Legislature(2017 - 2018)BUTROVICH 205

02/02/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:31:16 PM Start
03:32:17 PM SB21
04:15:05 PM Presentation: Dr. Ralph Townsend - Institute of Social and Economic Research, Answering Questions on Alaska's Economy.
05:10:44 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Dr. Ralph Townsend, Institute of Social and TELECONFERENCED
Economic Research (ISER)
Answering Questions on Alaska's Economy
*+ SB 21 PERMANENT FUND: INCOME; POMV; DIVIDENDS TELECONFERENCED
Heard & Held
         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