
that the dividend could disappear  because of the actions of                                                                    
the  current  legislature. He  suggested  that  it would  be                                                                    
easier to use the earnings  reserve than to impose an income                                                                    
tax on Alaska residents.                                                                                                        
Commissioner Hoffbeck expounded that  when facing a billion-                                                                    
dollar  deficit  there  were  3  options:  raise  a  billion                                                                    
dollars in new revenue through  taxes, cut a billion dollars                                                                    
from government spending,  or take a billion  dollars out of                                                                    
savings.  He agreed  that the  easiest solution  was to  use                                                                    
savings. He added  that lack of structure around  the use of                                                                    
the  earnings   reserve  was  the  biggest   threat  to  the                                                                    
durability of the earnings reserve  because of depletion due                                                                    
to unplanned draws.                                                                                                             
9:38:40 AM                                                                                                                    
Senator Dunleavy  wondered whether  the people of  the state                                                                    
supported the legislation.                                                                                                      
Commissioner  Hoffbeck  replied  that the  public  had  been                                                                    
supportive of the legislation.                                                                                                  
9:39:47 AM                                                                                                                    
Senator Dunleavy  asked if the administration  would support                                                                    
a public vote on using the earnings reserve.                                                                                    
Commissioner Hoffbeck responded that  the legislature was in                                                                    
the best position of the  proper use of the earnings reserve                                                                    
to balance the  state's fiscal situation. He  thought that a                                                                    
public vote against could create more controversy.                                                                              
9:41:11 AM                                                                                                                    
Senator Dunleavy understood that  the administration did not                                                                    
support a public vote on the matter.                                                                                            
Commissioner Hoffbeck  believed that the decision  needed to                                                                    
be made promptly by the legislature.                                                                                            
9:41:29 AM                                                                                                                    
Senator von  Imhof appreciated  that the  administration had                                                                    
worked  to inform  the public  on  the use  of the  earnings                                                                    
reserve for government spending.  She expressed concern over                                                                    
the  future of  the earnings  reserve if  draws were  needed                                                                    
again  in the  future.  She  thought that  the  best way  to                                                                    
preserve  the  fund,  and avoid  additional  appropriations,                                                                    
while  allowing the  fund to  grow  over time,  would be  to                                                                    
consolidate the fund into one  large fund. She felt that one                                                                    
large and  appropriately managed  endowment would  allow the                                                                    
state to maximize return on  investment and ensure inflation                                                                    
Commissioner  Hoffbeck replied  that although  the permanent                                                                    
fund  had  a  distinction  between  the  principal  and  the                                                                    
earnings  reserve, it  was  managed as  one  large fund.  He                                                                    
furthered  that there  was no  distinction  between the  way                                                                    
those pieces  of the  fund were  invested. He  admitted that                                                                    
the  earnings reserve  piece  of the  bill  entirely and  go                                                                    
straight POMV, 5.25  percent of the full value  of the fund,                                                                    
which  had been  considered by  the administration.  He said                                                                    
that  there was  concern that  doing that  could lessen  the                                                                    
security  of  the  earnings reserve.  He  believed  that  an                                                                    
investment construct  could be set up  within the department                                                                    
to use the  CBR as a liquidity bank to  pay bills throughout                                                                    
the year. He furthered that  as the fund realized gains, the                                                                    
annul transfer  could be made; as  long as the CBR  was paid                                                                    
back  by the  state  within  the fiscal  year  DOR would  be                                                                    
within the statutory authority of using the CBR.                                                                                
9:46:57 AM                                                                                                                    
Senator Olson  asked whether  there was  a concern  that the                                                                    
earnings reserve  would be the  only resource that  would be                                                                    
used  for   filling  the  deficit  gap,   rather  than  also                                                                    
considering a broad-based tax.                                                                                                  
Commissioner Hoffbeck responded that  the governor felt that                                                                    
a  comprehensive plan  was  necessary in  order  to reach  a                                                                    
viable  fiscal  solution.  He  asserted  that  the  governor                                                                    
preferred  a revenue  solution to  fully closing  the fiscal                                                                    
9:48:40 AM                                                                                                                    
Senator  Olson lamented  that a  comprehensive plan  had not                                                                    
been  presented  to  the  senate, and  that  the  best  plan                                                                    
offered so far was SB 26.                                                                                                       
Commissioner Hoffbeck  said that  many ideas  were currently                                                                    
under  discussion, and  that it  would be  premature to  say                                                                    
that  SB 26  was  the  final solution.  He  stated that  the                                                                    
administration  was working  under  the  presumption that  a                                                                    
comprehensive   fiscal  plan   would  be   crafted  by   the                                                                    
9:49:51 AM                                                                                                                    
Co-Chair  MacKinnon relayed  that the  public was  educating                                                                    
itself  on  Alaska's budgetary  issues.  She  said that  the                                                                    
state  had been  fortunate over  the past  30 years  to have                                                                    
only  one source  of volatile  revenue  that had  maintained                                                                    
services across  the state. She  spoke of the  declining oil                                                                    
production,  and  price, in  relation  to  the state  budget                                                                    
crisis. She  hoped that the  decline would be  reversed, but                                                                    
until then  savings were being spent  rather than generating                                                                    
revenue.  She  said  that  people   in  her  community  were                                                                    
"shouting for  reductions in  government." She  expounded on                                                                    
the  financial  troubles  the  state  currently  faced.  She                                                                    
offered  a summary  of budget  cuts made  over the  past few                                                                    
years. She worried  about the state being  downgraded in its                                                                    
credit rating.  She worried  about increased  property taxes                                                                    
in her district. She relayed that  she had heard that one of                                                                    
every three dollars spent in  local government came from the                                                                    
state.  She  reminded  the  committee  that  state  services                                                                    
included roads and airports.                                                                                                    
9:55:19 AM                                                                                                                    
Co-Chair  MacKinnon  adamantly  disagreed that  taxes  could                                                                    
help to close the fiscal gap.  She stressed that SB 26 would                                                                    
close the  gap, while  maintaining downward pressure  to cut                                                                    
the budget and  right-size the government for  the people of                                                                    
Alaska. She lamented that urban  areas were contributing too                                                                    
much, and that  rural Alaska was not  contributing what they                                                                    
should, toward  education; the largest  cost driver  for the                                                                    
state of Alaska.                                                                                                                
9:56:38 AM                                                                                                                    
Co-Chair  Hoffman  MOVED  to   REPORT  CSSB  26  (FIN)  with                                                                    
individual  recommendations  and   the  accompanying  fiscal                                                                    
9:57:17 AM                                                                                                                    
Senator Dunleavy OBJECTED for discussion.                                                                                       
9:57:24 AM                                                                                                                    
Senator Dunleavy  agreed that taxes  would be the  "death of                                                                    
Alaska's future." He  opined the high cost of  living in the                                                                    
state.  He expounded  on  the  evils of  taxes.  He did  not                                                                    
support  the legislation,  and offered  a  brief history  of                                                                    
dividend  payments.   He  recalled   past  actions   by  the                                                                    
committee. He asserted  that if the legislature  did not cap                                                                    
the operating budget, there would  be no tax base imaginable                                                                    
that  would catch  the projected  expenditures. He  believed                                                                    
that the bill  was one component of a  lager discussion that                                                                    
needed to occur.                                                                                                                
10:04:52 AM                                                                                                                   
Senator Dunleavy continued to highlight his concerns.                                                                           
Senator Dunleavy REMOVED his OBJECTION.                                                                                         
10:05:27 AM                                                                                                                   
Co-Chair MacKinnon OBJECTED for discussion.                                                                                     
10:05:34 AM                                                                                                                   
Co-Chair  Hoffman offered  comments on  the legislation  and                                                                    
the  state's  current  fiscal   climate.  He  supported  the                                                                    
10:07:34 AM                                                                                                                   
Vice-Chair  Bishop remarked  that he  wanted to  protect the                                                                    
dividend.  He  felt  that  there  was  some  continuity  and                                                                    
consistency with ensuring a $1000 dividend.                                                                                     
10:08:36 AM                                                                                                                   
Senator Micciche  argued that the  senate was not  trying to                                                                    
raid  the permanent  fund. He  demanded  protection for  the                                                                    
permanent  fund and  for a  perpetual  dividend program.  He                                                                    
likened using the  earnings reserve to the use  of a college                                                                    
savings  account.  He  contended  that  the  state  was  not                                                                    
meeting  the constitutional  requirements for  public safety                                                                    
in the  state. He  asserted that the  bill was  necessary to                                                                    
fund state government without cutting essential services.                                                                       
10:15:07 AM                                                                                                                   
Senator  Olson  reminded  the  committee  that  experts  had                                                                    
testified in the past that  even cutting government spending                                                                    
by 100 percent would not solve the state's budget woes. He                                                                      
10:17:44 AM                                                                                                                   
Senator Dunleavy  spoke to the  complexity of  making budget                                                                    
cuts. He spoke of ways that  state dollars had been spent in                                                                    
the past  that may  not have  been particularly  prudent. He                                                                    
thought  that the  focus  of the  legislature  should be  to                                                                    
protect the rights and properties of Alaskans.                                                                                  
Co-Chair  MacKinnon REMOVED  her OBJECTION.  There being  NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
CSSB  26 (FIN)  was REPORTED  out  of committee  with a  "do                                                                    
pass" recommendation  and with  two new fiscal  impact notes                                                                    
from Department of  Revenue, and one new  fiscal impact note                                                                    
from   Department  of   Corrections;   and  three   previous                                                                    
published zero fiscal  notes: FN1 (ADM), FN4  (REV), and FN5                                                                    
10:19:40 AM                                                                                                                   
AT EASE                                                                                                                         
10:20:51 AM                                                                                                                   

Document Name Date/Time Subjects
SB26CS(FIN) Sectional Analysis 03.11.2017.pdf SFIN 3/10/2017 9:00:00 AM
SB 26
SB 26 Support Letter AGCoA.pdf SFIN 3/10/2017 9:00:00 AM
SB 26
SB 26 Support Ltr Signed NRIM.pdf SFIN 3/10/2017 9:00:00 AM
SB 26
SB 26 Support Letter RDC.pdf SFIN 3/10/2017 9:00:00 AM
SB 26