Legislature(2013 - 2014)SENATE FINANCE 532

03/19/2013 09:00 AM FINANCE


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09:05:17 AM Start
09:07:50 AM Presentation: Maximum Sustainable Yield: a Fiscal Road Map for Alaska
10:27:04 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time & Location Change --
Joint with Senate Finance
+ Presentation: TELECONFERENCED
Maximum Sustainable Yield: Wealth Management for
the "Owner State" by Dr. Scott Goldsmith,
Professor Emeritus, Institute of Social and
Economic Research, University of Alaska Anchorage
          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