Legislature(2017 - 2018)HOUSE FINANCE 519
03/17/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB30 | |
| HB115 | |
| Amendments | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 30 | TELECONFERENCED | |
| += | HB 115 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 17, 2017
2:47 p.m.
2:47:00 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 2:47 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Les Gara, Vice-Chair
Representative Jason Grenn
Representative David Guttenberg
Representative Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
Representative Mark Neuman (alternate)
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Ed King, Special Assistant to the Commissioner, Department
of Natural Resources; Randall Hoffbeck, Commissioner,
Department of Revenue; Brandon Brefczynski, Staff,
Representative Steve Thompson; Alexei Painter, Analyst,
Legislative Finance Division.
PRESENT VIA TELECONFERENCE
None
SUMMARY
HB 115 INCOME TAX; PFD CREDIT; PERM FUND INCOME
HB 115 was HEARD and HELD in committee for
further consideration.
SB 30 APPROVAL: ROYALTY OIL SALE TO PETRO STAR
2:47:08 PM
Co-Chair Foster addressed the meeting agenda. He noted that
Representative Mark Neuman was sitting in as an alternate
for Representative Thompson.
SENATE BILL NO. 30
"An Act approving and ratifying the sale of royalty
oil by the State of Alaska to Petro Star Inc.; and
providing for an effective date."
2:48:04 PM
Representative Wilson questioned the fiscal note. She
wondered about the non-UGF (Other) fund source of $1.945.4
million.
ED KING, SPECIAL ASSISTANT TO THE COMMISSIONER, DEPARTMENT
OF NATURAL RESOURCES, identified three funds [royalty
distribution]: the general fund, Permanent Fund, and the
Public School Trust Fund.
Co-Chair Foster noted there were no amendments to the bill.
Vice-Chair Gara addressed the fiscal note from the
Department of Natural Resources, FN 2 (DNR). The fiscal
note had zero expenditures and brought in revenues totaling
$3.852.2 million in FY 18.
2:50:22 PM
Mr. King clarified that the initial fiscal note FN 1 (DNR)
had contained an error.
Co-Chair Seaton MOVED to REPORT SB 30 out of committee with
individual recommendations and the accompanying fiscal
note. There being NO OBJECTION, it was so ordered.
SB 30 was REPORTED out of committee with a "do pass"
recommendation and with one previously published fiscal
impact note: FN2 DNR.
2:51:26 PM
AT EASE
2:52:14 PM
RECONVENED
HOUSE BILL NO. 115
"An Act relating to the permanent fund dividend;
relating to the appropriation of certain amounts of
the earnings reserve account; relating to the taxation
of income of individuals; relating to a payment
against the individual income tax from the permanent
fund dividend disbursement; repealing tax credits
applied against the tax on individuals under the
Alaska Net Income Tax Act; and providing for an
effective date."
2:52:21 PM
^AMENDMENTS
2:52:57 PM
AT EASE
2:53:38 PM
RECONVENED
Representative Wilson WITHDREW Amendment 16, 30-LS0125\E.23
(Nauman, 3/12/17) (copy on file) and Amendment 17, 30-
LS0125\E.22 (Nauman, 3/10/17).
Representative Wilson MOVED to ADOPT Amendment 18, 30-
LS0125\E.39 (Nauman, 3/17/17).
Page 1, line 5, following "Act;":
2 Insert "authorizing an advisory vote to approve
legislative action that appropriates money from the
earnings reserve account for a purpose other than a
payment of a permanent fund dividend;"
Page 10, following line 24:
Insert a new bill section to read:
Sec. 16. The uncodified law of the State of Alaska is
amended by adding a new section to read:
ADVISORY VOTE. At the next primary election to be held
in substantial compliance with the election laws of
the state, including absentee voting and the
preparation, publication, and mailing of an election
pamphlet under AS 15.58, the lieutenant governor shall
place before the qualified voters of the state a
question advisory to the legislature and the governor.
The election pamphlet for the special election must
comply with AS 15.58.020(a) (6), including the
requirement that it contain statements that advocate
voter approval or rejection of the question.
Notwithstanding AS 15.80.005 and other laws relating
to preparation of the ballot proposition, the question
shall appear on the ballot in the following form:
QUESTION
Should the legislature appropriate money from the
permanent fund earnings for a purpose other than a
payment of a permanent fund dividend?
Yes [ ] No [ ]"
Renumber the following bill sections accordingly.
Page 10, line 29:
Delete "15, and 16"
Insert "and 15 - 17"
Page l0, line 3l:
Delete "see. 17"
Insert "sec. 18"
Representative Grenn OBJECTED for discussion.
Representative Wilson spoke to the amendment. She explained
that the amendment called for an advisory vote. She
referenced a memorandum from Legislative Legal Services
dated March 17, 2017 related to advisory votes.
2:54:40 PM
Co-Chair Seaton noted the language, "at the next primary
election" and indicated that the next primary election was
scheduled in August of the following year [2018]. He asked
whether that was the amendment sponsor's intention.
Representative Wilson replied in the affirmative. She felt
that the tax discussion was "complex" and did not want to
"rush." She added that if legislation was passed, the delay
allowed time to access whether it was working.
Co-Chair Seaton spoke in opposition to the amendment. He
felt that the impending vote would delay the "immediacy of
the discussion and the development of the bills." He voiced
that a referendum procedure was available if the public
disapproved of the approach chosen by the legislature. He
thought that the vote lead to a "blind trail" and did not
allow the legislature to address the issue and move forward
with a plan.
Representative Neuman supported the amendment and alluded
to public sentiment towards the Permanent Fund Dividend
(PFD). He stated that there were many diverse views on how
the Permanent Fund should be used. He believed that the
advisory vote "was a good idea" and that "the public should
have the chance to decide." He indicated that the fate of
the legislation Co-Chair Seaton referred to was uncertain.
He reported that according to the Department of Revenue the
state had over $15 billion in reserves; $10.6 billion in
the Earning Reserves Account (ERA) and $4.5 billion in the
Constitutional Budget Reserves (CBR). He noted that the
deficits were running $3 billion. He did not support using
the Permanent Fund to fund government while the reserves
were high.
2:59:04 PM
Representative Guttenberg testified in opposition to the
amendment. He shared his concerns regarding the issue. He
spoke to the prior and current process of attempting to
address the problem through creation of an endowment to
create a revenue stream while reserves dwindled each year a
plan was not adopted. He stated that the amendment was
merely an advisory vote and relayed that the public might
introduce their own referendum resulting in two measures on
the ballot posing the same question. He thought public
opinion was diverse and that an advisory vote was not
helpful especially one and half years away. He believed
that it was imperative for the legislature to take
immediate action.
Representative Pruitt believed there would be an advisory
vote whether it was proposed by the legislature or put
forward in a referendum. He supported the amendment. He
emphasized his strong support for an advisory vote. He
determined that public disapproval of actions taken by the
legislature would more "carefully" guide the policy. He
believed that many politicians had created a mind set over
30 years that the Permanent Fund would never be used to
fund government. He believed that the amendment allowed
public participation and as a result "kept the legislature
on track no matter" what action was taken.
3:03:43 PM
Representative Tilton spoke in favor of the amendment. She
recounted that the committee had heard discussions about
timing. She related that prior legislatures had discussed
an advisory vote on the matter. She wished that the vote
had already taken place and wanted the public to have a
voice on the issue.
Vice-Chair Gara was opposed to the amendment. He discussed
that part of the legislature's job was to ensure it "did
not fool the public." He remarked that the roughly $9
billion in the Permanent Fund Earnings Reserve Account was
referred to as savings. He noted that at the end of the
current fiscal year the state's savings balance would be $3
billion lower and depleted in the following fiscal year. He
reminded the committee that the balance started at $17
billion. There ultimately would not be sufficient money to
pay a dividend if ERA funds were expended like savings -
even with the implementation of "radical budget cuts." He
wanted to work together to determine a way to protect the
dividend.
3:06:10 PM
Representative Wilson provided closing comments on the
amendment. She believed it was a good thing the vote would
not happen immediately. She did not view the vote as
slowing down or stopping anything. She wanted the public to
be more engaged. An advisory vote would open a dialogue
with the public. She stated the vote would force
legislators "to have a specific conversation with their
constituents."
3:09:26 PM
Representative Grenn MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Neuman, Tilton, Wilson
OPPOSED:
The MOTION FAILED (4/7).
3:10:04 PM
Representative Wilson MOVED to ADOPT Amendment 19, 30-
LS0125\E.38 (Nauman, 3/17/17).
Page 1, line 5, following "Act;":
Insert "authorizing an advisory vote on legislative
action that imposes an income tax;"
Page 10, following line 24:
Insert a new bill section to read:
Sec. 16. The uncodified law of the State of Alaska is
amended by adding a new section to read:
ADVISORY VOTE. At the next primary election to be held
in substantial compliance with the election laws of
the state, including absentee voting and the
preparation, publication, and mailing of an election
pamphlet under AS 15.58, the lieutenant governor shall
place before the qualified voters of the state a
question advisory to the legislature and the governor.
The election pamphlet for the special election must
comply with AS 15.58.020(a) (6), including the
requirement that it contain statements that advocate
voter approval or rejection of the question.
Notwithstanding AS 15.80.005 and other laws relating
to preparation of the ballot proposition, the question
shall appear on the ballot in the following form:
QUESTION
Should the legislature appropriate money from the
permanent fund earnings for a purpose other than a
payment of a permanent fund dividend?
Yes [ ] No [ ]"
Renumber the following bill sections accordingly.
Page 10, line 29:
Delete "15, and 16"
Insert "and 15 - 17"
Page l0, line 3l:
Delete "see. 17"
Insert "sec. 18"
Co-Chair Seaton OBJECTED for discussion.
Representative Wilson spoke to the amendment. She commented
that the amendment called for an advisory vote on
legislative action that imposed an income tax.
Representative Guttenberg opposed the amendment. He voiced
that his constituents wanted him to act and he did not want
to second guess the decision by seeking an advisory vote.
He supported the public's use of the referendum process to
register disapproval of actions taken by the legislature.
3:11:41 PM
Representative Neuman supported the amendment. He related
that his constituents rated an income tax as their least
favorable way to fund government. He favored an advisory
vote. He felt that an income tax took money out of the
economy at a time when a recession was impending.
Co-Chair Seaton was opposed to the amendment. He did not
believe it was very useful to offer generic language on the
ballot that would result in a "generalized opinion." He
communicated that an income tax could be constructed in
many ways and specific details would generate a more
informed response. He believed the ballot measure
incentivized delay and interfered with forward movement on
use of an income tax to solve the fiscal problems.
Representative Pruitt did not believe the structure of an
income tax mattered to the public. He opined that the
public had a fundamental reaction and the discussion was
"psychological." He declared that the vote would reveal
that "the people did not want an income tax." He believed
the legislature would find "the overwhelming majority" of
voters opposed to an income tax. He did not think that a
vote delayed action taken on the budget. He was not afraid
of hearing from "the people" in an advisory vote. He wanted
to speak for the people he represented and voiced that the
"best" polling was the results from citizens voting.
3:17:32 PM
Representative Kawasaki relayed that in 2015 the Rasmuson
Foundation performed a poll that included questions
regarding an income tax. The poll had asked the public
whether they supported an income tax. A large majority
disapproved unless the tax only applied to individuals in
the over $100,000 income group. He deduced that the
structure of an income tax would affect the outcome of an
advisory vote.
Vice-Chair Gara spoke in opposition to the amendment. He
believed that the amendments "prevented legislators from
leveling with the public." He related that an income tax or
permanent fund restructuring (no dividend distribution)
alone would not solve the fiscal problem. He declared that
he had wanted a larger dividend than the amount Alaskans
received the prior year. He stated that the budget deficit
was so large the concept was beyond comprehension for many.
He voiced that the issue "was not a political thing." He
reiterated that single fixes like a sales tax or "radical
cuts" to the budget did not solve the fiscal problem. The
state would run out of savings soon.
Representative Neuman asked that the discussion remain
focused on the amendment.
Co-Chair Foster requested that Vice-Chair Gara restrain his
comments.
Vice-Chair Gara did not support putting part of a fiscal
plan to a public vote. He thought the advisory vote would
mislead the public. He characterized the issue as a
"massive" math problem that would lead to a 10-year
recession.
3:22:01 PM
Representative Wilson provided concluding comments on the
amendment. She did not know "when it had become a crime to
ask the public what they wanted." She felt that she engaged
in honest discourse with her constituents. She stated that
taxing a person's income was "specific" and was a
significant and important issue. She welcomed the public's
opinion on the matter.
3:24:31 PM
Co-Chair Seaton MAINTAINED his OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Pruitt, Neuman, Tilton, Thompson
OPPOSED: Ortiz, Gara, Grenn, Guttenberg, Kawasaki, Foster,
Seaton
The MOTION FAILED (4/7).
3:25:07 PM
Representative Pruitt MOVED to ADOPT Amendment 12, 30-
LS0125\E.27 (Nauman, 3/10/17) (copy on file):
Page 1, line 1, following "dividends;':
Insert 'relating to the management of the budget
reserve fund;"
Page 1, following line 9:
Insert a new bill section to read:
"Sec. 2. AS 37.10.430(c) is amended to read:
(c) A special subaccount is established in the budget
reserve fund (art. IX, sec. 17. Constitution of the
State of Alaska). Money in the subaccount shall be
invested to yield higher returns than might be
feasible to obtain with other money in the budget
reserve fund. [IN ESTABLISHING OR MODIFYING THE
INVESTMENT POLICY
11 FOR THE SUBACCOUNT IN THE CONSTITUTIONAL BUDGET
RESERVE FUND, THE COMMISSIONER OF REVENUE SHALL ASSUME
THAT THOSE FUNDS WILL NOT BE NEEDED FOR AT LEAST FIVE
YEARS.] Income earned on money in the subaccount shall
be retained in the subaccount by the department."
Page 10, line 18:
Delete "sec. 11"
Insert "sec. 12"
Page 10, line 19:
Delete "sec. 11"
Insert "sec. 12"
Page 10, line27:
Delete 'secs. 2 - 9" in both places
Insert "secs. 3 - 10" in both places
Page 10, line 29:
Delete "Sections 1 - 9, 15, and 16"
Insert "Sections 1, 3 - 10, 16, and 17"
Page l0, Iine3l:
Delete "sec. 17"
Insert "sec. 18"
Co-Chair Seaton OBJECTED.
Representative Pruitt spoke to the amendment. He related
that CBR funds were conservatively managed under a five-
year limit based on a potential need for liquidity. He
indicated that two years prior Commissioner Hoffbeck
(Department of Revenue) moved CBR funds to an account that
was managed more conservatively so that the funds were
readily available for expenditure. However, the account was
"making less money." The amendment allowed funds not deemed
necessary in the short term to be managed more aggressively
in the hopes of gaining higher earnings. In addition, the
funds must remain in a type of account that kept the funds
readily available for expenditure.
3:28:35 PM
Co-Chair Seaton thought the amendment seemed logical, but
he wanted to see how it worked within the revenue
restructuring act.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
answered that the amendment worked within the framework of
the restructuring act in two distinct ways. He explained
that by allowing greater flexibility in the way the funds
were invested increased the return on investment. Secondly,
the Permanent Fund restructuring component required a draw
from the Earnings Reserve Account (ERA) but the
administration did not want the Alaska Permanent Fund
Corporation (APFC) to change its investment practices. The
draw required "cash management on the treasury side" and
the CBR played a critical role. The flexibility within the
CBR allowed a structure to become a "cash management
vehicle," ensuring liquidity needs. He reiterated that the
CBR would be a critical tool in the restructuring process
for cash management, but the amendment allowed for "greater
returns" as well.
Vice-Chair Gara favored the provision. He asked for
verification that the amendment made no sense if a revenue
plan was not adopted. He noted that current spending from
the CBR necessitated short-term, low interest investments.
Commissioner Hoffbeck answered in the affirmative. He added
that without restructuring, the CBR funds were needed
within two years and would be kept "liquid and secure." He
restated that if no restructuring occurred, the CBR would
be gone in two years. Vice-Chair Gara asked whether 1 or 2
percent interest was expected on short term investments
versus 8 or 9 percent on long term investments.
Commissioner Hoffbeck answered that the earnings were about
2 percent. Vice-Chair Gara supported the amendment. He
stated that the CBR could only be invested in the long-term
if the legislature found ways to increase revenues and not
deplete the fund. Commissioner Hoffbeck replied in the
affirmative.
3:33:06 PM
Representative Neuman asked for verification that the
legislature had the ability to use the ERA to fund
government. Commissioner Hoffbeck responded in the
affirmative. Representative Neuman asked whether the
balance of the ERA was approximately $10 billion.
Commissioner Hoffbeck agreed with the statement.
Representative Neuman deduced that between the balance of
the CBR, which totaled approximately $4.6 billion and the
ERA combined the state would not run out of reserves in two
years. Commissioner Hoffbeck answered that the question
pertained exclusively to the CBR. Representative Neuman
asked whether the amendment changed the investment and
management rules governing the CBR. Commissioner Hoffbeck
answered that the subaccount and the main account would be
invested differently from the other. The main account would
be secure and liquid because it was assumed that it would
be used sometime within a five-year period. The subaccount
would be invested more aggressively for a longer term.
Representative Neuman asked if the money was "locked up in
a subaccount" the fund would not be expendable.
Commissioner Hoffbeck answered CBR funds would not be
placed in a subaccount if he determined the money would be
needed within five years. He added that the idea behind
eliminating the five-year requirement but maintain a
subaccount allowed for a more "progressive" investment
policy; having three-year, four-year, five-year and over
investments, opposed to a hard 5-year line for keeping
money liquid. Representative Neuman wondered how the
administration would know the state's future financial
needs. He spoke to the crash in oil prices that had caused
the current recession. Commissioner Hoffbeck answered that
the five-year provision was not a five-year "lockup" of
funds but more of a mindset on the amount of risk the state
was willing to accept. The subaccount could be invested in
a higher risk portfolio with high or low swings but could
be and index fund that was accessible anytime.
3:38:02 PM
Representative Neuman asked whether DOR would have to pay
penalties if the funds were used "earlier." Commissioner
Hoffbeck answered in the negative. Representative Neuman
thought that the legislature adopted a statute that
mandated CBR management by APFC. Commissioner Hoffbeck
answered that it was contained in the Permanent Fund
Protection Act [SB 26 Approp Limit & Per Fund: Dividend;
Earnings]. Representative Neuman suggested APFC management
of the CBR as another option. He reiterated that the
legislature should allow the APFC to manage the fund. He
noted that the APFC recently hired more fund managers while
DOR lost positions. Commissioner Hoffbeck answered that
currently the APFC did not have the same cash management
structure as DOR. He explained that the department managed
$400 million worth of funds monthly that was structured to
allow funds to mature and become available when necessary.
The APFC managed one fund. He indicated that moving the CBR
to the Permanent Fund was inefficient since DOR maintained
all the other accounts' management and treasury functions.
He informed the committee that DOR's staff was perfectly
capable of managing the money and had outperformed the APFC
22 years out of the last 30 years. He summarized that the
APFC "had a different investment mandate. He shared that
Angela Rodell, Executive Director, Alaska Permanent Fund
Corporation had testified that she would invest the CBR in
a similar manner as DOR. The department performed a study
recently that showed a similar outcome whether DOR or APFC
managed the CBR. He concluded that cash management was the
treasury's duty so CBR management should remain with DOR.
3:41:56 PM
Representative Neuman asked for verification that the
amendment would not change the investment "sideboards" that
governed how the department managed the CBR. Commissioner
Hoffbeck replied that the amendment provided increased
flexibility versus the "hard line" of five years.
Representative Neuman thought it was probably a good
amendment. He related that he had received information
regarding a proposed bond sale from the prior year. He
offered that if the $3.4 billion bonds sale proceeded the
state would have lost $278 million. Commissioner Hoffbeck
responded that the Pension Obligation Bonds (POB) would
have been sold the previous fall when the market was low.
He indicated that the POB sale would have been the lowest
in history; the "all in" rate was in the 3.5 to 3.7 percent
range on twenty-year notes. He noted that the stock market
returns since then were over 14 percent. The bonds would
have been sold at the end of a downturn and the start of an
upturn in the stock market. He believed an opportunity had
been missed. The state would have needed to make 3.6 or 3.7
percent return on the investments over twenty years to
break even. He determined that the proposed sale was "as
close to a safe large-scale investment that [the state]
possibly could have had." The lost opportunity had afforded
a very low cost of debt.
3:44:59 PM
Representative Wilson wanted to understand the amendment.
She asked for verification that the amendment allowed DOR
to increase the investment opportunity in the CBR.
Commissioner Hoffbeck replied in the affirmative.
Representative Ortiz asked whether a potential downside
existed. Commissioner Hoffbeck answered that DOR was
mandated to follow the prudent investment rule and would
balance risk and reward. He felt that the five-year rule
locked up funds and investing was currently "too safe."
Co-Chair Seaton WITHDREW his OBJECTION. There being NO
OBJECTION, it was so ordered.
Representative Pruitt MOVED to ADOPT Amendment 13, 30-
LS0125\E.25 (Nauman, 3/10/17) (copy on file):
Page 2, line 9:
Delete "a new subsection"
Insert "new subsections"
Page 2, following line 18:
Insert a new subsection to read:
'(c) In accordance with AS 37.13.145(b) (1), and
subject to appropriation, 33 percent of the amount
available for distribution under (b) of this section
shall be reserved for dividends. The remainder of the
amount calculated to be available for distribution
under (b) of this section shall be reduced by the
difference between the amount calculated under (1) of
this subsection and the amount under (2) of this
subsection if the amount calculated under (1) of this
subsection exceeds the amount under (2) of this
subsection:
(1) the total amount of oil and gas production taxes
under AS 43.55.011 - 43.55.180, mineral lease rentals,
royalties, royalty sale proceeds, net profit shares
under AS 38.05.180(f) and (g), and federal mineral
revenue sharing payments and bonuses received by the
state from mineral leases that are deposited into
the general fund in the current fiscal year; (2) the
sum of $1,200,000,000."
Vice-Chair Gara OBJECTED.
3:47:03 PM
AT EASE
3:52:53 PM
RECONVENED
Representative Pruitt addressed Amendment 12 related to the
Permanent Fund draw limit. He pointed to a chart from the
Legislative Finance Division showing two charts [the chart
on the left was titled "UGF Revenue without Payout Limit"
and the chart on the right was titled "UGF Revenue with
Payout Limit" dated 3/15/17 (copy on file)]. He reported
that the amendment contained a "mechanism" that ensured
fund growth and dividend growth over time. The draw on the
Permanent Fund for government expenditures was limited as
other revenues increased. He favored the amendment because
he felt that government spending would easily increase as
revenue increased and pointed to historical spending
patterns to illustrate his point. In addition, he thought
that a draw limit protected the funds growth for the
future. He believed Commissioner Hoffbeck was supportive of
the measure. He asked Commissioner Hoffbeck to address the
issue.
3:56:17 PM
BRANDON BREFCZYNSKI, STAFF, REPRESENTATIVE STEVE THOMPSON,
pointed to a handout distributed by Representative
Thompson's office that contained a table addressing a
scenario under HB 115 without the draw limit and with the
draw limit (copy on file) using information from DOR. He
explained that the first row on the chart showed that the
median beginning of the year fund balance for FY 18
(including the FY 17 draw) was $54 billion without the draw
limit and $54 billion with the draw limit. The second line
depicted the median FY 2041 end of year balance at $91
billion ($54 billion real) nominal amount without the draw
limit and $109 billion nominal amount ($64 billion real)
amount with the draw limit. He pointed out that the third
row contained the median FY 2041 net payout to the general
fund as $2.8 billion ($1.7 billion real) nominal amount
without the draw limit and $3.3 billion nominal amount
($1.9 billion real) amount with the draw limit. The last
line portrayed the median FY 2041 dividend per person as
$1,837 nominal amount [$1,077 real] without the draw limit
and $2,130 nominal amount [$1,248 real] with the draw
limit. He noted that the dividend was calculated at one-
third of the Point of Market Value (POMV). He believed that
the dividend amount was consistent with an adopted
amendment by Vice-Chair Gara that ensured a $1250 dividend.
3:59:54 PM
Representative Kawasaki asked for verification that the
model was built to 2041. Commissioner Hoffbeck answered in
the affirmative. Representative Kawasaki thought the number
seemed arbitrary and was far in the future. He requested
"more near-term' modeling.
Vice-Chair Gara surmised that by 2041 there was a roughly
$500 million difference. He deduced that to accomplish the
increase the state had to flat-line the budget between $75
and $105 price per barrel of oil. He did not understand how
to compare current figures to 2041 "by flat lining
revenue." Commissioner Hoffbeck replied that the impact of
flat lining revenue was shown in the differences in the
balances under a fixed draw. The fixed draw was what
created the additional revenue in the Permanent Fund.
Vice-Chair Gara knew that every circumstance could not be
included on a chart. However, for the next five to ten
years funds were necessary for schools, deferred
maintenance, and road construction. He wondered if oil
prices reached $75/bbl. or $80/bbl., whether there would be
funds for energy projects in rural areas, school funding,
etc. The data on the table did not address the questions,
it merely showed the amount of money available in the
Permanent Fund. Mr. Brefczynski replied that with more
money in the fund there would be more money for schools and
other government expenditures, which provided
sustainability and grew the fund.
Vice-Chair Gara countered that it was only more money for
schools if combined revenues were factored in. The chart
showed more money only for the portion of revenue that was
derived from the ERA. Commissioner Hoffbeck replied in the
affirmative. He communicated that employing Permanent Fund
earnings was never intended to be the sole plan. Other
revenues were intended to also be available to fund
government. He reported that the chart was developed out of
the fear that spending would "hyperinflate" in high oil
price years. He specified that if the limit was in place it
was necessary to "ratchet down" the draw in all years and
currently less money would be available to fund services.
Vice-Chair Gara relayed that the current debate included a
permanent fund restructure only plan. He referred to the
LFD model.
[Secretary Note: the model was interactive.]
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
replied the chart's data included the income tax provisions
in HB 115. He was able to remove the income tax portion
from the model. He added that in a response to previous
committee questions the model included the impacts for each
year from FY 18 through FY 26. He modeled lower production
and higher budget figures. He explained that without the
income tax or draw limit the budget was not balanced until
$85/bbl. of oil. He noted that with the draw limit the
budget was not balanced until a price of $105/bbl. in FY
18. He showed a similar situation under HB 115 without the
income tax extending out through the years where a deficit
persisted. He added that with the income tax "the budget
line approximately met the flat spot on the expenditure
limit in the following years." Production was declining
resulting in less revenue, but the POMV was larger, growing
at roughly the rate of inflation.
Vice-Chair Gara asked what the model would look like under
HB 115 without the income tax in 2024 and wondered how long
would the deficit last.
4:08:18 PM
Mr. Painter modeled one graph under the Senate plan and one
graph depicting Vice-Chair Gara's request and did not
verbally explain the results.
Representative Neuman referred to the chart from
Representative Thompson's office and asked whether an
additional $200 million was available for state expenditure
in 24 years. Mr. Brefczynski answered in the affirmative
and explained that according to the model more money would
be available for state spending and dividends. He
reiterated that more money retained in the Permanent Fund
grew the fund. He specified that the POMV draw was based on
a five-year average of the fund.
Representative Neuman asked whether $1.2 billion was the
draw limit. Commissioner Hoffbeck responded that $1.2
billion was the amount of oil and gas tax revenue that
triggered a reduction in the Permanent Fund draw, dollar
for dollar. He clarified that the oil and gas tax royalties
activated the draw limit. Representative Neuman asked
whether the POMV was the amount reserved for the dividend
distribution. Commissioner Hoffbeck answered in the
negative. He clarified that the POMV was the amount of the
total draw for government services and the dividend. The
draw limit reduced the amount for government services but
not the amount for the dividend. Representative Neuman asked
whether there was an additional mechanism that added more
money to the dividends.
4:12:25 PM
Commissioner Hoffbeck replied that as the fund's value
grew, the 5 percent or 5.25 percent value grew. The more
money in the fund the larger the dividend.
Representative Neuman pointed to the LFD chart on the
screen. He noted that the bottom line on the graph depicted
the state still running over a $1 billion deficit in 24
years. Mr. Painter clarified that the slide showed a
scenario without the income tax, with the income tax the
deficit disappeared when the price of oil rose to $75/bbl.
Representative Ortiz asked whether DOR included a rate of
inflation for the figures through 2041. Commissioner
Hoffbeck answered that the inflation rate was factored in
at 2.25 percent. Representative Ortiz asked whether a
higher inflation rate impacted the model. Commissioner
Hoffbeck replied in the affirmative. He concluded that
higher investment returns accompanying the high rate of
inflation would balance out the effect on the budget.
Representative Ortiz understood the deficit scenario
without an income tax. He wondered what the "opportunity
cost" of an extended deficit was. Commissioner Hoffbeck
ascertained that the other savings would be expended first
leaving unplanned draws from the ERA. Representative Ortiz
asked whether other revenue was necessary under a scenario
with an extended deficit. Commissioner Hoffbeck answered
that the assumption was revenue or budget cuts were
necessary. He added that the Permanent Fund alone was not
sufficient to resolve the entire issue.
Co-Chair Seaton asked Mr. Painter to adjust the LFD chart
on the screen. He requested that a reduction of fifty cents
on the dollar was modeled. Co-Chair Seaton reported that
the results increased revenue at $90/bbl. of oil at a more
rapid rate, but the deficit increased.
Representative Wilson requested more information about the
changes to the Excel chart and how they related to the
amendment.
Representative Pruitt explained that the sum of $1.2
billion sum was found under subsection (c) (2) [line 19] on
page 1 of the amendment and Co-Chair Seaton's scenario
changed the $1.2 billion to $1.5 billion on line 19. He
cited subsection (c) on lines 9 through 13 of the amendment
and read the following {line identifiers included]:
…The remainder of the amount calculated to be
available for distribution under (b) of this section
shall be reduced by the difference between the amount
calculated under (1) of this subsection and the amount
under (2) of this subsection if the amount calculated
under (1) of this subsection exceeds the amount under
(2) of this subsection:
Representative Pruitt referred to the sum from the
calculation in subsection (1) of subsection (c) [the total
amount of oil and gas production tax] and that sum was
reduced $1.00 per every dollar beyond the specified amount
of revenue in (2) (c), $1.2 billion [from oil and gas
production tax]. In Co-Chair Seaton's scenario the dollar
for dollar was reduced to a corresponding fifty-cent
reduction.
4:19:52 PM
Co-Chair Seaton continued with his questions about the LFD
chart. He asked what the charts would look like over time.
Representative Neuman saw that the UGF budget slowly
increased. He asked whether the increase was related to the
2.5 percent rate of inflation. Mr. Painter answered that
the model assumed a flat operating budget for the next two
years subsequently increasing with inflation. He indicated
that debt service was not increasing with inflation due to
the pause in school debt reimbursement, but state
retirement increased. The entire budget did not grow with
the rate of inflation but did increase close to the
inflation rate under the model.
Co-Chair Seaton requested that he take the $1.5 billion
revenue limit input to $2 billion. He reported that kicked
in at $95/bbl. of oil. He asked Mr. Painter to return to
the 50 cents on the dollar scenario. He mentioned the
change would provide greater security for eliminating
budget deficits and making up capital projects. He asked
whether the changes he made were unadvisable. Commissioner
Hoffbeck responded that he could provide further modeling
but deduced that the change might require a "lower base
draw' to avoid increasing the failure rate. Co-Chair Seaton
indicated that his scenario looked favorable and requested
that he provide additional modeling. Commissioner Hoffbeck
agreed to provide the information.
Representative Pruitt interjected that the models indicated
the potential for failure and the potential to erode the
Permanent Fund. He related that the model included the
different plans. He noted that with a full fiscal plan in
2041 the likelihood of failure was only 1.43 percent with
the draw limit. Without the draw limit, the likelihood of
failure was 8.6 percent. The legislature could manipulate
the Permanent Fund to achieve many desired results. He
voiced that a decision was needed on what the main goal of
the fund was. He requested that the additional modeling
include how the failure rate changed. He emphasized that
the failure rate of the ERA was very important.
Commissioner Hoffbeck responded that some of the other
things to be considered was if the draw limit was set at a
higher threshold and the dollar for dollar scenario was
reduced the impact would affect the four times draw because
reserves would grow slower and inflation proofing would be
impacted. In addition, volatility increased.
Representative Grenn asked whether the scenario produced
more for government spending. Commissioner Hoffbeck
responded that if the draw limit was removed, revenue
increased in certain years. The revenue spikes could
increase overall spending and threaten sustainability as
revenue dropped again.
4:30:59 PM
Mr. Brefczynski interjected that if the threshold was
raised and lowered to fifty cents on the dollar, the real
value of the Permanent Fund would decrease. He noted that
HB 115 reduced the royalty contributions to the fund and
eliminated the statutory inflation proofing relying on the
four times rule to grow. He deduced that without the four
times rule triggering because the ERA expenditure increased
it was also less likely to inflation proof. He concluded
that raising the threshold and lowering the offset to fifty
cents on the dollar would result in a smaller Permanent
Fund, smaller POMV, and a smaller dividend.
4:32:43 PM
Vice-Chair Gara commented that all the modeling was
academic if the Senate's plan without additional revenue
was adopted. He requested Mr. Painter model the Senate
plan.
Representative Wilson contended that modeling other bills
and going off topic of the amendment was confusing. She
wanted to understand how the amendment worked with HB 115.
4:34:14 PM
AT EASE
4:34:44 PM
RECONVENED
Co-Chair Foster would allow the digression.
Vice-Chair Gara wanted to recognize that currently there
was a difference of opinion in the legislature. He wondered
how a draw limit would impact a plan that only restructured
the permanent fund. He asked for a model of a permanent
fund only plan. He asked for the projected numbers in 2024.
Vice-Chair Gara asked whether the state retained a deficit
until $95/bbl. with the draw limit. Mr. Painter responded
that he was correct. Vice-Chair Gara asked if the CBR
balance would last until 2024 under a permanent fund only
plan. Mr. Painter commented that under HB 115 without an
income tax the CBR lasted through FY 26. Vice-Chair Gara
did not want to consider the amendment until a fiscal plan
was adopted. He believed the provision kept the state in
austerity without increased revenue.
Representative Neuman cited the 50 cents per dollar
scenario. He wondered what "volatile cash" [volatile
revenue] was. Mr. Painter explained that the revenue that
fell under the limit was the production tax and
unrestricted general fund royalties and did not include
other revenue sources. Representative Neuman interpreted
that without the limit there was more revenue in general.
Mr. Painter responded that the POMV payout would be reduced
under the limit under high oil prices and the funds would
remain in the ERA.
Mr. Brefczynski interjected that besides price, production
would also influence the draw. Representative Neuman was
aware of the statement.
Representative Neuman observed that in future years the
POMV payout with the limit disappeared. He asked for
clarification. Mr. Painter responded that the model only
portrayed FY 18. He delineated that the graph represented
that as oil price increased a smaller POMV draw was
necessary; in the scenario it was fifty cents on the
dollar. He commented that with every additional dollar of
volatile revenue the POMV draw was reduced by fifty cents.
He summarized that within FY 18 the dollar for dollar
provision substituted one type of revenue for another; the
higher oil revenue for POMV funds. Representative Neuman
asked whether the dividend check would also increase at a
greater rate. Mr. Painter replied that would not be the
case for FY 18. However, leaving more money in the fund
would eventually increase the dividend amount based on a
five year average.
Co-Chair Foster reviewed the agenda for the following
meeting.
HB 115 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the schedule for the following
meeting.
ADJOURNMENT
4:43:01 PM
The meeting was adjourned at 4:43 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 30 - Response to Rep. Guttenberg PS1 Tariffs.pdf |
HFIN 3/17/2017 1:30:00 PM |
SB 30 |
| SB 30 DNR Response to Rep Guttenber 03.15.2017.pdf |
HFIN 3/17/2017 1:30:00 PM |
SB 30 |
| HB 115 Amendments 18 - 19.PDF |
HFIN 3/17/2017 1:30:00 PM |
HB 115 |
| HB 115 Amendments 18-19 Legal Memo.pdf |
HFIN 3/17/2017 1:30:00 PM |
HB 115 |
| HB 115 - Amendment #13 supplemental info - $1.2B Draw Limit Comparison Chart.pdf |
HFIN 3/17/2017 1:30:00 PM |
HB 115 |