Legislature(2017 - 2018)BUTROVICH 205
02/02/2017 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| Presentation: Dr. Ralph Townsend - Institute of Social and Economic Research, Answering Questions on Alaska's Economy. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | SB 21 | TELECONFERENCED | |
SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS
3:32:17 PM
CHAIR DUNLEAVY announced the consideration of SB 21.
3:32:43 PM
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,
set forth that SB 21 is very straight forward and simple. He
said the bill's goal is to protect the permanent fund. He
explained that the state has struggled the last two or three
years through a budget deficit without the fortune of increasing
oil production and or prices. He said Alaska has slipped into a
state with massive hemorrhaging of its savings. He noted that
the Legislature put away $16 billion outside of the permanent
fund, but the savings accounts have been depleted to $3.6
billion. He opined that $3.6 billion may sound like a lot, but a
$2.8 billion deficit makes the amount very small.
3:34:50 PM
He said over the last couple of years the Legislature has talked
about how to fix the deficit through budget reductions or tax
increases, but the "clock has ticked" and "Alaska's cash is
burned." He set forth that the state has the fortunate
opportunity to be backstopped by the permanent fund that
Alaskans have set away for generations, approximately $56
billion. He added that the state is also fortunate to be the
owners of the largest conventional-hydrocarbon basin in North
America, which has been very profitable for Alaska. He pointed
out that his generation has lived through a huge wealth boon and
asserted that one of the most important things his generation
can do in public service is protect the state's wealth that was
created for future generations.
3:37:23 PM
SENATOR STEDMAN opined that a reoccurring structural deficit
will bankrupt the state. He set forth that the intent is to get
out of the structural deficit and move to more profitable times.
He pointed out that not only does the Legislature need to make
sure the permanent fund is protected, but to also have a
framework to bolt other solutions to; example, spending
reductions, taxes, or improvements to the state's oil basin.
He voiced his concern that the Legislature can more easily be
backed into the permanent fund's earnings reserve account (ERA).
He emphasized that the permanent fund is protected by the
constitution, but the fund's trading profits and dividends are
not. He noted that the Legislature has appropriated over time
about $7 billion to the permanent fund's corpus, but ensuring
that the state has a long-term asset for future generations
requires the permanent fund to be protected from the
Legislature. He remarked that the Alaska's legislators are
collectively the appropriators, good or bad the "buck stops" at
the Legislature.
He explained that he put forward a framework that he thought was
worthy of the Senate's consideration and hopefully beyond. He
said he offered his framework as a starting point and points of
discussion to bolt onto. He asserted that the permanent fund's
current structure has been a good structure that has been very
productive for the people, but a hard look must be taken to make
the fund more protective because only the corpus is protected by
the constitution whereas the ERA and the rest of it is not.
3:41:04 PM
CHAIR DUNLEAVY pointed out that Senator Stedman emphasized how
to protect the permanent fund and opined that he was really
talking about the ERA.
SENATOR STEDMAN answered correct and specified that he was
talking about the entire $56 billion, roughly the value of the
permanent fund. He pointed out that the Legislature can
currently access approximately $9 billion without "trading
profits," in addition to held assets that can be sold for even
more spending. He voiced his concern that the Legislature ends
up cannibalizing the permanent fund to work through the state's
current situation. He agreed with Chair Dunleavy that the
permanent fund's corpus is protected, but the ERA is not.
He stated that SB 21 would protect the ERA and limit
appropriations to guard the permanent fund from being raided. He
provided an overview of SB 21 as follows:
· Builds a new fiscal framework that provides a fair
dividend.
· Continues the proper management of the permanent fund.
· Limits use for public service.
He revealed that based on financial markets' history over the
past 100 years, pulling 4 percent to 5.5 percent out of the
permanent fund will also allow savings to last. He opined that
higher withdrawals will erode the permanent funds' savings over
time.
3:45:32 PM
He specified that SB 21 will access the permanent fund as
follows:
· Withdraw 4.5 percent of the market value so that the fund's
value does not erode for future generations.
· The permanent fund will grow most likely in perpetuity by
inflation proofing itself because the asset returns will
exceed the rate of inflation and withdrawal, on average.
He pointed out that over the past 30 years there have been 10
economic shocks in the financial markets and the state will have
economic shocks in the future; however, limiting the permanent
fund's withdrawal might not exceed its rate of return in the
long run. He added that limiting the withdrawal will protect the
fund from the legislative "wolves" from getting to it.
3:47:44 PM
He admitted that the Legislature cannot fix the state's
financial situation without the help of the permanent fund. He
asserted that the operating budget cannot be reduced enough, and
the state cannot tax enough. He said if the state is forced into
using the permanent fund, how to protect the permanent fund and
be fair with Alaskans on the permanent fund dividend (PFD) must
be addressed.
SENATOR STEDMAN detailed how SB 21 addresses the 4.5 percent
withdrawal from the permanent fund as follows:
· Half or 2.25 percent of the "citizens' money" goes to the
PFD.
· Half or 2.25 percent goes towards "core services" in the
operating budget.
· Legislature's 2.25 percent can either be added to the PFD
or returned to the permanent fund during strong economic
years.
· Market returns will be based on a five-year average over a
six-year period for budgeting purposes and to smooth out
fluctuation "ripples" from the financial markets.
· Addressing how the Legislature appropriates its 2.25
percent on an annual basis would not be a spending cap, but
does exert downward pressure on the "appropriating body."
He noted his concern that the Legislature will get itself into a
situation over the next couple of years where billions from the
ERA are appropriated that cannot be replaced.
3:53:51 PM
He addressed page 3, "Current Principles for the Permanent Fund"
and emphasized that SB 21 does not change how the permanent fund
is currently managed.
He addressed page 4, "Current Principles Work - 8.66 Percent
Annualized Returns for Last 32.5 Years ($734,000 in 1977 to
$56.3 billion Last Week)." He said the permanent fund returns
over time vary due to economic conditions and portfolio
allocations. He noted that Ms. Angela Rodell, CEO of the Alaska
Permanent Fund, was in attendance and could address the
intricacies of the permanent fund as well as her comfort level
with the 4.5 percent withdrawal.
He addressed page 5, "SB 21 (2017) Protects the Permanent Fund
under Current Principles: Invest Prudently, Provides a Fair
Dividend, Allows for Reinvestment, and Limits the Amount for
Government." He specified that SB 21 closes the door on
government spending and would not allow the Legislature to
appropriate over 4.5 percent out of the permanent fund. He
specified that the Legislature would have to take spending
seriously during a financial downturn because the ERA will not
be available to draw upon. He pointed out that the Legislature
can build upon the constitutional budget reserve (CBR) or other
savings accounts outside of the permanent fund if the
Legislature so chooses; however, the permanent fund would be
taken out of the discussion as an absolute fallback of unlimited
proportions that forces the Legislature to act rather than not
responding to deficits and swinging economic conditions.
3:56:41 PM
SENATOR STEDMAN revealed that Sitka switched their "little
permanent fund" in the 1990s from all bonds to a percent-of-
market-value approach with an annual payout of 6 percent to
their general fund. He noted that he assisted Sitka with their
fund restructuring. He said a 6 percent withdrawal has shown to
be too high where Sitka has seen a slow erosion of purchasing
power over the last 20-plus years. He asserted that there is no
magic with a 4.5-percent withdrawal, but 6 percent is too high,
and 2 percent is too low to fix the problems that the state
faces in addition to dividend amounts coming down substantially
as well. He set forth that he is trying to put on the table a
framework that facilitates discussions with the Alaska Permanent
Fund Corporation, legislative finance committees, and all the
experts to work collectively.
3:58:23 PM
He addressed page 6, "SB 21 (2017) - Projected 4.5 Percent Draw,
Dividend Amounts, and Other Funds" and asserted that his intent
with SB 21 was not driven by how much the PFD should be, but by
what structure should the state have to protect the permanent
fund. He said with the structure in place, the structure is
split 50/50 and the PFD is determined for the public. He
projected that the PFD from SB 21 would be in the range of
$1,700 in 2018 and total $1.89 billion. He admitted that the
state's situation is so grave that the PFD strategy will have to
be phased in, but the Legislature's ability to access 4.5
percent would be blocked. He said the public gets a fair
dividend, a fair split, and a fair shake for the assets they
own, and the legislature oversees. He set forth that the wealth
created over the last several decades continues for future
generations.
He addressed page 7, "SB 21 (2017) - Safeguards the Fund So It
Can Grow and Last for Generations." He reiterated that SB 21
helps close the fiscal gap and provides a framework to bolt-on
other tools as the Legislature sees fit, which will have to be
added. He asserted that SB 21 helps keep downward pressure on
government spending and noted that one of the tools is the
spending cap that Chair Dunleavy has worked on as well as others
that will be coming out. He said budget reduction discussions
are underway in addition to revenue enhancements, but the
Legislature needs a framework. He asserted that the Legislature
needs to have public support if the wealth coming off the
permanent fund is structured to be protected and shared with the
public. He said the public would share with the general fund
where objectives and obligations for education, public safety,
and the Department of Natural Resources are met. He opined that
without support the public will demand changes and that is why
the Legislature needs to set stability and predictability.
4:02:42 PM
SENATOR STEDMAN summarized that he is one of the "wolves" in the
Legislature and there are 60 in total. He said Alaska's
legislators have good intentions, but collectively the
Legislature is very dangerous when there is a pot of money in
front of it, especially with the biggest stack of billions
relative to the amount of people in the state. He remarked that
other states cannot even imagine Alaska's wealth. He set forth
that he just wants to make sure that the generation fortunate
enough on the timeline of life to be in Alaska during the
wealth-bubble deals with the deficit to pass the wealth forward
to the next generation of Alaskans.
CHAIR DUNLEAVY opined that some legislators see themselves as
"wolf hunters" who go after the "wolves" to protect the
permanent fund. He remarked that Senator Stedman's focus seems
to be on protecting the fund and noted his argument that the ERA
is a portal to the permanent fund where withdrawing too much
reduces the permanent fund. He asked why Senator Stedman did not
propose a constitutional amendment rather than a bill that can
be changed by future legislators.
4:04:36 PM
SENATOR STEDMAN agreed with Chair Dunleavy and explained that
his decision was based on the public supporting the bill. He
said he thought starting with a statutory change would be
better, even though the next legislature can change it.
CHAIR DUNLEAVY asked how a statutory change protects the
permanent fund.
SENATOR STEDMAN replied that if the public supports the concept,
which he thinks they will when they realize how defensive the
bill is for permanent fund and how the bill does not change the
permanent fund's structure. He specified that the bill does not
put the permanent fund at risk of being raided and closes the
door and "welds it shut." He opined that the public is going to
be very receptive to a constitutional amendment and he would
personally like to see one.
CHAIR DUNLEAVY asked to confirm that Senator Stedman would
support a constitutional amendment for his permanent fund
concept.
SENATOR STEDMAN answered yes.
CHAIR DUNLEAVY pointed out that the state has a statute for
decades that calculated a PFD payout which was vetoed this past
year.
SENATOR STEDMAN answered correct.
CHAIR DUNLEAVY opined that if the permanent fund protection is
not constitutionalized, the "wolves" in one form or another can
"monkey" with it. He asked why Senator Stedman did not initially
advocate for his legislation to be a constitutional amendment.
SENATOR STEDMAN replied that Chair Dunleavy made a good point.
He stated that his legislation is a point of timing where he
would like to see the public support whatever framework the
Legislature puts forward. He opined that SB 21 is a cornerstone
that is straightforward like an endowment portfolio with no
"smoke and mirrors." He said he thinks the public will support
and want a constitutional amendment to keep the "wolves" out
because the next several years are going to be tough years in
the Legislature for appropriating enough funds for the state to
make its payroll. He remarked that he would like to see input
from the Alaska Permanent Fund Corporation and the Alaska
Department of Revenue.
4:07:41 PM
CHAIR DUNLEAVY noted that Senator Stedman said, "It's the
people's money" when referring to the PFD. He asked Senator
Stedman if he supported SB 1 and SB 2. He specified that SB 1
and SB 2 would return the vetoed portion of the PFD to the
people of Alaska. He said he wanted to be sure that he
understood what Senator Stedman is saying that he believes it is
the "people's money."
SENATOR STEDMAN replied as follows:
There's no doubt, not only is it the people's money,
but it's the people's oil, it's the people's gas, the
"people's fish, bear, and deer. We are a state unlike
all other states that is owned in commons. We are not
Texas, we don't have the "Ewing's Ranch" on top of an
oil well, we collectively own it.
CHAIR DUNLEAVY remarked that he looked forward to Senator
Stedman's support on SB 1 and SB 2.
SENATOR GIESSEL noted that another proposal from the previous
year took a higher percentage from the ERA. She asked how the
lower percentage change in SB 21 effects how the permanent fund
is managed.
4:09:05 PM
SENATOR STEDMAN replied that Angela Rodell from the Alaska
Permanent Fund Corporation would be more adept at addressing
Senator Giessel's question.
SENATOR EGAN pointed out that the state would currently be in a
more difficult financial situation if it were not for the Senate
Finance Committee that Senator Stedman chaired when $12 billion
was into the CBR. He thanked Senator Stedman.
SENATOR STEDMAN replied as follows:
It's all about timing, trying to get public support. I
wish in retrospect we would have taken some of those
massive savings and put them in the permanent fund.
None of us expected to have this big of an economic
downdraft. We knew downdrafts come, but this has been
a doozy for the state, so it caught a lot of us by
surprise, I think.
4:10:26 PM
ANGELA RODELL, CEO, Alaska Permanent Fund Corporation, Juneau,
Alaska, addressed Senator Giessel's previous question as
follows:
The management of the fund under the proposed
legislation probably would not change. What is going
to drive changes to the management of the ERA as a
result of any legislation that might come forward is
going to be the liquidity demands and how quickly we
see that ERA getting drawn down and the expectation. I
think one of the things that is helpful in all of the
pieces of legislation including the senators is that
there is this "lag," so we are walking into a fixed-
dollar amount into the budgetary season and there is
not an expectation of expected earnings or an unknown
amount that may crop up in any of them. So the more
certainty we can have on the expected draws and what
those draws will be because due to the lags and the
percentages, the better able we will be able to
manage. Now, the higher the percentage draws, the more
we will have to look at the risk profile of the ERA to
make sure we have that higher dollar amount available
that you're expecting to be available for budgets.
4:11:47 PM
SENATOR COGHILL asked to confirm Senator Stedman's statement
that the valuation process would be straight forward. He said he
knows the Permanent Fund Corporation's asset allocation is
dynamic and inquired if a "continuous valuation" would say that
the 4.5 percent withdrawal would come from a certain asset
percentage.
MS. RODELL replied that SB 21's evaluation is straight forward
and complies with all the issues that the Permanent Fund
Corporation has. She noted that the Alaska Constitution is
written that the income is what is available for spending. She
said SB 21 continues to recognize the challenges the Permanent
Fund Corporation has between generally accepted accounting
principles and what can be made available for spending balances.
She summarized that SB 21 is a very straight forward calculation
for the Permanent Fund Corporation.
SENATOR GIESSEL noted that Senator Stedman projected that $1.1
billion would be made available by SB 21. She asked how much
would have been made available by SB 128 [29th Legislature].
MS. RODELL replied that she does not remember.
4:13:29 PM
CHAIR DUNLEAVY held SB 21 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 Sponsor Statement.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |
| SB 21 Sectional Analysis.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |
| SB 21 - Fiscal Note DOR.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |
| SB 21 - Fiscal Note DOC.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |
| SB 21 - Fiscal Note DOA.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |
| SB 21 Presentation Revised.pdf |
SSTA 2/2/2017 3:30:00 PM |
SB 21 |