Legislature(2017 - 2018)BUTROVICH 205

02/16/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:30:44 PM Start
03:31:34 PM SB21
03:59:06 PM SB26
04:31:10 PM Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation
05:04:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
       SB 26-PERMANENT FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                   
3:59:06 PM                                                                                                                    
CHAIR DUNLEAVY called  the committee back to  order and announced                                                               
the consideration of SB 26.                                                                                                     
3:59:27 PM                                                                                                                    
RANDALL  HOFFBECK, Commissioner,  Alaska  Department of  Revenue,                                                               
Juneau,  Alaska,  addressed the  comparison  between  SB 26,  the                                                               
Permanent Fund Protection Act (PFPA), and SB 21 as follows:                                                                     
        · Rule-based:                                                                                                           
             ƒPFPA: yes;                                                                                                       
             ƒSB 21: yes.                                                                                                      
        · Stabilizing-investment income:                                                                                        
             ƒPFPA:    partial,    5-year   averaging    in                                                                    
               percentage of market value (POMV);                                                                               
             ƒSB 21: Partial, 5-year averaging in POMV.                                                                        
        · Stabilizing-total revenue:                                                                                            
             ƒPFPA: partial, addressed in a mid-range of                                                                       
               oil prices;                                                                                                      
             ƒSB 21: no defined plan.                                                                                          
        · Sustainable-protect the dividend:                                                                                     
             ƒPFPA: yes;                                                                                                       
             ƒSB 21: yes.                                                                                                      
       · Sustainable-protect the fund's total and corpus:                                                                       
             ƒPFPA: yes, maintains value of the fund and corpus                                                                
               over the long term;                                                                                              
             ƒSB 21: partial, the total fund value is                                                                          
               maintained but the growth is not protected in the                                                                
       · Maximize the earnings reserve account (ERA) use:                                                                       
             ƒPFPA: yes, withdrawing less when oil                                                                             
               revenues are high allows higher draws when                                                                       
               oil revenues are low;                                                                                            
             ƒSB 21: partial, withdraws same percent each                                                                      
               year regardless of budget need.                                                                                  
COMMISSIONER HOFFBECK  said the state  is facing a  fiscal crisis                                                               
that requires steps to be taken  that are not comfortable but are                                                               
necessary in order to actually  resolve the fiscal situation that                                                               
the state  is in. He  emphasized that  the permanent fund  is the                                                               
state's largest  tool for solving  the fiscal crisis and  its use                                                               
maximized. He  disclosed that the  Department of Revenue  did the                                                               
modeling on  what the largest-sustainable  draw would be  for the                                                               
permanent fund that would:                                                                                                      
        · Not put the fund's corpus in jeopardy;                                                                                
       · Allow the fund to grow with inflation over time;                                                                       
        · Allow the fund to maintain its real purchasing power;                                                                 
        · Allow as much money as possible to be used for paying                                                                 
          both the dividend and for providing money for funding                                                                 
          government services.                                                                                                  
He set  forth that  the Department of  Revenue determined  that a                                                               
5.25  percent draw  was  aggressive  with probabilistic  modeling                                                               
that takes  into account  anomalies and  down markets  showed the                                                               
percentage  still survived.  He added  that McKinsey  and Company                                                               
reviewed  the  department's  modeling  and  concurred  that  5.25                                                               
percent  was a  realistic goal.  He disclosed  that McKinsey  and                                                               
Company  is  internationally  known   on  Wall  Street  and  with                                                               
sovereign wealth funds all over the world.                                                                                      
4:02:00 PM                                                                                                                    
At ease.                                                                                                                        
4:02:45 PM                                                                                                                    
CHAIR DUNLEAVY called the committee back to order.                                                                              
COMMISSIONER  HOFFBECK explained  that important  components were                                                               
needed to be  met when putting together the  bill's structure. He                                                               
set forth that using the  permanent fund's earnings must be rules                                                               
based to avoid overdrawing the fund  as well as a draw that could                                                               
stabilize revenues  for the  state of Alaska.  He noted  that the                                                               
bill introduced  in the previous  session originally had  a fixed                                                               
draw,  but was  rejected  as  being too  constrained,  so a  POMV                                                               
approach  was adopted  which the  Senate approved  last year.  He                                                               
added  that other  important  components  include protecting  the                                                               
dividend and  the fund's  corpus, and maximizing  the use  of the                                                               
fund  to generate  as much  revenue as  possible for  solving the                                                               
fiscal problem.                                                                                                                 
CHAIR DUNLEAVY  asked Commissioner Hoffbeck to  clarify that when                                                               
he  said "stabilize  revenues" he  meant stabilizing  the revenue                                                               
stream  coming  out  of  the fund,  not  stabilizing  the  entire                                                               
revenue stream.                                                                                                                 
4:04:31 PM                                                                                                                    
COMMISSIONER HOFFBECK  replied that the  PFPA does more  by tying                                                               
to oil-price revenues that acts as  a shutoff valve as oil prices                                                               
recover and the state gets more  revenue from oil rather than the                                                               
permanent  fund.  He  said  PFPA  stabilizes  the  state's  major                                                               
revenue  streams.  He  admitted  that  annual  fluctuations  will                                                               
occur,  but   five-year  averaging  will   take  a  lot   of  the                                                               
fluctuations  out  of  the  equation.  He  concurred  with  Chair                                                               
Dunleavy and Senator Stedman that SB 21  and SB 26 do not get the                                                               
state to the finish line by itself.                                                                                             
CHAIR DUNLEAVY asked what Commissioner  Hoffbeck meant by saying,                                                               
"Stabilizing the permanent fund."                                                                                               
4:06:27 PM                                                                                                                    
COMMISSIONER  HOFFBECK clarified  that he  said, "Protecting  the                                                               
dividend."  He explained  that  the dividend  has  become a  very                                                               
important part  of Alaska's economic base  and the administration                                                               
felt it needed to be protected, but  not at the rate over $2000 a                                                               
year because it took too much and  left the state too far away at                                                               
closing the gap. He continued as follows:                                                                                       
     Essentially  the  size  of  the  dividend  at  $60  oil                                                                    
     equates to  the size of  the deficit and it's  not that                                                                    
     the dividend creates  a deficit, it gives us  kind of a                                                                    
     way to  think in our mind  just how big the  deficit is                                                                    
     with various sizes of dividends.  So if you pay a $2000                                                                    
     dividend, you  have about a $1.3  billion deficit using                                                                    
     the 5.25  percent draw.  If you  pay a  $1000 dividend,                                                                    
     you've  got  about  a  $700  million  deficit  and  the                                                                    
     difficulty in  closing $700 million is  tremendous, but                                                                    
     to  close $1.3  billion becomes  almost insurmountable;                                                                    
     essentially that would require  the entire $750 million                                                                    
     in  cuts  that the  Senate  has  discussed and  a  full                                                                    
     broad-based  tax to  close  that in  order  to pay  the                                                                    
     $2000 dividend.                                                                                                            
4:08:03 PM                                                                                                                    
CHAIR DUNLEAVY  pointed out that the  decades-old calculation for                                                               
the dividend was determined  without interference from government                                                               
whereas the dividend in the  PFPA is determined by the government                                                               
based upon the deficit or how much the state needs.                                                                             
COMMISSIONER  HOFFBECK confirmed  that  the  entire 5.25  percent                                                               
draw  from the  permanent fund  goes  into the  general fund.  He                                                               
explained the formula for the dividend as follows:                                                                              
     Twenty  percent of  the draw,  the  5.25 percent  draw,                                                                    
     goes to pay  the dividend as well as 20  percent of the                                                                    
     non-constitutionally   deposited   mineral   royalties,                                                                    
     those two  together create the dividend;  so it's still                                                                    
     formula  driven,  but  it  goes  directly  through  the                                                                    
     general  fund and  comes out  of the  general fund.  If                                                                    
     that becomes  a sticking point  to getting this  to the                                                                    
     finish  line, we  have no  problem of  just dumping  it                                                                    
     into a dividend fund similar to  how it is done now. We                                                                    
     just felt  that it  was cleaner to  run it  through the                                                                    
     general fund  since it's flowing through  there anyway,                                                                    
     but that is not a critical piece to the plan.                                                                              
4:10:01 PM                                                                                                                    
SENATOR  WILSON  pointed  out that  Commissioner  Hoffbeck  keeps                                                               
saying, "Protecting the  dividend." He asked what  the purpose is                                                               
of protecting the dividend.                                                                                                     
COMMISSIONER  HOFFBECK replied  that that  the PFPA  protects the                                                               
earning reserve  from being  drawn to the  point where  the state                                                               
won't be able to pay the  dividend. He specified that the idea is                                                               
to  protect the  entirety  of the  permanent  fund including  the                                                               
portion that goes to pay the dividend.                                                                                          
SENATOR  WILSON said  he constantly  hears  from a  lot of  bills                                                               
similar to  SB 21  and SB 26  that the permanent  fund has  to be                                                               
protected.  He  asked  if  the   protection  was  needed  because                                                               
government does not have the  discipline to find another solution                                                               
other than to go the route of SB 26.                                                                                            
4:11:47 PM                                                                                                                    
COMMISSIONER  HOFFBECK concurred  with  Senator  Stedman when  he                                                               
talked about "wolves." He commented as follows:                                                                                 
     It's just kind  of the reality of what we  face when we                                                                    
     bump  up against  these decisions.  If you  are sitting                                                                    
     there with  a $500 million  hole that you need  to fill                                                                    
     in  the budget  and  that  means either  you  put in  a                                                                    
     broad-based  tax and  that  fills  the committee  rooms                                                                    
     with angry people, or you  put in $500 million worth of                                                                    
     expenditure cuts  and that fills  the rooms  with angry                                                                    
     people, or  $500 million  you can just  take it  out of                                                                    
     your savings.  There's a  lot of  incentive to  just go                                                                    
     take it  out of  your savings and  that's why  we think                                                                    
     that structure needs  to be there so that if  you go to                                                                    
     take it out of your savings,  you have to answer to the                                                                    
     public why  you didn't  follow the  rules that  you set                                                                    
     up,  it's exactly  what  the  administration is  facing                                                                    
     right now  because of the  governor's veto.  We believe                                                                    
     that the governor  had all of the  rights and authority                                                                    
     to  make the  veto or  he wouldn't  have done  it; that                                                                    
     being said,  the people  stood up  and said  why didn't                                                                    
     you follow  the rules, you've been  following that same                                                                    
     rule for 30-plus  years, why didn't you  follow it this                                                                    
     time.  I  think  by  putting  a  structure  around  any                                                                    
     restructuring of  how we  use the  dividend and  a real                                                                    
     framework, we  put ourselves in  the position  that any                                                                    
     time that we  don't follow the rule, we  have to answer                                                                    
     to the public why didn't we follow it.                                                                                     
4:13:27 PM                                                                                                                    
SENATOR WILSON asked  why the government should get  more than 50                                                               
percent  than the  people get  in terms  of the  payout from  the                                                               
COMMISSIONER  HOFFBECK  opined that  a  50-50  split is  easy  to                                                               
explain.  He   asserted  that   there  is   nothing  structurally                                                               
significant about  a 50-50 split.  He explained that  the current                                                               
dividend  formula was  the product  of  political compromise  and                                                               
there  was nothing  magical with  the calculation.  He emphasized                                                               
that a  50-50 split  does not  get the  government to  the finish                                                               
line. He remarked that the  administration did not say, "Let's go                                                               
grab some  money from the  citizens of  the state of  Alaska." He                                                               
asserted  that the  PFPA squeezes  as much  out for  the dividend                                                               
while still having  a reasonable expectation to be  able to close                                                               
the rest of the fiscal gap.                                                                                                     
4:15:16 PM                                                                                                                    
CHAIR  DUNLEAVY referenced  an  earlier  discussion with  Senator                                                               
Stedman on constitutionalizing SB 21.  He admitted that no matter                                                               
how much the legislation is  ring-fenced in statute, the governor                                                               
is able to veto or one could change the statute in one session.                                                                 
COMMISSIONER  HOFFBECK replied  that  Chair  Dunleavy's point  is                                                               
well  taken and  agreed that  not only  could the  administration                                                               
veto  it,   but  the  Legislature   could  just  choose   not  to                                                               
appropriate  a dividend  in  any  given year  as  well under  the                                                               
formula. He  said the  assumption is people  are going  to follow                                                               
the rules. He addressed the  concern with constitutionalizing the                                                               
legislation as follows:                                                                                                         
     The  concern with  putting in  the "constitutional"  is                                                                    
     exactly  what  the founders,  the  ones  who wrote  the                                                                    
     constitution  about   this  whole  idea   of  "siloing"                                                                    
     revenues  for  set  expenditures, they  prohibited  the                                                                    
     dedicated   funds   within   the   statutory   language                                                                    
     specifically in  the constitution because they  saw the                                                                    
     issues that  are associated with putting  your money in                                                                    
     silos that  can't be  broken and when  you put  them in                                                                    
     silos  that  can't  be  broken,   now  you  end  up  in                                                                    
     situations  where  often  times you  could  have  money                                                                    
     sitting  here that  you didn't  need that  you need  to                                                                    
     spend over  here, but you  would have no access  to it.                                                                    
     So that's  the real  danger you have  by putting  it in                                                                    
     the constitution  is that  you would tie  it up  to say                                                                    
     this is  exactly where  it's going to  have to  go, you                                                                    
     could be  in a  situation where  you couldn't  pay your                                                                    
     general obligation  debt or  you couldn't  make payroll                                                                    
     or some  other thing and  you would not have  access to                                                                    
     those  funds.  So  it  really ties,  not  so  much  the                                                                    
     administration's hands,  it's the  Legislature's hands,                                                                    
     you're taking away your  own appropriation authority by                                                                    
     putting  it into  the constitution.  The administration                                                                    
     can't spend  what you don't  appropriate, so  it really                                                                    
     is  an   issue  of  some  of   your  flexibility,  your                                                                    
     appropriation  authority  that  would  be  tied  up  by                                                                    
     moving  it  into  the  constitution;  but,  just  as  a                                                                    
     general statement, it's not good  public policy to silo                                                                    
     your revenues and  lock them up where they  can only be                                                                    
     spent   in  a   certain  fashion   and  not   have  the                                                                    
     flexibility to move the money around if you need to.                                                                       
4:18:00 PM                                                                                                                    
CHAIR  DUNLEAVY pointed  out  that the  state  had a  rules-based                                                               
system  for decades  that changed  because it  was statutory.  He                                                               
reiterated that  the PFPA  does not  provide protection,  it just                                                               
changes the way the permanent fund is dealt with.                                                                               
COMMISSIONER  HOFFBECK  clarified  that   the  PFPA  changes  the                                                               
formula and provides  no more or no less protection  that the old                                                               
formula had.                                                                                                                    
CHAIR DUNLEAVY  reiterated that the  PFPA is still  statutory and                                                               
amounts could be  vetoed, and the Legislature could  change it in                                                               
a 90-day session. He commented as follows:                                                                                      
     What  we are  lacking  right now  from my  perspective,                                                                    
     just from the feedback I'm  getting, is a confidence in                                                                    
     the public  that we are  going to  deal with this  in a                                                                    
     manner that they  thoroughly understand and potentially                                                                    
     could accept,  but they are  wading through  the terms,                                                                    
     the terminology,  the nuances,  and some of  this stuff                                                                    
     they are questioning.                                                                                                      
4:19:25 PM                                                                                                                    
COMMISSIONER  HOFFBECK  summarized the  plans  to  draw from  the                                                               
permanent  fund  by addressing  the  current  status quo  option,                                                               
drawing from the permanent-fund-only  option, and the differences                                                               
in using either SB 21 or SB 26 as follows:                                                                                      
   · Status quo will eventually deplete the earnings reserve and                                                                
     there  won't   be  a  dividend   or  money   for  government                                                               
   · Permanent-fund-only plan has the same problems as status                                                                   
     quo if  there is  not a  full-fiscal solution.  The earnings                                                               
     reserve  will  eventually be  depleted  and  you won't  have                                                               
     money for government services.                                                                                             
   · Whatever plan is selected needs the rest of the pieces to                                                                  
     solidify either of the plans.                                                                                              
   · Both SB 21 and SB 26 are rules based.                                                                                      
   · Both SB 21 and SB 26 stabilize the investment-income piece                                                                 
     by  using the  five-year-averaging strategy  that will  take                                                               
     the wild swings out of it.                                                                                                 
   · SB 21 does not have the shut-off valve on the percentage of                                                                
     market  value  (POMV) draw  and  potentially  may result  in                                                               
     super-heated  spending  if  oil  production  or  oil  prices                                                               
   · Total revenue is addressed more within SB 26, but only mid-                                                                
     range oil  prices is  addressed. Once  oil prices  move past                                                               
     the mid-range, oil-price volatility  could still be present.                                                               
     Other revenues  that are  part of  the total  fiscal package                                                               
     would not be addressed in SB 26, the bill only addresses                                                                   
     the tie between oil and the permanent fund.                                                                                
   · Both plans are statutory.                                                                                                  
   · Both plans protect the dividend.                                                                                           
   · Both plans have a formula-driven approach for the dividend.                                                                
   · Both plans protect the fund by at least growing at the rate                                                                
     of inflation.                                                                                                              
   · Both plans project the fund to have similar balances 24-                                                                   
    years out at approximately $104 billion to $105 billion.                                                                    
   · SB 21 will have more money in the earnings reserve and SB                                                                  
     26 will have more money in the fund's corpus.                                                                              
   · With money in the corpus at a 5.25 percent draw, SB 26 will                                                                
     generate more revenue for funding government services than                                                                 
     the 4.5 percent draw under SB 21.                                                                                          
COMMISSIONER HOFFBECK addressed a  final comparison between SB 21                                                               
and SB 26 that referenced FY2018 as follows:                                                                                    
   · FY2018 unrestricted general fund (UGF): $4.2 billion;                                                                      
   · FY2018 existing UGF revenues: $1.4 billion;                                                                                
   · Planned earnings reserve account draws for UGF:                                                                            
        ƒStatus quo: not available,                                                                                            
        ƒSB 21: $1.2 billion,                                                                                                  
        ƒSB 26: $2.0 billion;                                                                                                  
   · Additional measures required for a full-fiscal plan:                                                                       
        ƒStatus quo: $2.8 billion,                                                                                             
        ƒSB 21: $1.6 billion,                                                                                                  
        ƒSB 26: $0.8 billion.                                                                                                  
4:25:40 PM                                                                                                                    
SENATOR  WILSON  addressed  the  $1.4  billion  in  existing  UGF                                                               
revenues  in FY2018  and asked  Commissioner Hoffbeck  to provide                                                               
additional details.                                                                                                             
COMMISSIONER HOFFBECK  replied that he believes  the $1.4 billion                                                               
includes the revenues that the  governor proposed from the motor-                                                               
fuel tax. He  opined that the motor-fuel tax is  only $40 million                                                               
in the  first year, so  whether the tax  is included or  not does                                                               
not change the discussion.                                                                                                      
COMMISSIONER  HOFFBECK set  forth  that the  $800 million  "hole"                                                               
that  needs to  be  filled under  SB  26 will  be  a heavy  lift;                                                               
however, the administration does not see  a path to fill the $1.6                                                               
billion from  SB 21. He  opined that  an unfunded liability  is a                                                               
larger threat than a  too large of a draw. He said  a draw can be                                                               
turned down, but an unfunded  liability creates the incentive for                                                               
unplanned draws. He asserted that  unplanned draws really put the                                                               
risk and the volatility into the stability of any of the plans.                                                                 
4:27:58 PM                                                                                                                    
SENATOR  WILSON pointed  out  that  Commissioner Hoffbeck  stated                                                               
that he  did not see another  means to "fill the  hole." He asked                                                               
if he thought about "making the  hole smaller" by making the size                                                               
of government  smaller instead  of looking  for revenues  to fill                                                               
the hole.                                                                                                                       
COMMISSIONER  HOFFBECK  answered  yes.   He  explained  that  the                                                               
governor intentionally did not "fill  the hole" when he presented                                                               
his budget because  he thought a discussion  was needed regarding                                                               
how much  is going  to be  revenue and  how much  is going  to be                                                               
expenditure reductions.  He asserted  that "everything is  on the                                                               
table." He  opined that the  $1.6 billion in  additional measures                                                               
required for a full-fiscal plan  from SB 21 would require massive                                                               
expenditure cuts  and massive  taxes. He  admitted that  the $800                                                               
million left  from SB  26 is  going to  be a  pretty big  task in                                                               
CHAIR  DUNLEAVY remarked  that  now  is not  the  time to  engage                                                               
Commissioner  Hoffbeck on  the philosophy  of reductions  and the                                                               
size of government. He opined  that continued government spending                                                               
will be  above the $600  million that is projected  in additional                                                               
measures from SB 26.                                                                                                            
COMMISSIONER HOFFBECK said he had no further comment.                                                                           
4:29:36 PM                                                                                                                    
CHAIR DUNLEAVY thanked  Commissioner Hoffbeck, and held  SB 26 in