Legislature(2011 - 2012)FAHRENKAMP 203

02/23/2012 09:00 AM Senate STATE AFFAIRS


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 178 ALASKA OPERATING ENDOWMENT FUND TELECONFERENCED
Heard & Held
*+ SCR 22 ALASKA ARCTIC POLICY COMMISSION TELECONFERENCED
Heard & Held
*+ SCR 19 PROCLAIMING UNITED STATES MARSHALS DAY TELECONFERENCED
Moved SCR 19 Out of Committee
Bills Previously Heard/Scheduled
             SB 178-ALASKA OPERATING ENDOWMENT FUND                                                                         
                                                                                                                              
9:03:58 AM                                                                                                                    
CHAIR  WIELECHOWSKI  announced that  the  first  bill before  the                                                               
committee  was SB  178, which  would create  an Alaska  Operating                                                               
Endowment  Fund  as  a  depository for  the  state's  savings  to                                                               
generate  revenue  for  the  benefit  of  future  generations  of                                                               
Alaskans.                                                                                                                       
                                                                                                                                
SENATOR  BERT  STEDMAN,  as co-chairman  of  the  Senate  Finance                                                               
Committee, sponsor of  SB 178, introduced the bill.  He said that                                                               
currently,  Alaska  has amassed  excess  billions  of dollars  in                                                               
liquidity  outside  of  the  Permanent  Fund  and  has  a  unique                                                               
opportunity to create a fund  source for future operations of the                                                               
state.  Previous discussions,  even  five years  ago, were  about                                                               
when  the legislature  would withdraw  funds  from the  Permanent                                                               
Fund for the operations of the  state. He explained that the bill                                                               
would set  aside $15 billion  and allow  a revenue stream  of 4.5                                                               
percent to go into the general  fund, if needed. In the future if                                                               
funds are needed, the legislature  would have flexibility to meet                                                               
the  needs  of  the  state.  The bill  would  also  block  future                                                               
legislators from taking  billions out of savings  and would force                                                               
future   legislators   to   make  tough   decisions   to   reduce                                                               
expenditures.  He  summarized  that the  bill  would  permanently                                                               
protect the  dividend stream of  the Alaska Permanent  Fund, help                                                               
guide  future  legislators in  protecting  the  vast quantity  of                                                               
Alaska's assets, and leave flexibility  for future legislators to                                                               
appropriated funds, when needed, where they are needed.                                                                         
                                                                                                                                
9:08:44 AM                                                                                                                    
SENATOR STEDMAN addressed the Department  of Revenue fiscal note,                                                               
which he said  is large, but the legislature  is already managing                                                               
those large amounts.  He concluded by saying that it  was time to                                                               
have this conversation in the legislature.                                                                                      
                                                                                                                                
SENATOR GIESSEL referred to a  chart in the members' packets. She                                                               
noted that point  five on the chart says that  future returns are                                                               
based  on  2011  Callan  capital market  assumptions  and  median                                                               
expected  returns. She  questioned  whether  the Callan  earnings                                                               
assumptions were high at 7.5 percent.                                                                                           
                                                                                                                                
SENATOR  STEDMAN  explained  that  the basic  allocation  was  60                                                               
percent equities  and 40 percent bonds.  The forward expectations                                                               
from Callan  in the financial  markets have been lowered  for the                                                               
next  decade. By  capping expenditures  at 4.5  percent, anything                                                               
above  that would  be  re-invested. Over  time,  on average,  the                                                               
investment should be inflation proofed.  Callan's concern is that                                                               
bond market  yields have  been so  suppressed that  when interest                                                               
rates rise, the  bond market will have great losses.  He said 4.5                                                               
percent payout was the starting  discussion point and might be on                                                               
the low side.                                                                                                                   
                                                                                                                                
SENATOR  MEYER said  he  liked the  concept of  the  bill and  it                                                               
reminded him of the Percent of  Market Value (POMV) bill in 2004.                                                               
He asked what oil price is  being used in calculations for the FY                                                               
2012  and FY  2013  budgets. He  did  not know  if  tying up  all                                                               
savings would be  prudent if the price of oil  drops. He wondered                                                               
if the state should try to reduce its debt first.                                                                               
                                                                                                                                
9:15:29 AM                                                                                                                    
SENATOR STEDMAN  said the initial  payout can be  modified. There                                                               
is  concern with  break-even  oil price  and  oil production.  He                                                               
countered that the  bill would force budget  discipline. There is                                                               
more than  $15 billion in cash  which is open for  discussion and                                                               
could  be adjusted  as the  legislature sees  fit. He  maintained                                                               
that  starting out  with $15  billion would  protect most  of the                                                               
state's savings, but  would provide the ability  to build savings                                                               
outside of the endowment to help with the operating budget.                                                                     
                                                                                                                                
SENATOR  STEDMAN  maintained  that  the  retirement  system  debt                                                               
obligations would have to be  a separate discussion. There has to                                                               
be a balance. All  large issues would be put on  the table at the                                                               
same time and decisions made on how to deal with them.                                                                          
                                                                                                                                
SENATOR MEYER  agreed that it  does force  fiscal responsibility.                                                               
He asked what oil price was used to determine the budget.                                                                       
                                                                                                                                
SENATOR STEDMAN said  $109 per barrel was used  for the projected                                                               
revenue stream. He said he would  have to check on the break even                                                               
oil price, which  he thought was around $80 per  barrel. It would                                                               
be beneficial to the state to have a lower break even oil price.                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI asked  how  secure the  fund  would be.  He                                                               
wondered if  in a year the  legislature could modify the  size of                                                               
the appropriation.                                                                                                              
                                                                                                                                
SENATOR  STEDMAN stated  that the  fund would  be in  statute and                                                               
could be  changed by future  legislation. If could also  become a                                                               
Constitutional Budget  Amendment similar  to the  Permanent Fund.                                                               
He opined it  would be a better policy discussion  in the form of                                                               
a statute.                                                                                                                      
                                                                                                                                
9:20:47 AM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  it the bill  is a  dedicated fund                                                               
and  if there  could be  a legal  challenge about  binding future                                                               
legislatures.                                                                                                                   
                                                                                                                                
SENATOR STEDMAN replied  that he had not sought  a legal opinion;                                                               
however,  it  is not  a  dedicated  fund  because it  draws  from                                                               
general funds.                                                                                                                  
                                                                                                                                
ANGELA  RODELL,  Deputy   Commissioner,  Department  of  Revenue,                                                               
addressed the fiscal note for  SB 178, which has an appropriation                                                               
request for  $3,150,000. She  related that most  of the  money is                                                               
already  being spent  by other  funds. She  pointed out  that the                                                               
asset  allocation contemplated  by  the bill  would require  more                                                               
external management  because more  of the  monies would  be moved                                                               
into  an  equity position  and  then  moved  into a  more  active                                                               
external management position.                                                                                                   
                                                                                                                                
SENATOR  MEYER  summarized  that the  statutory  reserve  account                                                               
would go for  a year or two  with losses and then  hope for gains                                                               
in the future. He asked if the debt ratio was good.                                                                             
                                                                                                                                
MS. RODELL said it was very good.                                                                                               
                                                                                                                                
9:24:17 AM                                                                                                                    
SENATOR  PASKVAN   suggested  using  an   "institutional  prudent                                                               
investor  fund" method.  He commented  on an  article about  true                                                               
risk  over time  where the  real risk  is in  bonds, rather  than                                                               
equities. He suggested concentrating more in equities.                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  asked if the administration  has a position                                                               
on the bill.                                                                                                                    
                                                                                                                                
MS. RODELL said not at this time.                                                                                               
                                                                                                                                
SENATOR  WIELECHOWSKI understood  that  the money  in the  fiscal                                                               
note is currently being spent elsewhere.                                                                                        
                                                                                                                                
MS. RODELL said that was correct.                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI asked if any analysis was done to determine                                                                
whether the fund was a dedicated fund.                                                                                          
                                                                                                                                
MS. RODELL said no.                                                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI set SB 178 aside.                                                                                          
                                                                                                                                

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