Legislature(2015 - 2016)HOUSE FINANCE 519

04/13/2016 08:30 AM FINANCE

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
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Heard & Held
Moved CSSB 170(RES) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      April 13, 2016                                                                                            
                         8:37 a.m.                                                                                              
8:37:58 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Thompson   called  the  House   Finance  Committee                                                                    
meeting to order at 8:37 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Senator  Cathy  Giessel,  Sponsor; Brodie  Anderson,  Staff,                                                                    
Representative  Steve  Thompson;   Kevin  Anselm,  Director,                                                                    
Division of Banking and  Securities, Department of Commerce,                                                                    
Community and Economic  Development; Representative Charisse                                                                    
Millett,   Sponsor;   Brad  Keithly,   President,   Keithley                                                                    
Consulting, LLC; Senator Bill Stoltze.                                                                                          
PRESENT VIA TELECONFERENCE                                                                                                    
Renee  Wardlaw, Assistant  Attorney  General, Department  of                                                                    
Law, Anchorage.                                                                                                                 
HB 194    AK SECURITIES ACT; PENALTIES; CRT. RULES                                                                              
          HB 194 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
HB 311    SUSTAINABLE BUDGET REPORTING                                                                                          
          HB 311 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SB 170    DNR FEES FOR GEOLOGICAL SERVICES                                                                                      
          CSSB 170(RES) was REPORTED out of committee with                                                                      
          a "do pass" recommendation and with one                                                                               
          previously published fiscal note: FN2 (DNR).                                                                          
Co-Chair Thompson discussed the meeting agenda.                                                                                 
CS FOR SENATE BILL NO. 170(RES)                                                                                               
     "An   Act  authorizing   the   Department  of   Natural                                                                    
     Resources,  division  of   geological  and  geophysical                                                                    
     surveys,  to collect  fees  for facilities,  equipment,                                                                    
     products,  and  services;  relating to  accounting  for                                                                    
     certain   program  receipts;   and  providing   for  an                                                                    
     effective date."                                                                                                           
8:38:48 AM                                                                                                                    
SENATOR CATHY  GIESSEL, SPONSOR,  relayed that the  bill was                                                                    
another  revenue  generating  step  for  the  Department  of                                                                    
Natural  Resources  (DNR).  She relayed  that  the  Geologic                                                                    
Materials  Center (GMC)  functioned as  the main  repository                                                                    
for geologic materials from all  over Alaska and was similar                                                                    
to a library;  i.e., companies and agencies went  to the GMC                                                                    
to look at the rocks  and determine mineral content or other                                                                    
information  regarding resource  extraction. She  elaborated                                                                    
that the materials  had been stored in conex  boxes and were                                                                    
degenerating.  The department  purchased a  shuttered retail                                                                    
building "a  couple years ago"  at a reduced  price, located                                                                    
in Eagle  River and  converted it to  the GMC.  She detailed                                                                    
that Repsol had discovered  "promising materials" in the GMC                                                                    
that  led to  their  recent oil  discovery  in the  Colville                                                                    
Delta that could contain 500  million to 3.7 billion barrels                                                                    
of oil.  The bill allowed  DNR to  set and collect  fees for                                                                    
entry  into  the   GMC  and  use  of   its  facilities.  She                                                                    
referenced page  2, lines 25  through 26 of  the legislation                                                                    
that  was modified  in the  Senate Resources  Committee that                                                                    
allowed  student's free  admission.  She  reported that  the                                                                    
fiscal note  pointed to  revenue generation  through program                                                                    
Co-Chair Neuman stated  that he liked the  concept. He asked                                                                    
about  viewing areas.  Senator  Giessel  replied that  there                                                                    
were many shelves  of sample cores as well  as viewing rooms                                                                    
where cores from certain areas could be examined.                                                                               
Co-Chair Thompson OPENED public testimony.                                                                                      
Co-Chair Thompson CLOSED public testimony.                                                                                      
Vice-Chair Saddler  discussed the  fiscal note from  DNR. He                                                                    
noted that  the fiscal  note (FN  2 (DNR))  included revenue                                                                    
8:44:37 AM                                                                                                                    
Co-Chair  Neuman  MOVED  to  REPORT  CSSB  170(RES)  out  of                                                                    
committee   with   individual    recommendations   and   the                                                                    
accompanying fiscal note.                                                                                                       
CSSB  170(RES) was  REPORTED  out of  committee  with a  "do                                                                    
pass"  recommendation  and  with  one  previously  published                                                                    
fiscal note: FN2 (DNR).                                                                                                         
8:45:04 AM                                                                                                                    
AT EASE                                                                                                                         
8:48:03 AM                                                                                                                    
HOUSE BILL NO. 194                                                                                                            
     "An Act repealing and  reenacting the Alaska Securities                                                                    
     Act,   including   provisions    relating   to   exempt                                                                    
     securities and  transactions; relating  to registration                                                                    
     of  securities, firms,  and agents  that offer  or sell                                                                    
     securities   and   investment   advice;   relating   to                                                                    
     administrative,   civil,   and   criminal   enforcement                                                                    
     provisions, including  restitution and  civil penalties                                                                    
     for violations; allowing certain  civil penalties to be                                                                    
     used  for  an   investor  training  fund;  establishing                                                                    
     increased civil  penalties for harming  older Alaskans;                                                                    
     retaining provisions  concerning corporations organized                                                                    
     under the Alaska Native Claims Settlement Act;                                                                             
     amending Rules 4, 5, 54, 65, and 90, Alaska Rules of                                                                       
     Civil Procedure; and providing for an effective date."                                                                     
8:48:10 AM                                                                                                                    
Vice-Chair  Saddler MOVED  to ADOPT  the proposed  committee                                                                    
substitute for  HB 194,  Work Draft  29-GH1060\G (Bannister,                                                                    
4/12/16). There being NO OBJECTION, it was so ordered.                                                                          
BRODIE  ANDERSON,  STAFF,   REPRESENTATIVE  STEVE  THOMPSON,                                                                    
explained  the  changes  in  the  Committee  Substitute.  He                                                                    
related   that  the   change  corrected   language  from   a                                                                    
conceptual amendment  adopted in  the previous  committee to                                                                    
match the  intent of the  amendment. He delineated  that one                                                                    
correction was located  on page 101, line 2  and deleted the                                                                    
number 19 that  was replaced by the number  18. He explained                                                                    
that the number reflected the  age of maturity. In addition,                                                                    
on  page 101,  line  5, the  words  "or disappearance"  were                                                                    
deleted  and the  words  "dementia  or Alzheimer's  disease"                                                                    
were inserted.                                                                                                                  
KEVIN ANSELM, DIRECTOR, DIVISION  OF BANKING AND SECURITIES,                                                                    
DEPARTMENT OF COMMERCE,  COMMUNITY AND ECONOMIC DEVELOPMENT,                                                                    
reported that the  legislation was a re-write  of the Alaska                                                                    
Securities Exchange  Act and much  of the  language remained                                                                    
the same. She provided a  brief overview and highlighted the                                                                    
changes.  She outlined  that the  bill separated  securities                                                                    
statutes  from  the  Alaska  Native  Claims  Settlement  Act                                                                    
(ANCSA)  related statutes  to reduce  confusion and  improve                                                                    
the  understanding  of  both  acts.  The  bill  removed  the                                                                    
securities statutes  in AS  45.55 and  added a  new chapter,                                                                    
45.56.  The  legislation  "synthesized" the  Securities  Act                                                                    
with other  state's laws by adopting  relevant provisions of                                                                    
the  Uniform Securities  Act (2002)  to make  it easier  for                                                                    
businesses,  entrepreneurs,  and   investors  to  understand                                                                    
their  rights,  responsibilities,   and  opportunities.  She                                                                    
furthered that the bill  recognized and incorporated current                                                                    
securities  industry terms  and  standards. The  legislation                                                                    
opened  equity  crowd  funding  opportunities  and  derailed                                                                    
investment   scams  by   increasing  civil   penalties.  The                                                                    
penalties could  be used to provide  investor, consumer, and                                                                    
entrepreneurial   education    via   legislative   approval.                                                                    
Finally,  HB  194  tripled penalties  for  offences  against                                                                    
senior   citizens  or   vulnerable   adults.  She   provided                                                                    
background regarding the securities  industry in Alaska. She                                                                    
reported  that  by the  end  of  2015  the state  had  1,234                                                                    
registered broker/dealer  firms, however  only one  firm was                                                                    
Alaskan.  She  remarked  that   Alaska  had  765  investment                                                                    
advisors and  only 30 firms  were "domiciled" in  the state.                                                                    
In  2015, 90,340  financial sales  persons were  licensed in                                                                    
Alaska and less than 1000  were domiciled here. She observed                                                                    
that the  state received 6,600 securities  filings each year                                                                    
and most  were from  out-of-state. In general,  the industry                                                                    
was compliant with state laws.                                                                                                  
Representative Munoz joined the meeting.                                                                                        
Ms. Anslem continued  to address the bill.  She relayed that                                                                    
Alaska's  security industry  paid approximately  $13 million                                                                    
per year in  licensing and filing fees and the  bill did not                                                                    
affect  the  fees. The  budget  for  the division  was  $3.5                                                                    
million  per  year.  She informed  the  committee  that  the                                                                    
division  investigated and  took enforcement  action against                                                                    
securities firms, agents, and  issuers, if necessary. In the                                                                    
last four calendar  years the division had  taken 54 actions                                                                    
against  securities related  firms  and  sales persons.  She                                                                    
offered  that  most  actions were  settled  through  consent                                                                    
agreements,  and all  civil penalties  went directly  to the                                                                    
General Fund (GF). The division  took default orders against                                                                    
the six cases  that weren't settled. She  discussed three of                                                                    
the  unsettled  cases to  emphasize  the  importance of  the                                                                    
enforcement actions  and passage of the  bill. She indicated                                                                    
that  the   current  maximum  fine  was   only  $25,000  per                                                                    
respondent no matter how many violations were committed.                                                                        
8:55:46 AM                                                                                                                    
Ms. Anslem read the following from prepared notes:                                                                              
     13-1095-S,  Fortune  Oil &  Gas,  Russell  Vera and  R.                                                                    
     Gerald  Bailey:  On  February  3,  2014,  the  Division                                                                    
     issued  a Final  Cease and  Desist Order  that included                                                                    
     the   MAXIMUM   civil   penalty  of   $25,000   against                                                                    
     Respondents   for   selling   over  $3.1   million   in                                                                    
     unregistered  limited  partnership interests  in  Texas                                                                    
    Oil and Gas ventures, mainly to Alaskan investors.                                                                          
     14-1442-S, Global  Arena Capital Corp.: On  October 23,                                                                    
     2015,  the Division  issued a  Final  Cease and  Desist                                                                    
     Order  that  included  a   civil  penalty  of  $150,000                                                                    
     against  Global  Arena and  six  of  its employees  for                                                                    
     violations    of    the    Alaska    Securities    Act.                                                                    
     Specifically, an employee of  Global Arena contacted an                                                                    
     elderly  Alaska halibut  fisherman in  poor health  and                                                                    
     sold him junk bonds,  although the investor believed he                                                                    
     was  buying  something  like a  CD.  The  investigation                                                                    
     revealed that  the agents were instructed  to offer and                                                                    
     sell  the  junk  bonds  as  "safe  investments."    The                                                                    
     fisherman invested $27,000 in  the bonds, which rapidly                                                                    
     lost  value.   The  firm  even  attempted to  sell  the                                                                    
     investor  other bonds,  including  one  that would  not                                                                    
     reach maturity  until the investor  was 119  years old.                                                                    
     The investment  lost nearly  $16,000. Global  Arena was                                                                    
     cited for deceptive  and misleading representations and                                                                    
     offering   unsuitable    securities.   Currently,   the                                                                    
     Division  can  only  get money  back  for  a  defrauded                                                                    
     investor  with an  agreement with  a bad  actor to  pay                                                                    
     restitution directly  to the  investor.  In  this case,                                                                    
     the Division  successfully negotiated  with one  of the                                                                    
     respondents  to pay  restitution to  the investor.  The                                                                    
     Division may be  able to recover some  of the penalties                                                                    
     through  a SIPC  action since  the firm  is now  out of                                                                    
     15-1520-S/15-1520-2-S, Garden  State Securities/Garland                                                                    
     James:  Garland James,  previously an  agent at  Global                                                                    
     Arena  Capital Corp.,  went to  work for  Garden State.                                                                    
     He  cold-called the  same  elderly  Alaskan fleeced  by                                                                    
     Global  and  tried  to  sell him  $82,000  of  a  risky                                                                    
     biotechnology stock.  When he made the  call, James was                                                                    
     not  registered as  a  broker-dealer  agent in  Alaska.                                                                    
     The  Division entered  into  a  consent agreement  with                                                                    
     Garden  State to  withdraw its  registration in  Alaska                                                                    
     and pay  a $25,000 civil penalty  (maximum) for failing                                                                    
     to  supervise James.  The Division  issued a  Temporary                                                                    
     Cease and Desist Order against  James on March 21, 2016                                                                    
     for   unregistered  activity   and   for  offering   an                                                                    
     unsuitable security to the  investor, seeking a $25,000                                                                    
     civil penalty.                                                                                                             
     12-85-S, Troy Stafford and  Patrick Williams:  Stafford                                                                    
     and Williams  formed an Alaska  LLC, GS Capital  and WS                                                                    
     Seafood.  Stafford   offered  an  Alaska   resident  an                                                                    
     opportunity  to  invest  $40,000   in  WS  Seafood  and                                                                    
     employment.   Stafford  also   stated,  falsely,   that                                                                    
     another corporation had promised  a $10 million loan to                                                                    
     assist the endeavors. The  investor invested his money.                                                                    
     The deal  fell through and the  investor never received                                                                    
     the promised  management role. The  Division negotiated                                                                    
     a settlement  with the  respondents, requiring  them to                                                                    
     offer  rescission to  the  investor, which  respondents                                                                    
     agreed to do and promised  to pay, even filing a notice                                                                    
     of  rescission  with  the Division.  Respondents  never                                                                    
     paid the  investor as promised.  The Division  issued a                                                                    
     Cease and Desist and received  a court order to enforce                                                                    
Ms. Anslem  stressed that  in regards to  the last  case; no                                                                    
statute  mandated   payment  by  the  perpetrators   to  the                                                                    
investor. The current version  of the legislation authorized                                                                    
enforcement. She continued to read the following:                                                                               
     This bill  would change the  maximum civil  penalty per                                                                    
     violation  to $100,000.    You can  see  that with  the                                                                    
     kinds of cases  we are talking about, there  would be a                                                                    
     wider range  of potential  civil penalties.   The fines                                                                    
     imposed  for  the  six  cases  that  I  mentioned  were                                                                    
     $525,000.    Under  the  provisions   in  HB  194,  the                                                                    
     potential  fines could  have  reached over  $7,000,000.                                                                    
     Of  course,  one  never  knows  what  can  actually  be                                                                    
     collected.    Accordingly,  we can't  promise  revenues                                                                    
     with  any  certainty,  thus  the  indeterminate  fiscal                                                                    
9:01:02 AM                                                                                                                    
Co-Chair  Thompson   asked  about  the  importance   of  the                                                                    
legislature adopting HB 194 during  the current session. Ms.                                                                    
Anslem considered the bill critical.  She explained that the                                                                    
division  had worked  for a  number of  years to  update the                                                                    
securities  law. She  believed the  legislation helped  with                                                                    
revenue  generation by  increasing the  civil penalties  for                                                                    
businesses that harm Alaskans.                                                                                                  
Vice-Chair Saddler asked what  specific sections or elements                                                                    
of the bill were the  most critical. Ms. Anslem replied that                                                                    
most   of  the   Alaska  specific   provisions  dealt   with                                                                    
exemptions  from  registration  and carried  over  from  the                                                                    
original act.  She pointed  out that  the state  had special                                                                    
exemptions for certain  fishing cooperatives, the Commercial                                                                    
Fishing  and  Agricultural  Bank  (CFAB),  and  some  mining                                                                    
exemptions.  Vice-Chair  Saddler  asked whether  there  were                                                                    
sections or  elements of the  bill that were  "more critical                                                                    
than the  others." Ms. Anslem answered  that the enforcement                                                                    
and  crowd funding  provisions  were  critical. She  thought                                                                    
that the  provisions that were  the least critical  were the                                                                    
exempt  security  sections:  Article  1,  2,  and  4,  which                                                                    
remained  very similar  to the  original.  She deduced  that                                                                    
another  important   element  allowed  the   legislature  to                                                                    
allocate up to  one third of the funds  collected from civil                                                                    
penalties for consumer and  investor education. She revealed                                                                    
that  consumer  and  investor  education  was  part  of  the                                                                    
division's mission but currently was not funded.                                                                                
9:04:51 AM                                                                                                                    
Vice-Chair Saddler asked whether  there were elements of the                                                                    
bill  that required  conformity  with federal  requirements.                                                                    
Ms.  Anslem replied  that  there were  a  number of  federal                                                                    
requirements  that had  evolved over  time but  were already                                                                    
referenced in  the law. She  elaborated that  securities law                                                                    
was comprised  of two components:  a federal overlay,  and a                                                                    
"blue sky law" that all  states administered. One layer, the                                                                    
national  securities  law   governed  individual  investors,                                                                    
dealers,  and financial  markets  operations. She  furthered                                                                    
that localized  securities laws  were handled  by individual                                                                    
states.  Alaska's  laws  written  in  alignment  with  other                                                                    
states aided  business and investors, which  allowed them to                                                                    
cross state  lines and maintain compliance  with federal and                                                                    
state laws.                                                                                                                     
Vice-Chair  Saddler noted  that the  National Conference  of                                                                    
State  Legislatures   (NCSL)  and   the  Council   of  State                                                                    
Governments  issued  uniform  laws and  recommendations.  He                                                                    
asked who  produced and administered the  Uniform Securities                                                                    
RENEE  WARDLAW, ASSISTANT  ATTORNEY  GENERAL, DEPARTMENT  OF                                                                    
LAW,  ANCHORAGE  (via  teleconference),  answered  that  the                                                                    
National Conference  of Commissioners on Uniform  State Laws                                                                    
[also  known as  the Uniform  Law Commission  (ULC)] drafted                                                                    
the legislation.                                                                                                                
Representative  Wilson stated  that she  had not  vetted the                                                                    
bill.   She  referred   to   the   provisions  on   criminal                                                                    
enforcement  that changed  "willful" violation  to "knowing"                                                                    
violation  and   asked  for   an  explanation.   Ms.  Anslem                                                                    
responded that  the Uniform Securities Act  had included the                                                                    
term   "willfully"    that   meant    "intentionally."   The                                                                    
Legislative Legal  Services Agency attorney's  requested the                                                                    
change  to   "knowingly."  She  clarified  that   the  legal                                                                    
determination  regarding state  of mind  and culpability  in                                                                    
criminal law  (Mens Rea)  was hierarchically  categorized as                                                                    
intentionally,   knowingly,  recklessly,   and  negligently.                                                                    
Knowingly  was  a  lesser  standard.  Representative  Wilson                                                                    
asked  for verification  that the  standard for  criminality                                                                    
was being  lowered. Ms. Anslem  replied in  the affirmative.                                                                    
She cited  AS 11.81.900  as the  statute that  contained the                                                                    
9:09:40 AM                                                                                                                    
Representative Wilson  asked whether  the division  or court                                                                    
proceedings  determined  whether   violations  occurred  and                                                                    
dispensed penalties.  Ms. Anslem  responded that  there were                                                                    
three different  types of actions  that could be  taken. She                                                                    
detailed that  the first action was  administrative taken by                                                                    
the   Department   of   Commerce  Community   and   Economic                                                                    
Development (DCCED).  The second  action was civil  taken by                                                                    
either  DCCED or  "a  private cause  of  action." The  third                                                                    
action  was  criminal, taken  by  DCCED  or the  state.  She                                                                    
clarified that  the department had  not taken on  a criminal                                                                    
case  to date  and the  Department of  Law (DOL)  could take                                                                    
criminal  action if  a case  arose in  a context  outside of                                                                    
DCCED.  Representative Wilson  surmised that  the department                                                                    
could find  someone guilty through an  administrative action                                                                    
and the new provisions could  enact penalties up to $100,000                                                                    
in restitution.  She asked whether the  department could add                                                                    
additional fines. Ms. Anslem replied  that the civil penalty                                                                    
would be  up to $100,000  per violation although  the amount                                                                    
was  typically negotiated  on a  consent  basis. She  stated                                                                    
that   restitution  was   different.   She  explained   that                                                                    
restitution was usually  a repayment of lost  money and that                                                                    
imposing both  was possible. Representative  Wilson wondered                                                                    
about   the  administrative   appeal  process.   Ms.  Anslem                                                                    
answered  that  an  appeal  was   heard  in  the  Office  of                                                                    
Administrative   Hearings  and   that  decisions   could  be                                                                    
appealed to Superior  Court. Representative Wilson contended                                                                    
that  she   had  issues  with  the   administrative  hearing                                                                    
Co-Chair  Thompson  noted  that  Representative  Edgmon  had                                                                    
joined the meeting.                                                                                                             
Representative  Pruitt wondered  what the  state could  have                                                                    
done  differently  for the  elderly  gentlemen  in the  case                                                                    
against Garden State  Securities if the new  provision in HB
194 had been  enacted at the time. Ms.  Anslem answered that                                                                    
the  state would  have been  able to  order restitution  and                                                                    
fine the firm for failure  to supervise employees. The state                                                                    
would have  been able to  take action against  every manager                                                                    
in  the  firm involved  in  instructing  brokers to  mislead                                                                    
investors.  The findings  would have  led to  the amount  of                                                                    
culpability  and   the  fines   would  have   been  adjusted                                                                    
accordingly.  Representative  Pruitt  asked  whether  Garden                                                                    
State  Securities  was  registered outside  of  Alaska.  Ms.                                                                    
Anslem  replied  that Garden  State  was  a New  York  firm.                                                                    
Representative Pruitt  asked how  the division  enforced the                                                                    
law outside  of Alaska and  whether enforcement was  part of                                                                    
the uniform law.  He asked whether the  laws assisted Alaska                                                                    
to  pursue  enforcement outside  of  the  state. Ms.  Anslem                                                                    
answered  in   the  affirmative.  She  detailed   the  North                                                                    
American  Securities Administrators  Association facilitated                                                                    
states  working together  via very  strong agreements  among                                                                    
each  other. She  observed that  often  violations were  not                                                                    
occurring in  just one state  and joint  investigations were                                                                    
9:16:42 AM                                                                                                                    
Co-Chair Neuman asked whether the  bill created a board or a                                                                    
committee.  Ms. Anslem  replied  in  the negative.  Co-Chair                                                                    
Neuman asked  whether any businesses were  currently working                                                                    
in Alaska  that would  be impacted by  the bill.  Ms. Anslem                                                                    
responded that any of the changes  in the bill did not apply                                                                    
to transactions  that took place  before the  effective date                                                                    
of  July 1,  2016. Co-Chair  Neuman thought  that businesses                                                                    
were  not required  to have  an Alaska  business license  to                                                                    
practice  in Alaska.  Ms. Anslem  replied that  the question                                                                    
was  related  to the  Division  of  Boards and  Professional                                                                    
Licensing (CBPL)  regarding whether a specific  business was                                                                    
required to have  a license. She commented that  most of the                                                                    
firms in  Alaska did have  a business license in  the state.                                                                    
Co-Chair Neuman  referred to  a "snow  bird" carve  out. Ms.                                                                    
Anslem  answered that  the snow  bird carve  out applied  to                                                                    
firms that had clients from  another state that travelled to                                                                    
Alaska  and   permitted  the  firms   to  carry   out  three                                                                    
transactions  without  being separately  licensed.  Co-Chair                                                                    
Neuman  noted that  via statute,  money received  from court                                                                    
judgements went  into the General  Fund. Ms.  Anslem replied                                                                    
that HB 194 would not change the statute.                                                                                       
Representative Guttenberg spoke about  a letter from Samuels                                                                    
Yoelin  Kantor LLP  - Robert  Banks dated  February 1,  2016                                                                    
(copy  on  file)  that  reported   an  issue  with  variable                                                                    
annuities  for  customers  and   brokers.  He  wondered  why                                                                    
variable annuities were allowed to  be sold in the state. He                                                                    
stated that he  could not find the statute  AS 45.56.605 (f)                                                                    
as  cited in  Mr. Banks  letter in  the bill  or summary  of                                                                    
changes (copy  on file). He  wondered whether  the provision                                                                    
was deleted. Ms. Anslem replied  in the affirmative - it had                                                                    
been  removed from  the  current version  of  the bill.  She                                                                    
explained  that the  Division of  Insurance was  the primary                                                                    
regulator  of  variable   annuities,  which  were  federally                                                                    
considered  a  security.   However,  states  could  regulate                                                                    
variable  annuities  depending  on what  provisions  of  the                                                                    
Uniform Securities Act a state  adopted. Upon request by the                                                                    
insurance industry, the division  chose not to adopt federal                                                                    
provisions relating to variable annuities.                                                                                      
9:21:25 AM                                                                                                                    
Representative  Guttenberg noted  the  importance Mr.  Banks                                                                    
placed  on the  adopting the  provisions. He  asked how  the                                                                    
regulations  were  "being  covered" under  the  Division  of                                                                    
Insurance.  Ms.  Anslem  responded   that  the  Division  of                                                                    
Insurance  was and  always had  been the  sole regulator  of                                                                    
variable annuities. Representative  Guttenberg asked whether                                                                    
additional rules should be placed  in the bill no matter who                                                                    
the regulator was.  Ms. Anslem replied in  the negative. She                                                                    
thought that  the issue  required more  review and  that the                                                                    
division might revisit  the issue. Representative Guttenberg                                                                    
asked whether there was a  history of problems with variable                                                                    
annuities  in Alaska  and wondered  why the  provisions were                                                                    
being  left  out  of  a  bill  dealing  with  conforming  to                                                                    
national  standards. He  remarked that  the letter  reported                                                                    
issues related to lack of  conformity to national standards.                                                                    
Ms. Anslem  responded that issues around  variable annuities                                                                    
were different in other states  depending on the strength of                                                                    
its regulations.  She offered  that variable  annuities were                                                                    
regulated  on a  national level  by the  Securities Exchange                                                                    
Commission   (SEC)   the   successor   [Financial   Industry                                                                    
Regulatory   Authority,  Inc.   (FINRA)]  to   the  National                                                                    
Association  of Securities  Dealers who  required licensing.                                                                    
The department  licensed variable annuities  brokers through                                                                    
both  the  Division  of  Banking   and  Securities  and  the                                                                    
Division of  Insurance. She informed the  committee that the                                                                    
insurance  division  had  the  sole  authority  to  regulate                                                                    
variable  annuities under  Chapter 21  and provisions  under                                                                    
45.56  would  be  additional  to  the  insurance  division's                                                                    
regulations. She  revealed that  the decision had  been made                                                                    
between  the   Division  of  Insurance  and   the  insurance                                                                    
industry  to do  further  study to  determine  how well  the                                                                    
state   was   regulating   the   annuities.   Representative                                                                    
Guttenberg asked whether  there was a problem  with the sale                                                                    
of variable  annuities in Alaska.  Ms. Anslem  answered that                                                                    
there  had been  complaints,  but she  did not  characterize                                                                    
them as a problem.                                                                                                              
Representative  Gattis asked  whether there  were provisions                                                                    
in  the legislation  that  were imperative  to  pass in  the                                                                    
current session.  She felt the  bill was immense  and wanted                                                                    
to be sure the committee  did its due diligence but realized                                                                    
there  were   essential  "clean-up"  provisions   that  were                                                                    
9:25:43 AM                                                                                                                    
Ms. Anslem  replied that the  bill had a number  of hearings                                                                    
through prior  committees: House Labor and  Commerce and the                                                                    
House  Judiciary   Committee.  She  deemed  that   the  most                                                                    
important  issues  were  enforcement,  civil  penalties  and                                                                    
restitution, and consumer education.  She expounded that the                                                                    
issues were  about the protection of  Alaskans and educating                                                                    
the public  to protect  them from  "getting ripped  off" and                                                                    
made  aware  of   the  resources  available.  Representative                                                                    
Gattis acknowledged that  there was a lot of  cleanup in the                                                                    
bill that  could be done  and wondered where  emphasis could                                                                    
be placed. She  wanted to know why passage of  the bill "was                                                                    
pressing" in  the current session.  Ms. Anslem  replied that                                                                    
the bill had  been in process for the past  6 years in order                                                                    
to bring  the state in  compliance with the most  recent act                                                                    
from 2002 and  enable alignment with other  states. She felt                                                                    
that  passage  of  the  bill   was  important  for  economic                                                                    
development  in the  state. In  addition, the  crowd funding                                                                    
provisions represented  a new opportunity for  Alaskans that                                                                    
authorized  investing  up  to  $5000  per  year  on  Alaskan                                                                    
businesses  and  start-ups. She  noted  that  SB 126  (Small                                                                    
Security Offerings) sponsored by  Senator Mia Costello dealt                                                                    
with the issue  and was moving through  the legislature. She                                                                    
remarked that  the crowd  funding provisions  were regulated                                                                    
solely by the state.                                                                                                            
9:29:45 AM                                                                                                                    
Representative  Munoz  asked  about  the  90,000  registered                                                                    
agents.  She asked  whether the  number was  unusually large                                                                    
compared  to  other states.  Ms.  Anslem  answered that  the                                                                    
number was a  larger per capita number than  in other states                                                                    
but not the  largest. She indicated that one  of the largest                                                                    
draws was Alaska's  higher per capita income  and higher per                                                                    
capita   net  worth.   She  believed   that  without   solid                                                                    
enforcement opportunities  the state would continue  to be a                                                                    
target  for  offences.  Representative Munoz  asked  whether                                                                    
crowd  funding statutes  existed in  current state  law. Ms.                                                                    
Anslem answered in the negative.  She remarked that the only                                                                    
crowd funding allowed was through  internet option like Kick                                                                    
Starter and the  investor did not expect to get  a return on                                                                    
investment. However,  with equity crowd funding,  returns on                                                                    
investment   or    other   remunerations    were   possible.                                                                    
Representative  Munoz   asked  whether   the  $5000   was  a                                                                    
cumulative  cap.  Ms. Anslem  answered  that  the limit  was                                                                    
$5,000  per  investment.   Representative  Munoz  asked  how                                                                    
violations were discovered. Ms.  Anslem responded that cases                                                                    
were  often  referred to  the  division  through federal  or                                                                    
state law  enforcement, complaints, the  Securities Exchange                                                                    
Commission, and from  a number of other sources  such as the                                                                    
National Association of Securities administrators.                                                                              
9:33:01 AM                                                                                                                    
Vice-Chair  Saddler  noted  that  the fiscal  note  did  not                                                                    
include or mention funding for  consumer education. He asked                                                                    
for further  information. Ms.  Anslem replied  that consumer                                                                    
protection  was  part  of   the  department's  mission.  She                                                                    
provided  the  example  of   a  $25,000  securities  penalty                                                                    
collected,  which allowed  for  approximately  $8,000 to  be                                                                    
deposited  into   an  account  under  the   control  of  the                                                                    
legislature  who could  appropriate the  funds for  consumer                                                                    
education and  outreach events. Vice-Chair  Saddler wondered                                                                    
how much  money could possibly become  available. Ms. Anslem                                                                    
answered   that    the   penalties   would    have   totaled                                                                    
approximately $7,000,000  and up to  one third of  the funds                                                                    
could have  been appropriated  for consumer  education based                                                                    
on  the  cases  she  exemplified, under  the  maximum  fines                                                                    
established in the bill.                                                                                                        
Representative Pruitt  asked how long the  division had been                                                                    
working on  the bill.  Ms. Anslem replied  that work  on the                                                                    
bill had been in progress since 2008.                                                                                           
Co-Chair Thompson recalled hearing a  version of the bill in                                                                    
the House Judiciary Committee six years earlier.                                                                                
Representative Pruitt  asked about  restitution and  how the                                                                    
issue  was   addressed  in   the  legislation.   Ms.  Anslem                                                                    
responded  that  restitution needed  to  be  paid before  an                                                                    
action was cleared.                                                                                                             
9:37:33 AM                                                                                                                    
Representative   Pruitt  asked   about  the   crowd  funding                                                                    
component of  the bill. He  asked whether the  bill mirrored                                                                    
other  states  regulation or  whether  it  was adjusted  for                                                                    
Alaska.  Ms.   Anslem  answered   that  the   crowd  funding                                                                    
provisions in the  bill were simpler when  compared to other                                                                    
states. The crowd  funding was a simple  process that helped                                                                    
get entrepreneurs off  the ground. The bill  did not require                                                                    
escrow   but  required   compiling  information   about  the                                                                    
business but excluded a  business prospectus requirement due                                                                    
to  the   small  population  of  the   state  and  resulting                                                                    
transparency. She  noted that the  cost to require use  of a                                                                    
broker  dealer  was  very  high  and  not  included  in  the                                                                    
legislation.  Her goal  was to  ensure that  the information                                                                    
about the  business provided to  the investor  was accurate.                                                                    
The state was  considered a "full disclosure"  state but not                                                                    
a  "merit" state.  Representative Pruitt  asked if  the bill                                                                    
ensured  crowd funding  consumers  that  "if something  went                                                                    
sideways they  would potentially be made  whole." Ms. Anslem                                                                    
replied that it  was related to the same  provisions she had                                                                    
already  discussed. Representative  Pruitt  asked about  the                                                                    
mechanism   to  safeguard   that   the   new  business   was                                                                    
legitimate. He asked  what elements were in  place to ensure                                                                    
oversight. Ms.  Anslem answered that the  elements included;                                                                    
a  filing requirement  that  was  scrutinized by  securities                                                                    
examiners,  background  checks,  and Alaska  residency.  She                                                                    
characterized   equity  crowd   funding  as   "Alaskans  for                                                                    
Alaska."  Representative  Pruitt   asked  how  the  division                                                                    
executed  consumer education.  Ms. Anslem  replied that  the                                                                    
division   worked  closely   with  the   SEC  who   provided                                                                    
presentations  and   seminars  as   well  as   the  American                                                                    
Association  of Retired  Persons (AARP)  and acquired  joint                                                                    
grants through  the Investor Protection  Trust to  produce a                                                                    
series  of 30  minute programs  that were  broadcast through                                                                    
KTOO TV on the 360  degree North Channel and reached 250,000                                                                    
viewers per year. The division  participated in all kinds of                                                                    
community events; small and large.                                                                                              
9:44:00 AM                                                                                                                    
Representative Wilson  wondered what  had been  the sticking                                                                    
point  on  the  bill  over  the  past  six  years  to  stall                                                                    
adoption. Ms. Anslem answered that  the bill was complex and                                                                    
the rewrite made the issue  appear "bigger" than it was. She                                                                    
noted that  the ANCSA  issue was intermixed  with securities                                                                    
and had  been a real  impediment to updating  the securities                                                                    
act  because most  of the  securities act  did not  apply to                                                                    
ANCSA. She  believed that separating  the statutes  would be                                                                    
beneficial  to all  parties. Representative  Wilson surmised                                                                    
that  the bill  sounded good,  but she  did not  know enough                                                                    
about it. Her biggest  concern was related to administrative                                                                    
hearings  versus court  hearings.  She  was concerned  about                                                                    
lowering  the threshold  for guilt.  She  asked whether  the                                                                    
industry received notification and had  a chance to weigh in                                                                    
on  the bill.  Ms. Anslem  answered in  the affirmative  and                                                                    
pointed to the issue involving variable annuities.                                                                              
Co-Chair Thompson OPENED public testimony.                                                                                      
Co-Chair Thompson CLOSED public testimony.                                                                                      
Co-Chair Thompson  understood the concerns of  the committee                                                                    
based on the  bill's large size. He noted that  the bill had                                                                    
been well  vetted by two  other committees. He spoke  to the                                                                    
fiscal notes and  reported that two were zero  and the other                                                                    
for the  Department of Revenue  was indeterminate but  had a                                                                    
minimal  impact.   He  communicated  that   the  legislation                                                                    
protected  consumers, vulnerable  individuals, and  provided                                                                    
for  restitution   among  other   benefits.  He   asked  for                                                                    
discussion  regarding reporting  the bill  out of  committee                                                                    
due to the facts that  only several days of session remained                                                                    
and  CCED thought  that the  bill  would be  adopted by  the                                                                    
9:48:34 AM                                                                                                                    
Representative  Wilson appreciated  the Co-Chair's  comments                                                                    
and  the  consumer  protection afforded  in  the  bill.  She                                                                    
understood   that  the   bill  had   been  vetted   and  she                                                                    
acknowledged that  there was a  companion bill in  the other                                                                    
body. However, she  wanted more time to  answer her concerns                                                                    
regarding   lowering   the   criminal   threshold   and   to                                                                    
familiarize herself with all of the provisions in the bill.                                                                     
Representative  Gattis requested  more time  to look  at the                                                                    
bill in order to gain more clarity.                                                                                             
Vice-Chair  Saddler  echoed  the comments  by  the  previous                                                                    
speakers and asked for more time to review the legislation.                                                                     
HB  194  was  HEARD  and   HELD  in  committee  for  further                                                                    
HOUSE BILL NO. 311                                                                                                            
     "An Act requiring the governor's fiscal plan to                                                                            
     include certain information."                                                                                              
9:52:22 AM                                                                                                                    
9:52:50 AM                                                                                                                    
AT EASE                                                                                                                         
9:56:04 AM                                                                                                                    
9:56:15 AM                                                                                                                    
REPRESENTATIVE   CHARISSE   MILLETT,   SPONSOR,   introduced                                                                    
9:56:25 AM                                                                                                                    
REPRESENTATIVE  CHARISSE  MILLETT, SPONSOR,  explained  that                                                                    
the  bill  was an  additional  tool to  help  the  budgeting                                                                    
process by  calculating a sustainable amount  that the state                                                                    
can reasonably  spend on funding  government each  year. The                                                                    
bill  would accentuate  a sustainable  budget  plan and  not                                                                    
compete   against    one.   The   legislation    took   into                                                                    
consideration  all of  the  budgetary  mechanisms the  state                                                                    
already  employed to  calculate a  "sustainable spend."  She                                                                    
believed that the bill was  a "fiscal planning tool" and was                                                                    
"relevant" to  the budget  crisis. She  shared that  she had                                                                    
worked extensively  with Dr.  Scott Goldsmith,  Institute of                                                                    
Social   and  Economic   Research,   University  of   Alaska                                                                    
Anchorage, (ISER) who currently  retired. During the process                                                                    
of  crafting  the  bill  the  amount  of  $4.5  billion  was                                                                    
calculated as  the sustainable budget amount.  She felt that                                                                    
by determining  the state's capacity for  spending each year                                                                    
the  bill   was  "generational".   She  believed   the  bill                                                                    
complemented   any   fiscal    plan   implemented   by   the                                                                    
9:59:32 AM                                                                                                                    
Representative Gattis asked whether  the bill would hold the                                                                    
legislature  accountable.  She  noted her  frustration  with                                                                    
other  fiscal  plans   was  that  they  did   not  hold  the                                                                    
legislature   or  future   legislatures  accountable   to  a                                                                    
spending limit and she would  judge the legislation based on                                                                    
Representative Guttenberg  voiced that  he had  seen similar                                                                    
legislation over  the years.  He believed  that it  was very                                                                    
difficult in  the end  to develop a  "one page  snapshot" so                                                                    
that everyone  could understand and  base policy  around the                                                                    
information. He thought that the  approach was important and                                                                    
beneficial  and  should  happen  every  year  regardless  of                                                                    
passage of the bill.                                                                                                            
Representative Gara  appreciated the  bill. He spoke  to the                                                                    
requirements  mandating  the  governor  to  issue  a  report                                                                    
regarding incoming  revenue excluding the net  present value                                                                    
of  oil reserves  and wondered  why. Representative  Millett                                                                    
replied  that the  answer would  be forthcoming  through the                                                                    
slide presentation on how ISER set up the calculation.                                                                          
Vice-Chair Saddler voiced that he  did not see anything that                                                                    
precluded  including future  oil reserves  and did  not find                                                                    
the word sustainable in the legislation.                                                                                        
BRAD KEITHLY, PRESIDENT,  KEITHLEY CONSULTING, LLC, provided                                                                    
a  PowerPoint  presentation   titled  "HB  311:  Sustainable                                                                    
Budget Reporting"  dated April 13,  2016 (copy on  file). He                                                                    
relayed  that he  would discuss  the background,  objective,                                                                    
and implementation of the legislation. He moved to slide 3:                                                                     
     · HB 136 (28thLegislature)                                                                                                 
     · Hearings on HB 136:                                                                                                      
        Apr. 5, 2013 (full Committee)                                                                                           
        Jan. 9, 2014 (Fiscal Policy Subcommittee)                                                                               
     · HB 311 is the same bill                                                                                                  
        In preparation for the 2013 testimony Dr. Goldsmith                                                                     
        and I prepared a work draft that improved some                                                                          
        We have included that work draft here as part of                                                                        
        this testimony.                                                                                                         
Mr.  Keithley  relayed that  the  bill  had originally  been                                                                    
introduced as HB  136 during the 28th  legislature. The work                                                                    
draft was  included in the  bill's backup file and  could be                                                                    
adopted  as a  Committee Substitute.  He turned  to slide  4                                                                    
which contained a quote from Dr. Scott Goldsmith:                                                                               
   · Requires the Administration to calculate and submit                                                                        
     each year as part of the December budget process a                                                                         
     long term sustainable budget number                                                                                        
          "A  spending  level  based  on  current  financial                                                                    
          assets and the  projected future petroleum revenue                                                                    
          stream which, if adopted  now, could be maintained                                                                    
          consistently  long into  the future,  adjusted for                                                                    
          inflation and population growth"                                                                                      
Mr. Keithley  thought that the bill's  objective to annually                                                                    
calculate a long-term sustainable  budget number was simple.                                                                    
He noted that the  methodology was considered the "Goldsmith                                                                    
approach."  He discussed  the historical  volatility of  the                                                                    
price  of oil  and the  resulting revenue  ups and  downs as                                                                    
well as  spending highs and  lows. He  moved to slide  4 and                                                                    
referred  to  the  table   depicting  different  sources  of                                                                    
revenue  to  the state  in  various  colors. He  listed  the                                                                    
income   sources   considered   in  the   Goldsmith   model;                                                                    
Constitutional  Budget Reserve  (CBR), other  taxes, current                                                                    
oil  sources,   incremental  oil  revenues  from   new  oil,                                                                    
revenues from  the AKLNG Project,  divert earnings  from the                                                                    
Permanent Fund  deposit, and  Permanent Fund  Dividend (PFD)                                                                    
Earnings  Reserve funds.  He explained  that the  black line                                                                    
was calculated  by the  model and  depicted a  steady budget                                                                    
through  periods  of  time when  revenues  were  higher  and                                                                    
lower.  He delineated  that if  the state  saved money  when                                                                    
revenues  were above  the line  sufficient funding  would be                                                                    
available when  revenue dipped below  the line. The  goal of                                                                    
the process was to treat  all generations of Alaskans fairly                                                                    
through a reliable spending stream.                                                                                             
10:10:56 AM                                                                                                                   
Mr. Keithley addressed the goal of the bill on slide 5:                                                                         
   · Goal is to provide a number that "looks through" the                                                                       
     ups and downs of the commodity cycle and identifies a                                                                      
     stable, long term (i.e., "sustainable") budget number                                                                      
   · Not a spending cap, although it could be used for that                                                                     
     (as I and others have advocated)                                                                                           
   · Not a fiscal plan, although it could be used for that                                                                      
     as well (as I and others have advocated)                                                                                   
   · But in the form of HB 311 a guide to the spending                                                                          
     levels that help ride through the ups and downs of                                                                         
     commodity cycles                                                                                                           
Mr. Keithley communicated  that the bill was  not a spending                                                                    
cap or a  fiscal plan. The bill  merely provided information                                                                    
and  would "institutionalize"  getting a  number before  the                                                                    
10:12:58 AM                                                                                                                   
AT EASE                                                                                                                         
10:13:07 AM                                                                                                                   
Mr. Keithley presented slide 6:                                                                                                 
Origin of the model                                                                                                             
   · A response to wide swings in spending levels (and                                                                          
     economy) based on revenue levels                                                                                           
          "How much do we need to save during a high                                                                            
          revenue period in order to be prepared to offset                                                                      
          the effect during a low revenue period"                                                                               
Mr. Keithley  revealed that  the plans  inception came  as a                                                                    
question to Dr. Goldsmith from  bankers at Northrim Bank who                                                                    
asked him  to develop  a methodology  to determine  what the                                                                    
state would have  to save today in order to  have income for                                                                    
tomorrow  in  light  of the  revenue  volatility  the  state                                                                    
experiences. He  noted the chart  on the slide  developed by                                                                    
the Legislative Finance Division  that depicted the high and                                                                    
low revenue  periods through the  years. He turned  to slide                                                                    
Creates focus on long-term outlook                                                                                              
     If you assume future is always like the present:                                                                           
     • At  high prices, too optimistic  and current spending                                                                    
     overshoots the mark                                                                                                        
     • But  pessimism is an  equal problem - at  low prices,                                                                    
     too pessimistic  and policy makers pull  tax/PFD levers                                                                    
     that unnecessarily penalize the current economy                                                                            
     HB311 creates  a tool  to help  focus fiscal  policy on                                                                    
     the long-term  out look  to look  through high  and low                                                                    
     cycles, which is critical in a commodity based economy                                                                     
10:16:36 AM                                                                                                                   
Mr.  Keithley  remarked  that   the  following  slides  were                                                                    
directly from ISER. He highlighted slide 9:                                                                                     
RECOGNIZE AND  MANAGE OUR PETROLEUM WEALTH  (ENDOWMENT) LIKE                                                                    
A DEPLETABLE ASSET                                                                                                              
     1. How  much is it  worth?2. How  can we invest  it for                                                                    
     maximum  return?  3.  How  much  of  it  can  we  spend                                                                    
     annually without depleting it?                                                                                             
Mr. Keithley moved  to slide 10 titled  "Petroleum Wealth of                                                                    
the "Owner State." He reported  that the chart showed ISER's                                                                    
calculation  of  the state's  wealth  (Total:  FY 2017  $125                                                                    
billion) in  the bank  ($64 billion) and  oil in  the ground                                                                    
($61  billion). He  explained  that oil  in  the ground  was                                                                    
defined  as  the  estimated  net  present  value  of  future                                                                    
petroleum revenue  based on a  three year moving  average to                                                                    
account for  volatility in  the price  of oil.  He addressed                                                                    
slide 11  titled: "How Much  Can We Spend Today:  GF Maximum                                                                    
Sustainable  Yield."  He   indicated  that  Mr.  Goldsmith's                                                                    
approach considered  the state's  fiscal assets and  the net                                                                    
present value of  the oil assets equally and  took 5 percent                                                                    
of  the  total  and  subtracted  0.8  percent  adjusted  for                                                                    
inflation  and population  growth,  which  kept the  revenue                                                                    
level per Alaskan  the same in the future  which equaled 4.2                                                                    
percent. He calculated that 4.2  percent of $125 billion was                                                                    
$5.2 billion  minus the  PFD maintained  at the  full amount                                                                    
($1.3  billion)  and  added in  non-petroleum  revenue  ($.5                                                                    
billion) and came  up with the GF  maximum sustainable yield                                                                    
in  FY  17  totaling  $4.4 billion.  He  observed  that  the                                                                    
maximum  sustainable yield  was the  number the  state could                                                                    
spend  today  from  revenue and  savings  without  adversely                                                                    
impacting  the future.  When revenues  were high  the number                                                                    
adjusted for  inflation and population growth  should remain                                                                    
the  same  and  the   surplus  deposited  into  savings.  He                                                                    
detailed that the savings needed  to be replenished to repay                                                                    
the withdrawal  from savings when  revenues were low  and to                                                                    
maintain spending  through future  periods of  low revenues.                                                                    
He reiterated that the number was not a spending cap.                                                                           
10:22:33 AM                                                                                                                   
Mr. Keithley  briefly examined slide 12  titled "What Should                                                                    
We  Sustain?" which  contained a  chart  that portrayed  the                                                                    
results  of maintaining  a sustainable  budget approach.  He                                                                    
summarized that  overtime more money  would be taken  out of                                                                    
earnings  to supplement  low oil  reserves  but the  savings                                                                    
would  grow and  be available  for spending.  He highlighted                                                                    
slide 13: "Maximum Sustainable Yield: Implementation."                                                                          
  · Manage financial assets for maximum long term return                                                                        
   · Proactively participate in management of petroleum in                                                                      
     the ground for maximum return                                                                                              
   · Establish monitoring system to track Nest Egg value,                                                                       
     set   MSY   target,    and   track   progress   towards                                                                    
   · Gradually transition to GF Maximum Sustainable Yield                                                                       
Mr. Keithley  pointed out  that the  third bullet  point was                                                                    
the only  one on the slide  relevant to HB 311.  He moved to                                                                    
slide 14:                                                                                                                       
Other perspectives                                                                                                              
     "The State is spending  money at an unsustainable rate.                                                                    
     If  this  is  not  checked, extreme  measures  such  as                                                                    
     diverting  all  Permanent  Fund  Dividends  and  and/or                                                                    
     instituting  state  taxes  could  become  necessary  to                                                                    
     sustain spending on State programs ….                                                                                      
     The State  has an urgent  need to develop  the practice                                                                    
     of creating  successive long-term strategic  plans with                                                                    
     annual budgets based on maximum sustainable yield of                                                                       
     the State's primary assets."                                                                                               
     -Commonwealth North (Feb. 2013)                                                                                            
Mr. Keithley informed the committee  that The Alaska Chamber                                                                    
had   recommended   Dr.    Goldsmith's   approach   to   the                                                                    
legislature. In  addition, Commonwealth North had  looked at                                                                    
the approach  in detail in  February, 2013. He read  the two                                                                    
quotes from the slide. He underlined slide 15:                                                                                  
     HB 311 was a tool to help keep Alaska fiscal policy                                                                        
     focused on the long-term…                                                                                                  
10:26:08 AM                                                                                                                   
Representative  Gattis  agreed  that   the  state  needed  a                                                                    
sustainable  budget. She  stated there  were others  who may                                                                    
disagree and planned to "play  devil's advocate" through her                                                                    
questions.  She wondered  why the  state  would assume  $125                                                                    
billion and then  exclude the major saving  account from the                                                                    
maximum  sustainable yield  formula.  Mr. Keithley  answered                                                                    
that  it had  been a  deficiency  in the  original bill.  He                                                                    
explained that when  drafting the bill a  long debate ensued                                                                    
between   Legislative  Legal   Services   and  the   sponsor                                                                    
regarding the language in the  bill that did not capture Dr.                                                                    
Goldsmith's intention.  He related  that the work  draft for                                                                    
HB 136  (Sustainable Budget) [introduced February  22, 2013]                                                                    
more  accurately   reflected  the  approach   he  described.                                                                    
Representative Gattis  read the following: "the  changes the                                                                    
bill  made to  statute  seemed  to nullify  the  basis of  a                                                                    
maximum   sustainable   yield    principal.   Your   maximum                                                                    
sustainable yield  calculation for FY 2017  was $4.4 billion                                                                    
not including the dividend. She  asked where the state would                                                                    
"get the  cash" if  the approach excluded  savings accounts.                                                                    
Mr.  Keithley replied  that the  language deficiency  in the                                                                    
current version  was incorrect and  the methodology  did not                                                                    
exclude anything.  He recapped  that the approach  drew from                                                                    
savings when in a low revenue  cycle and adds to saving in a                                                                    
high  revenue cycle.  Representative  Gattis  asked why  the                                                                    
state would be  broke in FY 2022 if  the maximum sustainable                                                                    
yield plan  worked. Mr. Keithley  answered that if  the plan                                                                    
was used the state would not  be broke in FY 22; application                                                                    
would lead the state to be solvent in FY 22.                                                                                    
Representative Millett  interjected that  the bill  could be                                                                    
used with  any of the  fiscal plans that had  been proposed.                                                                    
She  reiterated that  the  approach  was a  tool  and was  a                                                                    
mechanism for determining a  sustainable spend. She declared                                                                    
that the  legislation was not  a panacea. The  bill provided                                                                    
the  legislature  with  a guide.  She  maintained  that  the                                                                    
sustainable  yield  was merely  "an  indicator  of what  the                                                                    
state could spend based on assumptions that we use."                                                                            
10:32:29 AM                                                                                                                   
Representative Wilson asked whether  the $4.4 billion number                                                                    
included  capital  and   operating  expenses.  Mr.  Keithley                                                                    
answered in the affirmative.  He elaborated that the formula                                                                    
did not care what  category the spending was. Representative                                                                    
Wilson  asked how  the plan  reconciled the  accounting when                                                                    
general  fund  spending  was moved  to  "other  funds."  Mr.                                                                    
Keithley  responded that  the tool  did not  delve into  the                                                                    
undesignated  general fund  versus  designated general  fund                                                                    
monies;  it offered  a  number that  represented  a "pot  of                                                                    
money" available for spending.                                                                                                  
Co-Chair Neuman remarked on the  $800 million in tax credits                                                                    
that  the state  issued  to incentivize  production in  Cook                                                                    
Inlet. He  asked whether the  credits were included  "in the                                                                    
budget." Mr.  Keithley answered that  they were  included in                                                                    
the $4.4 billion;  tax credits were taking money  out of the                                                                    
treasury and  depleted the state's  revenues like  all other                                                                    
spending. Co-Chair Neuman discussed  the benefits of the oil                                                                    
credits especially  in the area of  increased throughput. He                                                                    
indicated that when the credits  were offered there was more                                                                    
oil in  the pipeline and the  price of oil was  much higher.                                                                    
He wondered  whether the  state had  to spend  extra dollars                                                                    
now  on tax  credits  above  the $4.4  billion  in order  to                                                                    
ensure that in  the future there was more  revenue coming in                                                                    
through  increased  input  in order  to  maintain  the  $4.4                                                                    
billion. He  wondered how the  plan would "level  that out."                                                                    
Mr. Keithley answered that the  methodology did "a very good                                                                    
job  of  that"  by  projecting  future  oil  production  and                                                                    
factored  in  the  tax  credits.   The  model  included  the                                                                    
calculation  of the  value of  what the  tax incentives  had                                                                    
produced  in the  future. However,  the model  informed that                                                                    
even with the  additional future value from  the tax credits                                                                    
the  spending  level  should still  be  maintained  at  $4.4                                                                    
billion.  He  reiterated  that  the bill  did  not  cap  the                                                                    
spending  amount at  $4.4  billion.  Co-Chair Neuman  stated                                                                    
that  in the  last 3  years throughput  in the  pipeline had                                                                    
increased 5 percent. He asked  whether there was a mechanism                                                                    
that  averaged  out  investing   now  for  increased  future                                                                    
throughput.  He stated  there were  $800 million  in credits                                                                    
that were unexpected and he  did not want to "touch" Prudhoe                                                                    
Bay credits in  order to maintain the  viability of Alaska's                                                                    
oil  and  gas industry.  He  reported  that the  budget  was                                                                    
roughly $4.3  billion or  $4.4 billion in  FY 17,  which was                                                                    
close to the sustainable number  but the oil and gas credits                                                                    
were  currently "dogging"  the state's  budget. He  wondered                                                                    
whether there  was a  mechanism to  average the  spending on                                                                    
credits now to maintain the $4.5 billion spend.                                                                                 
10:39:41 AM                                                                                                                   
Mr. Keithley  returned to a graph  on slide 7 that  showed a                                                                    
calculation of  a long-term sustainable revenue  number. The                                                                    
green on the  graph related to new oil  created from credits                                                                    
and  incentives and  depicted an  estimate of  the resulting                                                                    
volume. He reiterated  that even by taking the  new oil into                                                                    
account  the calculation  still brought  the number  to $4.4                                                                    
billion. He deduced that spending  any more than that amount                                                                    
impaired the  dollars available in the  future. He suggested                                                                    
that  decisions about  what to  spend the  money on  was not                                                                    
involved  in the  calculation. He  remarked that  the number                                                                    
took  into  account the  consequences  of  oil and  gas  tax                                                                    
credits and projected out the  future production levels. Co-                                                                    
Chair Neuman  noted that several  years ago  the legislature                                                                    
used  $3  billion  from the  Constitutional  Budget  Reserve                                                                    
(CBR)  to  pay  down  Public  Employees'  Retirement  System                                                                    
(PERS) and  Teachers' Retirement  System (TRS)  resulting in                                                                    
over  $1 billion  less in  actuarial payments.  Mr. Keithley                                                                    
responded that  it had  been a  bit different  scenario than                                                                    
oil tax  credits because the  payment was used to  lower the                                                                    
operating costs  going forward. He stressed  that the number                                                                    
that was  calculated each  year out  of the  methodology was                                                                    
what  the number  should be.  He related  that in  any given                                                                    
year if the legislature determined  that by spending more it                                                                    
would  lower future  operating costs;  the PERS/TRS  payment                                                                    
was an example,  the judgement to spend more  could be made.                                                                    
He believed  that the sustainable number  would provoke deep                                                                    
examination  to   understand  the  long-term  impact   in  a                                                                    
scenario where  spending was  above the  sustainable number.                                                                    
The bill would provide a long-term perspective.                                                                                 
10:43:30 AM                                                                                                                   
Co-Chair  Neuman  characterized  the   oil  tax  credits  as                                                                    
"somewhat out of the budgeting  cycle" that were investments                                                                    
for the  future and not really  part of the state's  "day to                                                                    
day" operating expenses. Mr. Keithley  agreed, but felt that                                                                    
oil tax  credits were different  than the PERS and  TRS one-                                                                    
time payment. He qualified that  the oil and gas tax credits                                                                    
were  continuing   and  the   sustainable  number   was  the                                                                    
"baseline"  measured  against  what the  legislature  should                                                                    
consider spending on credits.                                                                                                   
Vice-Chair Saddler understood  the maximum sustainable yield                                                                    
concept and  the "caution" it  provided the  legislature. He                                                                    
wondered  what tool  was actually  created by  the bill.  He                                                                    
thought  the legislation  "did what  the governor  should do                                                                    
anyway"  and was  puzzled  that the  bill  language did  not                                                                    
address  sustainability.  Representative Millett  reiterated                                                                    
that the language in the  current version was inadequate and                                                                    
she recognized  the flaw but  introduced the  legislation in                                                                    
expediency. She shared  that she had a fix  and formula that                                                                    
explained how  the calculation worked and  remarked that the                                                                    
bill  did a  poor job  and a  new Committee  Substitute (CS)                                                                    
would be  introduced. She directed  an additional  remark to                                                                    
Co-Chair  Neuman. She  agreed that  the decisions  regarding                                                                    
PERS and TRS were  beneficial, carefully weighed, with known                                                                    
fiscal impacts. She  offered that the bill  did not prohibit                                                                    
any  future spending  above the  sustainable  number and  it                                                                    
informed the outcome  of the spending above  the number. She                                                                    
felt that  the calculation  was "just a  number in  time and                                                                    
how it  would affect"  the state's budget  and was  merely a                                                                    
"mechanism"  so  that  legislatures and  the  administration                                                                    
would  be aware  of spending  consequences in  future years.                                                                    
She thought  that a  transitional fund for  the oil  and gas                                                                    
credits could  work in concert with  the maximum sustainable                                                                    
10:48:13 AM                                                                                                                   
Co-Chair Thompson noted  that the bill would  be heard again                                                                    
in committee with a new Committee Substitute.                                                                                   
Representative Munoz  felt that  the calculation was  a very                                                                    
important tool.  She asked about  the intangible  aspects of                                                                    
the net operating  losses that were difficult  to include in                                                                    
a sustainable  draw calculation and  wondered how  they were                                                                    
accounted   for.  Mr.   Keithley  replied   that  the   bill                                                                    
represented  a big  picture tool.  He mentioned  that future                                                                    
revenue was  a prediction of  revenue under the  current tax                                                                    
regime  and  the  net operating  losses  factored  into  the                                                                    
calculation  of the  net  present value  of  the future  oil                                                                    
Co-Chair Thompson OPENED public testimony.                                                                                      
Co-Chair Thompson CLOSED public testimony.                                                                                      
HB 311 was HEARD and HELD in committee for further                                                                              
Co-Chair Thompson addressed the following meeting schedule.                                                                     
10:51:03 AM                                                                                                                   
The meeting was adjourned at 10:51 a.m.                                                                                         

Document Name Date/Time Subjects
HB194 - Summary of Changes Ver A to Ver N.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB 194 CS WORKDRAFT FIN vG.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 - Transmittal Letter.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 Fiscal Note-DCCED-DBS-01-25-16.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 Supporting Documents - ACLI letter.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 Supporting Documents - Robert Banks letter.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 Supporting Documents - Snowbird Exemptions.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 Supporting Documents - Ver P Whitepaper.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 ver I Summary of Changes.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 ver I Sectional Analysis.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
HB194 ver I Supporting Documents - Crosswalk Ver I.pdf HFIN 4/13/2016 8:30:00 AM
HB 194
SB0170-Explanation of Changes-Version A to Version W.pdf HFIN 4/13/2016 8:30:00 AM
SB 170
SB0170-Sectional Analysis-Version W.pdf HFIN 4/13/2016 8:30:00 AM
SB 170
SB0170-Sponsor Statement.pdf HFIN 4/13/2016 8:30:00 AM
SB 170
SB0170-Supporting Document-FAQs from DNR-DGGS.pdf HFIN 4/13/2016 8:30:00 AM
SB 170
SB0170-Supporting Document-Letter-DNR-DGGS.pdf HFIN 4/13/2016 8:30:00 AM
SB 170
HB311 Sponsor Statement.pdf HFIN 4/13/2016 8:30:00 AM
HB 311
HB 311 Presentation (4.13.2016).pdf HFIN 4/13/2016 8:30:00 AM
HB 311