Legislature(2017 - 2018)BUTROVICH 205

02/07/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:30:31 PM Start
03:30:58 PM SB26
04:57:59 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
         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                                                               
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                                                               
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                                                               
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                                                                        
   · 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                                                                   
        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                                                                
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                                                                        
   · As North Slope production declines, the fund's earnings                                                                    
     will be increasingly important to sustaining public                                                                        
   · 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                                                               
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                                                                  
   · 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                                                                   
   · 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                                                                    
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                                                               
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                                                                   
        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                                                               
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                                                               
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                                                                     
   · 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                                                               
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                                                                    
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                                                                     
   · 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                                                               
[SB 26 was held in committee for future consideration.]