Legislature(2013 - 2014)SENATE FINANCE 532
03/19/2013 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Maximum Sustainable Yield: a Fiscal Road Map for Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
March 19, 2013ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE FINANCE COMMITTEE
SENATE FINANCE COMMITTEE
March 19, 2013
9:05 a.m.
9:05:17 AM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 9:05 a.m.
SENATE FINANCE COMMITTEE MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
SENATE FINANCE COMMITTEE MEMBERS ABSENT
Senator Lyman Hoffman
HOUSE FINANCE COMMITTEE MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative Lindsey Holmes
Representative Scott Kawasaki, Alternate
Representative Cathy Munoz
Representative Steve Thompson
Representative Tammie Wilson
HOUSE FINANCE COMMITTEE MEMBERS ABSENT
Representative David Guttenberg
ALSO PRESENT
Dr. Scott Goldsmith, Professor Emeritus, Institute of
Social and Economic Research, University of Alaska
Anchorage; Representative Lora Reinbold.
SUMMARY
PRESENTATION: MAXIMUM SUSTAINABLE YIELD: A FISCAL ROAD MAP
FOR ALASKA
9:07:50 AM
Co-Chair Kelly presented a YouTube presentation that was
produced on AlaskaBudget.com.
Vice-Chair Fairclough restated that the video was located
on AlaskaBudget.com.
Co-Chair Kelly shared that Dr. Goldsmith had developed a
fiscal plan for the Alaska.
9:11:42 AM
^PRESENTATION: MAXIMUM SUSTAINABLE YIELD: A FISCAL ROAD MAP
FOR ALASKA
DR. SCOTT GOLDSMITH, PROFESSOR EMERITUS, INSTITUTE OF
SOCIAL AND ECONOMIC RESEARCH, UNIVERSITY OF ALASKA
ANCHORAGE (UA), presented the PowerPoint, "Maximum
Sustainable Yield: A Fiscal Road Map for Alaska" (copy on
file). He remarked that there were positive and negative
aspects to the fiscal issues for Alaska. He stated that his
presentation was based on his research and analysis, and
was not in conjunction with UA. He remarked that Alaska had
a unique fiscal challenge, because of the heavy dependence
on oil production. The general fund (GF) revenue was more
than 90 percent directly dependent on oil. He estimated
that the indirect benefit to the GF was more than 95
percent. He stressed that it was difficult to base most of
the revenue on oil, because oil production had been in
decline for the previous 20 years.
Dr. Goldsmith looked at slide 2, "10 Year Fiscal Plan:
Hints at the Problem." He stated that the Alaska Office of
Management and Budget (OMB) had a ten-year fiscal plan. The
plan hinted at the problem that Alaska faced. He stated
that the slide showed a ten-year projection. The GF
expenditures, represented as bars on the graph, were
growing with population, inflation, and increased needs.
The green line represented GF revenues. He stressed that
the bars and the lines were moving in opposite directions,
showing the gap between revenues and expenditures getting
larger year by year. He stated that the graph showed a
difference of approximately $4 billion in FY 23. He
declared that Alaska had savings that would cover the
annual deficits for a number of years. He felt that the
ten-year plan did not get to the crux of the fiscal
problem.
Dr. Goldsmith presented slide 3, "Looking Beyond 10 Years."
He looked at the top graph, and explained that the green
portion represented GF revenues; and the red portion was
the withdrawal from cash accounts to fund the growing GF.
The graph was a ten-year projection and showed that growing
GF needs could be met for ten years, under certain
reasonable assumptions. He moved on to the bottom graph,
and explained that it represented what would happen beyond
the ten year horizon. After ten years, the red portion
disappeared and a large gap opened up between growing
expenditures and available revenues to fund the
expenditures. He explained that the green area represented
current oil revenues; the tan area represented new oil
revenues from unconventional sources; and the purple area
represented an estimate of revenues from a gas pipeline.
The fiscal gap continued to grow over time, and remarked
that the structural change would continue. He pointed out
that revenue remained relatively flat. He stressed that
expenditure demand would continue to grow with population
and inflation increases. He stated that the Alaska state
budget was a large portion of the state's economy, so if
the budget needed to decrease, Alaska's economy would
suffer.
Dr. Goldsmith looked at slide 4, "Non-Petroleum Strategies
for the Future?"
-Natural Resource Development
-Value Added Processing
-Economic Diversification
-Infrastructure Investments in Power and
Transportation
-Footloose Industry
-Renewable Energy
9:19:34 AM
Dr. Goldsmith displayed slide 5, "Non-Petroleum GF
Revenues." He remarked that the various economic strategies
had not contributed to Alaska's ability to finance
government. He explained that the graph showed that GF
revenues from non-petroleum sources was approximately
$1,000 per capita, and remarked that the graph reflected
the lack of ability to generate GF revenues from non-
petroleum sources as the economy grew.
Dr. Goldsmith highlighted slide 6, "How can We Sustain a
Healthy Level of Public Services in the Future?"
MAXIMUM SUSTAINABLE YIELD Management of our biggest
asset-Petroleum.
1)How Big is Our Nest Egg
2)How Should We Manage It
3)How Should We Spend it
Dr. Goldsmith looked at slide 7, "Petroleum Wealth in our
Infrastructure." He explained that Alaska had collected
approximately $180 billion in petroleum revenues since
statehood. He explained that investments were made in
physical capital: dams, roads, and other types of
infrastructure; and human capital: education, health care,
etc. He stressed that those forms of capital had
contributed to the strength and health of the economy. He
furthered that approximately 20 to 25 percent of the
revenue had been put into savings accounts like the
permanent fund and general fund.
Dr. Goldsmith discussed slide 8, "Petroleum Wealth in the
Bank (Billion $)." He stated that the large financial
accounts totaled approximately $60 billion, factoring the
stock market and other factors.
9:23:26 AM
Dr. Goldsmith looked at slide 9, "Petroleum Wealth in the
Ground." He shared that there was petroleum revenues that
had not been collected. These were revenues that were hoped
to derive from future oil and gas production. He stated
that the potential for additional production was profound.
He stated that the slide represented his projections based
on an assumption of reserves that were economically
recoverable at current prices. He stated that the total was
between 28 to 38.5 billion barrels of oil, independent of
gas. The slide divided up the projection between known
conventional, known unconventional, and yet to be
discovered oil.
Dr. Goldsmith highlighted slide 10, "Revenue Potential
Constrained." He stressed that the oil in the ground would
not likely generate the kind of income that Alaska was
accustomed. He stated that the chart gave the sense of what
types of taxes and royalties, under current law, Alaska
would collect from production of the various categories of
oil. He pointed out that conventional oil on state land
paid a production tax royalty, state income tax, and
property tax. Marginal oil and unconventional oil, in
theory, generated the same types of taxes and oils; but in
reality the return was unlikely to be as large as
conventional production on state land. He pointed out that
the state would only share in half the royalties that the
federal government would collect on that unproduced oil.
9:28:21 AM
Dr. Goldsmith looked at slide 11, "Future Petroleum
Revenue: Value Today (Billion $)." He stated that the
graphic attempted to summarize what the current value might
be of the state's share of in-the-ground oil and gas. He
remarked that he had created a projection of future
revenues year-by-year from potential production and
development from various types of oil. He remarked that the
graph reflected the flow of future revenues year-by-year
out through 2039. He pointed out that the $67 billion area
was based on the DOR projection, which was based on known
conventional oil on state lands. He stated that his graph
pushed the projection beyond the ten-year period, and
included other potential sources of revenue. He stated that
the cumulative nominal return would result in $536 billion
dollars, according to his analysis. He stated that his
research used a net present value analysis.
Dr. Goldsmith highlighted slide 12, "Petroleum Wealth of
the 'Owner State'."
TOTAL: $149 Billion
In the Bank: $60 Billion
In the Ground: $89 Billion
Known Conventional Oil: $67 Billion
Other Oil and Gas: $22 Billion
$200,000 for each current resident.
Dr. Goldsmith looked at slide 13, "How should we Manage the
Nest Egg (Asset, Endowment)?" He remarked that the asset
was in the form of infrastructure, so it was time to
determine the nest egg based on money in the bank and
resources in the ground.
Dr. Goldsmith displayed slide 14, "How Much of the Nest Egg
Should We Spend?"
DRAW each year at a rate that will conserve the value
of the Nest Egg for future generations of Alaskans-the
Maximum Sustainable Yield.
9:36:10 AM
Dr. Goldsmith highlighted slide 15, "Maximum Sustainable
Yield: Calculation." He stated that the draw-rate needed to
be determined based on assumption that the population of
Alaska had been growing at approximately 1 percent per
year. He stressed that 1 percent of income needed to return
to GF to offset the increase in population. He determined
that the maximum sustainable yield draw-rate would be 4
percent, resulting in $6 billion in maximum sustainable
yield to maintain the value of the nest egg.
Dr. Goldsmith discussed slide 16, "Maximum Sustainable
Yield: Mechanics." He explained that the nest egg currently
earned $7.3 billion based from oil and gas revenue; and
$4.5 billion in financial earnings. The total nest egg cash
flow was $11.8 billion. He stated that 4 percent would
allow a draw of $6 billion in maximum sustainable yield,
and the remaining $5.8 percent could be returned to savings
and reinvestment.
Dr. Goldsmith looked at slide 17, "Maximum Sustainable
Yield: Disposition." He explained that the total maximum
sustainable yield of $6 billion would be used for the
permanent fund dividend (PFD): $1 billion; $5 billion for
the general fund; and $5 million in GF non-petroleum
revenues. The result would be $5.5 billion in GF maximum
sustainable yield.
9:42:05 AM
Dr. Goldsmith highlighted slide 18, "Maximum Sustainable
Yield Nest Egg Growth." He stated that the value of the oil
in the ground was decreasing, so the share of the nest egg
held as oil in the ground would decrease. He furthered that
money would be returned to the nest egg as financial
savings, so the savings share would grow to offset the
decline in oil value in the ground. He stressed that the
total value of the nest egg would grow over time, at 1
percent a year in real dollars.
Dr. Goldsmith discussed slide 19, "Maximum Sustainable
Yield: General Fund Growth." He explained that the GF
would, over time, receive less revenue from current
petroleum revenues; and more of its revenue from financial
earnings. He remarked that the GF expenditures could grow
based on non-petroleum revenues, and would grow at the rate
of inflation and population. He stressed that the graph was
based on the maximum sustainable yield calculation for the
nest egg. He explained that non-petroleum revenues could
affect the projection, if they experienced growth.
Dr. Goldsmith looked at slide 20, "FY 2013 General Fund
Spending (Billion $)." He explained that the current GF
actual spending was at $7.6 billion; the GF maximum
sustainable yield draw was $5.5 billion; so the GF was over
spent by $2.1 billion. He stressed that the GF was
experiencing a fiscal burden and asset erosion. He pointed
out that this calculation was after subtracting endowment
spending on the PFD and adding in non-petroleum revenues;
and it was imperative to maintain the maximum sustainable
yield and save all revenues above that amount.
9:47:18 AM
Dr. Goldsmith highlighted slide 21, "Maximum Sustainable
Yield: Implementation."
-Gradual transition to GF Maximum Sustainable Yield
level
-Protection of financial assets
-Active participation in management of petroleum in
the ground thru alignment
-Establish monitoring system to track Nest Egg value,
set MSY target for each budget, and track progress
towards sustainability
Dr. Goldsmith looked at slide 22, "Maximum Sustainable
Yield: Challenges to Implementation."
"It can't work"
-Confusion about the concept
-Uncertainty about portfolio size, rate of return,
population growth, risk aversion
-Institutional constraints
-Political challenge of constraining current spending
level
-Fragility of social contract (trust)
-Suppression of individual positive discount rate
-Speculative/Opportunistic migrants
"It shouldn't be tried"
-Aversion to Public Savings Accounts
-Negative effects of "Rentier Society" or "Trust Fund
Babies"
-Indifference to future generations of Alaskans
-Past good luck will continue
-Life was better before petroleum
-Future generations' preferences unknowable
-Money in the bank is not working for Alaska economy
9:52:25 AM
Dr. Goldsmith highlighted slide 23, "MSY Sensitivity to
Assumptions." He stated that his calculation was his own,
and remarked that everyone would come up with a different
number. He stressed that the number would change over time,
because of the changing conditions in the oil market and
technology. He pointed out that the targets for saving,
investing, or spending needed to adjust to take account of
those changes. He stated that the last two slides
represented the sensitivity of his nest egg calculation. He
stated that the far left bar on the graph was a measure of
the current estimated nest egg size. He explained that he
had divided the nest egg into three components: blue,
financial analysis; red, known conventional oil; and black,
other oil and gas. He stated that the blue portion was
pretty stable as it represented money in the bank. The red
portion was also fairly stable, although price varied over
time. He stressed that the black portion could provide
substantial income, benefit, and revenue for Alaska. He
added that there was much uncertainty, and did not know the
fiscal terms. He remarked that his determination of the
nest egg reflected a conservative forecast for other oil
and gas revenues.
Dr. Goldsmith looked at slide 24, "Future Petroleum
Revenues have Lower Current Value." He explained that the
graph displayed how the oil and gas that would not be
produced in the near future, and how it would only have a
modest impact on the size of the nest egg, because of the
net present value calculation.
Dr. Goldsmith highlighted slide 25, "Better than the
Current Fiscal Strategy?" The graphic on the slide said,
"Please God, give us another oil boom, we promise not to
@#&%! it away this time."
Co-Chair Kelly stressed that Dr. Goldsmith was available
for information, not debate. He observed that there were
large numbers available for budgets, but the presentation
was not a recommendation.
10:02:13 AM
Co-Chair Stoltze recalled a presentation from 2011, and
remembered graphic figures of up to $3 billion. He recalled
that the presentation explained that Alaska should receive
$4,000 per ounce for gold; a $20 tax on each salmon; and a
$2,000 tourist tax. He also recalled a presentation the
following year that showed a $7.5 billion gap with $10,000
per ounce for gold; a $50 tax on each salmon; and a $7,500
tourist tax. He remarked that the current presentation
centered on oil revenues, and stressed that those previous
presented taxes were so miniscule compared to oil revenues.
Dr. Goldsmith replied that he wanted to focus on strategy
and target. He agreed that the non-petroleum revenues were
approximately $500 million for a decade, and showed very
little expansion. He stressed that the profitability of the
industries did not have the capability to generate the kind
of revenue from petroleum. He specifically pointed out that
the average tourist in Alaska was not spending ten times as
much as they did in 2000. He asserted that he felt that all
the industries were contributing a fair share, but their
share could not replace the declining revenue in oil and
gas.
Co-Chair Stoltze remarked that the unrestricted general
fund (UGF) had approximately $36 million from commercial
fishing and approximately $65 million from mining. He
furthered that cigarettes and insurance premiums paid more
tax than the commercial fishing industry. He understood
that the focus should be on the oil revenue, because it was
the significant portion of Alaska's revenue.
10:07:17 AM
Representative Thompson looked at the maximum sustainable
yield, and noticed that the nest egg was at $149 billion,
of which $89 billion was still in the ground with a 5
percent return. He wondered if that assumption was like
depending on 5 percent from the bank that had not yet been
invested. Dr. Goldsmith responded that he did expect a 5
percent increase in the value of what was in the ground,
because the entire value of the nest egg was increasing at
almost 5 percent.
Senator Dunleavy inquired if the $20 billion combined debt
was considered in Dr. Goldsmith's calculations. Dr.
Goldsmith responded that the GF debt was part of the GF
appropriations, so any debt for general obligation (GO)
bonds would come under the 5.5 percent maximum sustainable
yield for GF.
Representative Gara looked at slide 11, and surmised that
the red portion of the chart was a revenue assumption from
a large natural gas pipeline. Dr. Goldsmith agreed.
Representative Gara furthered that the last page implied
that it was "dumb luck" that Alaska was in its current
state. He stressed that Alaska had raised an extra $15
billion by passing the last oil tax reform in 2007. Dr.
Goldsmith argued that the cost of oil had increased,
therefore allowing an opportunity to change the oil tax
structure.
Representative Costello wondered if the discount factor
included inflation or the forgone present consumption. Dr.
Goldsmith replied that he conducted his analyses
independent of inflation, and then apply inflation in the
end. He conducted his research in this manner because
people like to see nominal dollars rather than "real"
dollars. He explained that the discount factor in real
terms was 5 percent, which was consistent with the
permanent fund goal under a real long-term basis according
to a rate of return. He explained that some economists felt
that 5 percent was too high, but stated that the 5 percent
was based on the last 20 years. He noted that the rate of
return on the nest egg decreased, if that 5 percent were
lower.
10:12:17 AM
Representative Holmes looked at slide 5, and wondered why
there was a spike and sudden decrease in the 1970s. Dr.
Goldsmith responded that the impact was mostly based on the
elimination of the individual income tax and other tax
changes.
Co-Chair Kelly wondered if that impact was based on the
corporate income tax decrease following the oil boom in the
1970s. Dr. Goldsmith reiterated that it was primarily a
result of the elimination of the personal income tax.
Representative Wilson wondered if a certain percentage of
the oil revenue should be automatically into a savings
account. Dr. Goldsmith responded that the focus should not
be on savings, but rather on what the state could afford to
spend. He remarked that the $5.5 billion was in the budget,
and anything above that should be put into savings. He
pointed out that that amount varied from year to year, so
there was no formula to determine the exact amount that
should be saved each year.
Representative Wilson felt that the strategy was not unlike
a retirement account. Dr. Goldsmith agreed and furthered
that there will come a day when the oil revenue is no
longer available.
Representative Wilson felt that that perspective should
have been in place to begin with.
10:17:29 AM
Co-Chair Kelly stated that he heard a presentation from Dr.
Goldsmith in 1996. Dr. Goldsmith responded that Alaska had
done pretty well, in terms of the permanent fund. He noted
that Alaska had taken in $180 billion, with 20 to 25
percent in savings.
Co-Chair Kelly stressed that the challenge was to focus on
decreased spending in order to implement the plan. He felt
that the current growth of 6.4 percent was unsustainable.
He stressed that it was not effective to merely "cut the
budget." He pointed out that there should be a plan to keep
the government from growing.
Representative Kawasaki looked at slide 20. He wondered if
there would be a consideration to support a bill that would
take billions of dollars of revenue and asset erosion.
Co-Chair Kelly felt that Representative Kawasaki's question
was an attempt to start a debate on oil taxes.
Dr. Goldsmith replied to Representative Kawasaki's
question, and stated that the $5.5 billion calculation was
contingent upon the current assumptions from DOR for
petroleum revenues for the next ten years. He furthered
that he had added assumptions to augment those
calculations.
Representative Gara remarked that ConocoPhilips had
recently released a statement that declared that they could
reduce their production decline to 3 percent. He wondered
if the analysis was based on the 6 percent decline from DOR
or the 3 percent decline from ConocoPhilips. Dr. Goldsmith
responded that he used the DOR Fall Revenue Forecast that
was contingent on the 6 percent decline.
Co-Chair Kelly remarked that ConocoPhilips was only one
company in the oil industry, so a model could not be made
based on their declarations.
10:22:17 AM
Vice-Chair Fairclough wondered where the 3 percent
production decline could be found. She wondered if it was a
distorted fiscal analysis. She wondered if that was based
on a newspaper article or an actual report. Co-Chair Kelly
stated that a response could be saved for a later date.
Dr. Goldsmith stated that his analysis was based on many
assumptions, and felt that there were many different
uncertainties. He stressed that his numbers should not be
considered the best an only numbers, but that the approach
and way of thinking about Alaska's fiscal future. He felt
that his presentation should spark a discussion on how to
reduce spending, and a general discussion of what the
overall strategy should be when planning for future
generations.
Dr. Goldsmith stressed that his approach focused on the
petroleum nest egg, and how much could be spent from that
nest egg. He pointed out that spending and maintaining
maximum sustainable yield could be achieved, if other tax
sources could contribute.
ADJOURNMENT
10:27:04 AM
The meeting was adjourned at 10:27 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ISER Presentation Scott Goldsmith 2013.pdf |
HFIN 3/19/2013 9:00:00 AM |
ISER Joint Finance 3/19/13 |
| ISER Web Notes Maximum Sustainable Yield.pdf |
HFIN 3/19/2013 9:00:00 AM |
ISER Presentation |