Legislature(2017 - 2018)BUTROVICH 205
02/07/2017 03:30 PM Senate STATE AFFAIRS
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.
| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 26 | TELECONFERENCED | |
SB 26-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
3:30:58 PM
CHAIR DUNLEAVY announced the consideration of SB 26.
3:31:28 PM
EMMA POKON, Assistant Attorney General, Alaska Department of
Law, Juneau, Alaska, introduced herself and offered to answer
questions regarding SB 26.
3:31:44 PM
RANDALL HOFFBECK, Commissioner, Alaska Department of Revenue,
Juneau, Alaska, addressed Emma Pokon's presence at the meeting.
He said typically someone from the Department of Law does not
sit next to him during a bill presentation, but Ms. Pokon has
been involved with the development of SB 26 as well as
coordinating the bill's modeling. He said Ms. Pokon is
intimately involved with the details of the bill.
3:33:19 PM
He explained that there are two-main purposes of the Permanent
Fund Protection Act (PFPA) that sets up the following:
1. Framework for sustainable withdrawals from the earnings
reserve account (ERA).
2. Sustainable dividend formula.
He said both are needed to be accounted for in the final plan.
He explained that the bill is "numbers driven" with a
significant public-overlay as it relates to the Permanent Fund
Dividend (PFD).
3:34:24 PM
COMMISSIONER HOFFBECK explained that the "problem" is a
combination of the following issues:
1. Low oil revenues,
2. Persistent deficit,
3. Diminished budget reserves.
He explained that the low-oil revenues have been a constant
since late 2014. He opined that "low" may be a misnomer because
current oil prices may be the new norm so that current revenues
is the baseline to be looked at going forward regarding what is
possible for government expenditures and services that can be
provided.
He revealed that $103 per-barrel oil pricing would be required
to balance the current budget. He noted that the current price
for oil is approximately $55 per barrel. He pointed out that no
one is forecasting future-oil prices to be above $60 to $70 per
barrel. He detailed that approximately 500,000 barrels of oil is
flowing through the Trans-Alaska Pipeline System and
approximately 1.5 million barrels-per-day would be needed to
balance the budget at $60 per-barrel oil. He set forth that
current oil prices and production levels puts the state in a
situation where something other than oil price or production
rebound must be looked at. He added that the Alaska's diminished
budget reserves that have been used over the past several years
to fund the gap between revenues versus expenditures for the
last few years have been greatly diminished.
He said to provide a perspective to the low-oil revenues, from
2005 to 2014 over 90 percent of the Alaska's unrestricted
general fund (UGF) revenues came from petroleum revenues,
primarily from the severance tax and royalties. He added that
between 2012 and 2015, oil revenue fell by 88 percent, $7.8
billion in revenue. He summarized that Alaska has lost
approximately 80 percent of its revenues, overall.
He noted that current oil prices and production are higher than
what was forecasted for 2017. He revealed that an annual
average-oil price that increases by a dollar is worth
approximately $30 million in revenue and 10,000 barrels of
additional annual production equates to approximately $20
million in revenue.
3:35:31 PM
SENATOR COGHILL joined the committee meeting.
CHAIR DUNLEAVY asked what is anticipated for the state's revenue
from oil production.
COMMISSIONER HOFFBECK detailed that the average oil price is
$48.82, approximately $2 more than forecasted that equates to
$60 million more in revenue. He said production is at 515,000
barrels-per-day which is 25,000 more than forecasted that
equates to an additional $50 million. He summarized that total
revenue would be approximately $1.5 billion.
3:38:31 PM
He addressed the state's deficit spending and noted that even
though expenditures have been reduced by 44 percent over the
last five years, expenditures do not match the 80-percent loss
in revenue. He remarked that the state will run out of savings
long before the deficit gap is closed and real changes need to
be made. He informed that the forecasted combined balance from
the Statutory Budget Reserve (SBR) and Constitutional Budget
Reserve (CBR) is $4.6 billion for June 30, 2017. He noted that
the fall forecast is projecting more revenue for the next fiscal
year.
He detailed that with no structural changes, the state would be
down to $2.1 billion by the end of the next fiscal year. He
declared that $2.1 billion is not enough to fund another year's
deficit if nothing is done to fix the issue. He informed that
the state needs to retain some money within the CBR for
emergency expenditures and budget interruptions. He asserted
that some liquidity is needed to make the state's fiscal plan
work. He detailed that the Department of Revenue (DOR) borrows
against the CBR during the fiscal year in order to meet
expenditures. He said the borrowing allows DOR a liquidity bank
that is used with the general-fund expenditures and the hope is
to avoid the Alaska Permanent Fund Corporation (APFC) from
having to modify their investment portfolio and carry the
liquidity on their books.
3:41:31 PM
He asserted that the big issue is once the CBR and SBR are gone,
the only place to turn would be the permanent fund if the state
has an ongoing structural deficit. He said the PFPA comes into
place as a way to efficiently and effectively use the permanent
fund while maintaining government services and a sustainable
dividend.
COMMISSIONER HOFFBECK addressed the permanent fund's structure
to provide an understanding between the ERA, the permanent
fund's principal, and the segregation within the principal
between the corpus and unrealized gains. He detailed FY2016 data
on the permanent fund as follows:
· Permanent fund's principal: $44.2 billion.
· Permanent fund's corpus within the principal: $39.4
billion.
· Permanent fund's unrealized gains that the corpus has
achieved but not realized: $4.7 billion.
· ERA balance: $8.6 billion.
He reiterated that the permanent fund's corpus is the protected
portion of the fund that cannot be spent on anything whatsoever.
He added that the $4.7 billion in unrealized gains will
eventually be realized and flow within the ERA.
3:43:16 PM
He addressed how the money flows in and out of the permanent
fund's "corpus" as follows:
· Money in:
ƒMineral royalties:
¾At least 25 percent deposited into the corpus,
¾Currently depositing 30 percent of all mineral
royalties.
ƒInflation proofing.
· Money out is prohibited.
He addressed the ERA's money flow as follows:
· Money in:
ƒInvestment income:
¾Statutory net income (SNI) from the principal,
also known as realized gains:
o Money from dividends,
o Maturation of fixed-income investments,
o Real estate,
o Royalties,
o Equities that are sold,
o Private equity distributions
o "Things that generate cash."
· Money out:
ƒInflation proofing the corpus;
ƒDividends, approximately 50 percent of the SNI.
3:45:26 PM
COMMISSIONER HOFFBECK disclosed that the permanent fund's
annual-net income far exceeds the amount of money generated from
oil-and-gas taxes as well as from royalties. He said the state
is looking long term at $60 plus-or-minus oil prices with
500,000 barrels-a-day as the maximum ceiling moving forward with
nothing on the horizon that is ever going to change. He asserted
that the state's financial assets now are Alaska's greatest
resource that will generate more revenue for funding government
services than oil and gas is going forward in the future. He
noted that the state crossed over the "crossover point" in 2015,
a moment in time that was envisioned when the permanent fund was
set up. He set forth that the permanent fund is the new future
for state funding.
He asserted that the "problem" is spending continues without a
plan where additional revenue sources are not generated with
oil, gas and other revenues remaining at current levels. He said
the "no plan" scenario would mean the Legislature spends the CBR
to zero and the ERA would be depleted by FY2022 or FY2023. He
informed that a depleted ERA would mean the state is "off of the
fiscal cliff in freefall" as well as not having money to pay the
PFD from the ERA.
3:47:36 PM
At ease.
3:48:45 PM
CHAIR DUNLEAVY called the committee back to order.
COMMISSIONER HOFFBECK addressed why the permanent fund should be
used. He specified that the current UGF budget is $4.2 billion,
revenues of about $1.4 billion, leaving the state with
approximately a $2.8 billion budget gap.
He reviewed the potential tools outside of the permanent fund to
close the budget gap as follows:
· Motor-fuels tax increase:
ƒ$100 million.
· Other broad-based tax:
ƒ$600 million.
· Corporate-income tax:
ƒ$100 million.
· Oil tax credit reform:
ƒ$100 million.
· Maximum cuts proposed by the Senate (over three years):
ƒ$750 million.
· PFPA (net dividend):
ƒ$1.9 billion.
COMMISSIONER HOFFBECK said excluding the PFPA, the total
proposed revenues and cuts equal approximately $1.65 billion,
leaving approximately $1 billion to $1.2 billion short of a
total solution. He set forth that there really is only one asset
that the state has that is capable of closing the budget gap and
that is the permanent fund. He asserted that approximately $1.9
billion will be generated by the PFPA for government services.
3:50:27 PM
At ease.
3:52:31 PM
CHAIR DUNLEAVY called the committee back to order.
COMMISSIONER HOFFBECK said the other question addresses whether
the PFPA is the proper use of the permanent fund for government
expenditures. He mentioned that there has been a lot of
discussions about interpreting the statutes, what the
legislative intent was, the memory of the folks that were
involved with the permanent fund, a lot of "Hammond quotes"
floating around, and a lot of public perception. He revealed
that the administration actually went back to what was on the
ballot proposition that people voted on. He detailed Ballot
Proposition No. 2 on establishing the permanent fund as follows:
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
law.
COMMISSIONER HOFFBECK pointed out that there is an odd
understanding in the constitution for expenditures because
ballot proposition's noted expenditure phrase does not show up
in the constitution, which creates an odd understanding of what
the purpose was.
3:54:01 PM
He set forth that the permanent fund should be used in a
systematic and rules-based fashion that actually achieves the
goals of funding government services while still protecting the
corpus of the fund and paying a dividend. He specified that
there are five ways of judging the sufficiency of a plan as to
whether the plan achieves the goal of a sustainable and durable
use of the permanent fund:
1. Long term,
2. Sustainable,
3. Rule-based,
4. Stabilizing,
5. Maximize the use of the permanent fund earnings.
He detailed the need for a long-term plan as follows:
· The fund is meant to provide for all generations of
Alaskans.
· As North Slope production declines, the fund's earnings
will be increasingly important to sustaining public
services.
· Unlike petroleum, Alaska's financial reserves can be a
renewable resource.
· Like petroleum, investment earnings can be highly variable.
He addressed the need for planned "sustainability" as follows:
· Maintain or grow the real (inflation-adjusted) value of the
permanent fund.
· Provide for a dividend.
· Ensure ERA "durability" where the ERA holds enough to
bridge years of low earnings.
He specified that ERA "durability" is a critical issue,
particularly in light of discussions about purposely leaving a
structural deficit in the budget. He said he understands the
logic behind a structural deficit where downward pressure is
created on the budget; however, a secondary pressure is created
that may be greater than the pressure on the budget and that is
the pressure to spend unscheduled expenditures out of the ERA.
He opined that a scenario occurs where the ERA is tapped into
when the budget has not been cut enough and there are not enough
revenues. He said tapping into the ERA with unscheduled
expenditures starts to deplete the ERA and makes the plan less
durable.
COMMISSIONER HOFFBECK revealed that when DOR modeled out a full-
fiscal plan so that uncertainty is taken out, a 1.12-percent
failure rate occurred; however, if uncertainty is left in where
strictly a permanent fund "only" plan with no other changes, the
failure rate is approximately 45 percent. He summarized that the
structural deficit is a critical piece that needs to be closed.
3:57:54 PM
CHAIR DUNLEAVY noted that the current model has been used for
decades and was supposed to be long term. He asked what has
changed that makes the current model outdated.
COMMISSIONER HOFFBECK explained that the biggest reason is
simply that never before has the state needed to use the ERA for
something other than paying the dividend and inflation proofing
the permanent fund. He set forth that the state has reached a
life-cycle point with its oil-and-gas revenues that the
permanent fund needs to be used at its maximum capacity to fund
government services. He reiterated that there is no other
solution that can get the state to the "finish line."
CHAIR DUNLEAVY asked why DOR used their own modeling rather than
the APFC's modeling. He pointed out that the APFC has managed
the permanent fund for decades.
3:59:31 PM
COMMISSIONER HOFFBECK replied that the APFC just models their
return scenarios going forward whereas DOR modeled the state's
entire budgetary process and the demands that will be made on
the available revenues. He set forth that DOR is comfortable
with its modeling as well as the modeling that the APFC does. He
noted that DOR works with the APFC regularly.
CHAIR DUNLEAVY pointed out that APFC's modeling is totally
different from what DOR's modeling is showing where the ERA runs
out in 2022.
4:01:10 PM
COMMISSIONER HOFFBECK addressed the need for a rule-based plan
for savings, spending, and dividends as follows:
· Withdrawals occur under a set of statutory rules.
· Designed to protect the fund and guard against
unsustainable uses.
· International best practice.
COMMISSIONER HOFFBECK pointed out examples of rule-based
frameworks used for other sovereign wealth funds as follows:
· Singapore developed a proprietary model that projects 20-
year returns where the government may spend 50 percent of
the annualized 20-year expected returns.
· Kazakhstan uses a fixed-annual draw of $8 billion which may
be adjusted by 15 percent, but the draw is reduced if the
fund balance is less than 20 percent of the GDP.
· Norway limits withdrawals to 4 percent, but withdrawals are
allowed over 4 percent in limited circumstances with
parliamentary resolution.
He summarized that there is no one perfect way to structure a
sovereign-wealth fund, but a fund is structured based on the
needs of the particular entity and what other resources they
have available. He said DOR believes that the structure they put
forward has been carefully modeled and is the best model for
using the permanent fund resources for funding government
services. He pointed out that the governor has said the PFPA is
"written in pencil" and the administration is happy to take a
look at better ideas. He noted that the previous year the Senate
State Affairs Committee had taken the administration's permanent
fund plan with a $3.3 billion fixed draw where everything flowed
through the permanent fund and substituted it with a percentage
of market value (POMV) plan with draw limits. He noted that this
year's plan is essentially the same bill that passed the Senate
last year, SB 128, with a couple of modifications.
He addressed the need for a "stabilizing" plan as follows:
· Over the long term, economies that experience repeated ups
and downs grow slower than stable economies.
· Because commodity prices are volatile, economies dominated
by a single-commodity industry experience more pronounced
cycles.
· Government spending that follows the same cycle amplifies
the damaging effect.
COMMISSIONER HOFFBECK said for budgetary purposes the state
needs to know what their revenues are going to be.
4:05:26 PM
He addressed the need for a plan that maximizes the use of the
permanent fund earnings as follows:
· Other proposed new revenues and cuts could reduce the
deficit by millions, the fund can sustainably contribute
billions.
· Withdrawing too much is unsustainable and risks damaging
the fund.
· Withdrawing too little limits future options for full-
fiscal solutions.
He summarized that the state's biggest resource should be
maximized and as many of the "other decisions" as possible
should be eliminated.
SENATOR WILSON asked what Commissioner Hoffbeck meant by
"eliminating other decisions."
COMMISSIONER HOFFBECK replied that the budget gap requires
either new revenue sources or very significant cuts in
expenditures, both of which have a significant impact on the
economy, individuals and businesses. He set forth that
maximizing the permanent fund can protect Alaska's fragile
economy by limiting new taxes and cuts to government
expenditures. He asserted that using the earnings from the
permanent fund is the only solution that injects new money into
the system.
4:08:26 PM
He explained that SB 26 is a slimmed down version of the bill
(SB 128) that passed the Senate last year. He revealed that SB
128 was heavily vetted in 2016 with 39 hearings between the
Senate State Affairs, Senate Finance and House Finance
committees. He added that 63 hearings and 7-public hearings
occurred last year on various permanent fund bills. He noted
that Senator McGuire's bill, SB 114, ultimately became the core
to SB 26 by incorporating the POMV process. He said the
administration felt that the plan that passed the Senate was
solid and the bill was worth bringing back this year.
He set forth that SB 26 is the same as the CS for SB 128, but
without the following provisions:
· CBR management:
ƒMoving from DOR to APFC.
ƒDOR is more equipped to deal with cash management and
liquidity issues for the permanent fund earnings on a
daily basis.
· APFC procurement:
ƒDoes not have a real purpose in the bill.
· Secondary savings rule.
ƒNot part of the crux of the plan and has its own
momentum in separate bills.
4:11:44 PM
CHAIR DUNLEAVY asked if he believes that the change in the bill
will get the bill passed.
COMMISSIONER HOFFBECK replied that the administration is
essentially giving back the bill that the Senate passed last
year. He pointed out that the House has the same issues
associated with addressing broad-based taxes as well as oil-and-
gas credit reform first. He pointed out a need for a "clean
bill" as follows:
What we are hoping to do is pass as clean a bill to
the House as we possibly can and try to take as much
of that noise out of the discussion. We've been
pushing hard with them to say we think we need clean
bills and we need to deal with these issues on their
merits, but obviously we don't control what the House
will do, we are hopeful.
He detailed that the PFPA outlines a long-term plan with three
formulas as follows:
1. Sustainable draw formula:
ƒ5.25 POMV,
ƒDraw limit.
2. Sustainable dividend formula:
ƒ20-percent of UGF royalties,
ƒ20-percent of POMV draw.
3. Adjust deposits to corpus:
ƒReduce royalty deposits to the constitutionally
mandated 25 percent,
ƒChange inflation-proofing transfers.
4:13:31 PM
COMMISSIONER HOFFBECK addressed how money will flow under SB 26
as follows:
· Mineral royalties:
ƒContinue to go directly into the corpus of the fund at
the 25-percent mandated by the constitution.
· Principal (corpus):
ƒStatutory net income (SNI) would flow out of the
principal (corpus) into the ERA.
· ERA:
ƒMonies from the ERA would flow into the general fund.
· General fund:
ƒ20/20 formula used to move money into the dividend
fund.
He pointed out that one big difference is the dividend's money
route would now flow through the general fund. He added that
another difference is planned inflation proofing where money
from the ERA is fed back into the corpus when the ERA reaches
four times the annual draw rather than through legislative
appropriation.
He addressed the POMV draw as follows:
· 5.25 percent of the average fund value in the first 5 or
the last 6 years to assist with the budget process and APFC
with investing.
· Example draw calculation:
ƒAverage fund value for FY2012 through FY2017 equals:
$48.1 billion.
ƒ5.25 percent of $48.1 billion equals a $2.5 billion
draw.
ƒEffective POMV from the $2.5 billion draw for FY2017
of $53.6 billion equals 4.7 percent.
He detailed that as long as the permanent fund is growing, using
the "back average" of 5.25 percent results in the effective POMV
of 4.7 percent, a percentage that is substantially less than the
5.25 percent against the current year's value of the fund. He
pointed out that the 5.25 percent back-average would be in line
with this year's estimate return for the permanent fund return
of 6.95 percent, less 2.25 percent for inflation that equals 4.7
percent.
4:16:57 PM
SENATOR WILSON asked Commissioner Hoffbeck why a more moderate
withdrawal rate that is less than 5.25 percent be considered if
the idea is to protect and have sustainability.
COMMISSIONER HOFFBECK explained that the intent is to maximize
the use of the asset and "not leave money on the table" that
necessitates more cuts and more taxes. He admitted that the
model was "cranked" to squeeze as much out of the permanent fund
earnings as possible. He revealed that there is a three-year
review in the plan to make sure the fund is not being overdrawn
and noted that the percentage can always be adjusted.
SENATOR WILSON remarked that he questioned the aggressive 5.25-
percent POMV and noted Commissioner Hoffbeck's overly-optimistic
modeling that did not take into account a once-a-decade market
situation that would require draws on the ERA.
COMMISSIONER HOFFBECK replied that DOR's modeling takes into
account various swings that could potentially occur during the
24-year modeling period. He explained that the modeling showed
that even with the 5.25 percent draw, the failure rate to grow
the fund and make the payments was only 1.25 percent. He
reiterated that the administration believes the 5.25 percent
draw is sustainable.
4:19:40 PM
He addressed the 5.25-percent POMV-draw formula with UGF revenue
and oil prices. He explained that the draw by itself would not
stabilize UGF revenue because revenue continues to vary with oil
prices. He said an additional step was needed to stabilize cash
flows and noted that the Senate State Affairs Committee during
the previous year developed a draw-limit that is imposed when
UGF production tax and royalties exceeds $1.2 billion. He
detailed that once the $1.2 billion threshold is exceeded, the
POMV draw is reduced by a dollar for every dollar collected in
production taxes and royalties. He said the end result is
spending would level off at $1.2 billion plus the ERA draw.
He specified that the draw limit does not apply to the portion
for the dividends. He emphasized that any reductions in the draw
does not impact the size of the dividend because the dividend
calculation is always against the 5.25 percent maximum, not the
reduced draw that will occur from additional oil-and-gas taxes.
He addressed modeling for the UGF revenue and oil prices with
the POMV draw and draw limit. He noted that once oil prices hit
the $75 to $80 range, a reduction in the POMV draw will start to
occur as oil-and-gas royalties and taxes start to rise,
essentially shutting off the ERA draw when oil-and-gas taxes are
sufficient to cover the budget. He asserted that the draw limit
addresses the issue of super-heating government spending when
the POMV is layered on top of increased revenue without a limit.
4:22:15 PM
CHAIR DUNLEAVY pointed out that constitutionally, the CBR has to
be replenished. He asked how the CBR will be replenished.
COMMISSIONER HOFFBECK replied that any monies left over at the
end of the year that are available for appropriation are
deposited or "swept" back into the CBR; the ERA has been an
exception to that, the money residing in the ERA has not been
"sweepable." He pointed out that there is nothing that would
prevent the Legislature from moving money. He noted that there's
one thing that automatically happens and that is once you get
greater than the four-times-draw money flows back into the
corpus of the permanent fund.
CHAIR DUNLEAVY asked to confirm that movement into the ERA is
not into the general fund and not subject to the "sweep."
COMMISSIONER HOFFBECK answered correct. He pointed out that once
a point is reached where the draw is completely shut off from
the ERA, there is nothing that stops a continued draw from the
oil-and-gas revenue for expenditures. He said there has been
some discussion whether the continued draw from oil-and-gas
revenue needs to be shut down or not, but there is also the
argument that there will be some pent-up need for capital and
maintenance programs.
4:25:07 PM
CHAIR DUNLEAVY asked if spending can keep increasing from oil
revenue or a broad-based tax once oil revenue hits a certain
amount and the "spigot" from the permanent fund is reduced.
COMMISSIONER HOFFBECK answered yes. He noted that one of the
criticisms was that a relatively flat profile for government
spending would be required.
CHAIR DUNLEAVY asserted that the continued spending issue in SB
26 is one of the reasons why the Senate is contemplating an
appropriation limit. He said he is interested to see where the
administration falls on the appropriation-limit concept. He set
forth that an appropriation limit would keep the possible added
revenues and the growth of government tighter. He noted that any
added revenues could be diverted to the CBR.
COMMISSIONER HOFFBECK explained that the bill has a formula for
a sustainable-dividend draw. He detailed that SB 26 has a $1,000
per person guarantee for the first two years of the plan. After
the first two years the dividend draw would be 20 percent of the
UGF royalties, plus 20 percent of the 5.25-percent POMV draw. He
disclosed that the dividend draw is expected to stay around
$1,000 per person into the future. He specified that having the
dividend based on a 20/20 draw from the UGF royalties and
permanent fund earnings tends to stabilize the dividend over
time. He added that the 20/20-dividend draw also tied Alaskans
to the state's overall economic health.
4:29:41 PM
He addressed inflation-proofing transfers and noted that AS
37.13.145(c) currently provides for an annual inflation-proofing
transfers from the ERA to the corpus of the fund. He said
although the ERA needs to have a sufficient balance to meet the
draw each year, the bill's feedback-loop provides the ability to
inflation proof the corpus as well. He detailed that when the
balance in the ERA reaches four times the annual draw, then the
additional revenue flows back into the corpus of the fund to
inflation proof the fund.
SENATOR WILSON asked what would occur if the scenario that
Commissioner Hoffbeck described does not occur and the permanent
fund is not inflation proofed.
COMMISSIONER HOFFBECK concurred that there would be an issue
where permanent fund's corpus may not be inflation proofed. He
opined that the fund itself would likely continue to grow at a
sufficient rate with the 5.25-percent draw. He specified that
the gains would be realized either in the ERA or in the
unrealized gains piece, but not in the protected part of the
fund's corpus with the feedback-loop occurring.
CHAIR DUNLEAVY noted that the bill caps the dividend at $1,000.
He asked what the government's take could range.
4:32:31 PM
COMMISSIONER HOFFBECK replied that the government's take would
be approximately $1.9 billion at the fund's current size. He
added that the government's take would increase as the fund
grew. He noted that the dividend is not capped and added that
the dividend will grow if the permanent fund grows because the
dividend is tied to the POMV draw. He summarized that the bill
will start with $700 million for the dividend and $1.9 billion
for government services.
CHAIR DUNLEAVY asked to confirm that the government take will
always be larger than the dividend.
COMMISSIONER HOFFBECK answered yes.
SENATOR WILSON reiterated that the dividend is set at $1,000 for
the first two-years and then based on the 20/20 formula that
Commissioner Hoffbeck explained. He asked what would occur if a
governor continued to set the dividend at $1,000 and vetoed the
remaining portion.
COMMISSIONER HOFFBECK answered that the funds would be moved
into the general fund and then would be available for any
purposes.
4:35:24 PM
He said a review would occur after three years to take a look
and make sure everything is actually working and make
adjustments if needed. He pointed out that the bill has an
immediate effective date and could be applied during the current
FY2017 budget year. He added that a quirky accounting "thing"
would occur where the bill changes forward-funding
appropriations from previous fiscal years to appropriations that
occur in the same fiscal year.
He summarized about the PFPA as follows:
· Sustainably provides billions to the general fund when
needed.
· Preserves the dividend program.
· Stabilizes the budget for the state as well as providing
confidence to investors in the state's future.
4:38:26 PM
He addressed the bill's sectional analysis as follows:
Section 1:
Framework for the three-year review.
Section 2:
Reduces the royalties to just the 25-percent constitutional
payment into the principal of the fund.
Section 4:
POMV and draw-limit formulas.
Section 6:
Appropriation for the earnings reserve for the general fund and
principal plus the four-time draw component.
Section 7:
20/20-dividend formula.
Section 10:
$1,000 dividend in calendar years 2017 and 2018.
Section 13:
Repeal language for the CBR sub-account which restricts the way
investments can be in the CBR. The language is the same as the
language in the bill that passed the Senate last year.
Section 15:
Immediate effective date.
SENATOR WILSON noted that Commissioner Hoffbeck commented
earlier during his presentation that the government portion of
the draw would always be higher than the dividend's portion. He
asked which portion would be prioritized in a "short" year.
4:40:05 PM
COMMISSIONER HOFFBECK explained that with the structure of the
four-times-draw from the ERA, there will be years where the
statutory-net income is less than the payout and there will be
years when the statutory-net income is greater than the payout;
however, over time the two would even out. He pointed out that
sustained-low returns over three or four years would be needed
in order to deplete the ERA. He revealed that the financial
markets have never had three or more consecutive years of down
markets.
SENATOR WILSON said the bill's title that references
"protection" bothers him. He noted that Commissioner Hoffbeck
stated that the permanent fund currently works fine, but then
claimed that government's only viable solution for the budget is
to use the permanent fund. He asked who the bill protects the
permanent fund from.
COMMISSIONER HOFFBECK replied that the new economic reality is
the state is looking at insufficient oil-and-gas revenues to
fund government services going forward. He asserted that the new
reality is not a short-term deal. He set forth that the bill
would protect the permanent fund's integrity, not from an
individual or entity, but from the reality that the state is
about to burn through the last of its savings. He asserted that
the next step in proceeding with an ad hoc draw against the ERA
is probably the greatest potential for jeopardizing the
permanent fund.
4:43:09 PM
SENATOR WILSON remarked that the bill actually protects the ERA
and the bill's title seems a little misleading in identifying
the permanent fund rather than the ERA.
COMMISSIONER HOFFBECK replied that by definition the permanent
fund is a combination of the corpus, the unrealized gains within
the principal, and the ERA.
CHAIR DUNLEAVY asked Commissioner Hoffbeck to provide his
definition of the dividend.
COMMISSIONER HOFFBECK answered as follows:
The dividend is that portion of the earnings from the
investments of the permanent fund that are shared with
the citizens of the state of Alaska.
CHAIR DUNLEAVY asked Commissioner Hoffbeck if he viewed the
permanent fund as welfare.
COMMISSIONER HOFFBECK answered no.
CHAIR DUNLEAVY asked if he viewed the dividend as a way for
citizens to partake in the royalty concept that citizens were
denied by the Statehood Act in the Alaska Constitution.
COMMISSIONER HOFFBECK replied as follows:
I see it as what the ballot initiative said in the
constitutional amendment which is that it was to
reserve money for the future, for government
expenditures was the fund itself. There's nothing
incorporated within the fund itself that talks about
it being a share of the royalties. So I think the
construct that the dividend is a share of the royalty
I think is probably imposing something on the
permanent fund itself that was never there in its
original structure. I think people saw it not so much
as a share of the royalty wealth as it was a way to
preserve some of the money, the wealth in high years
for the future years when we did not have as much
money.
4:45:49 PM
CHAIR DUNLEAVY asked if he was addressing the dividend.
COMMISSIONER HOFFBECK replied as follows:
The fund itself and the dividend is a piece of the
fund. There was nothing in the arguments and
discussions in creating the fund itself about being a
way to preserve a royalty for the citizens; it is an
argument that has developed after the fund was
developed versus something that I think is imbedded in
the fund itself.
CHAIR DUNLEAVY asked if he views the dividend as welfare.
COMMISSIONER HOFFBECK answered that he does not view the
dividend as welfare.
CHAIR DUNLEAVY stated that SB 26 will be held in committee for
future consideration. He asked if he had any parting thoughts.
COMMISSIONER HOFFBECK thanked Chair Dunleavy for the opportunity
to present the bill. He set forth that the administration views
the bill as a solid way to use the permanent fund.
SENATOR COGHILL suggested that a graphic representation be
provided where both the status quo in keeping the permanent fund
dividend formula the way it is and the PFPA's dividend formula
be juxtaposed to one another on a graph.
4:49:23 PM
COMMISSIONER HOFFBECK noted that several graphs have been
provided to the committee that shows what Senator Coghill
referred to.
SENATOR COGHILL opined that the intent was to try and smooth out
the dividend's volatility, but using the ERA was not considered
for government; however, the government takes a bigger and
bigger chunk. He pointed out that government currently has the
right to appropriate from the ERA and asked what the impact to
the dividend formula would be if government appropriated out of
the ERA.
SENATOR COGHILL noted that people in his district inquire why
government doesn't just use the ERA and leave the dividend
alone. He pointed out that taking money out of the ERA has a
huge impact on the dividend based on cash available. He opined
that continued work must be done to figure out the methodology.
He said he did not know if the Senate will buy in again or if
the House will buy into the proposal as well.
He said he listened to the other approach which is based on a
clean-endowment model. He admitted that the clean-endowment
model is tempting in addition to having perpetuity; however, the
model delivers a whole lot less value to the state and forces
the Legislature to deal with harder decisions. He summarized
that the Legislature has to eventually figure out how to come up
with $1.9 billion.
CHAIR DUNLEAVY addressed modeling differences between DOR and
APFC. He noted that APFC's modeling from recent months projected
the following:
· FY2018: $10.4 billion starting out in the ERA with equal
appropriations for the dividend and government of $1.5
billion.
· FY2022: Equal appropriations from the ERA for the dividend
and government of $1.8 billion.
· FY2027: Total value of the permanent fund of $64 billion.
He pointed out that Commissioner Hoffbeck raised concerns that
the ERA would actually be zeroed out by 2020 or 2022.
4:52:54 PM
COMMISSIONER HOFFBECK pointed out that APFC's 50/50-split
modeling leaves a $1.2 billion to $1.4 billion deficit in
government spending that would have to come from the ERA. He
added that the APFC modeling did not include inflation proofing
the permanent fund. He said DOR will work with APFC to provide a
true comparison for the committee.
SENATOR WILSON inquired if the status quo in DOR's modeling
means there will be no new revenue sources and no significant
cuts to the budget. He asked if the administration believes that
the state has the right government size with the model presented
by Commissioner Hoffbeck.
COMMISSIONER HOFFBECK replied that the governor looked at the
budget that included substantial cuts; however, the governor
believes that was not his vision for the state of Alaska. He
said the governor's position is that he feels the solution now
is additional revenues. He pointed out that the state has
already cut $3.8 billion out of the budget and it was time to
start talking about the revenue side of the equation. He noted
that revenue would include using the permanent fund as well as
new taxes.
SENATOR WILSON specified that his question related to the DOR
model that currently says the state has the right size of
government and the government should stay the same without
looking at other cuts or other sources of revenue outside of
permanent fund earnings.
4:55:23 PM
COMMISSIONER HOFFBECK replied that one DOR model was a dividend-
only solution with the budget gap filled with earnings. The
second model was a full-fiscal solution with a forecast for
government spending to be flat for two to three years and then
growing with inflation over time.
CHAIR DUNLEAVY opined that the size of state government was
actually growing. He said the Legislature has competing visions
for Alaska. He set forth that there is one vision where enough
cuts have been made and the legislature must rearrange the
permanent fund so that government gets more, and the people get
less. He opined that the first vision argues that people will
get more government services, but the people will get less in
their ability to spend their dividend in the way they want. He
added that the first vision will continue to address taxes as
well. He set forth that the second vision includes a philosophy
of Alaskans wanting to keep more money in their pockets and
bring down the size of government.
He remarked that his hope is the Legislature can come together
within the next 60 days with a fiscal plan that everyone can
live with; however, he conceded that there are some serious
differences in the way Alaska should be.
CHAIR DUNLEAVY thanked Commissioner Hoffbeck for his well laid-
out presentation and welcomed him back to reconcile some
"numbers."
[SB 26 was held in committee for future consideration.]