Legislature(2015 - 2016)BILL RAY CENTER 208

06/06/2016 03:00 PM FINANCE

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Audio Topic
03:17:00 PM Start
03:17:48 PM HB245
04:47:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 3:15 pm Today --
+= HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                  FOURTH SPECIAL SESSION                                                                                        
                       June 6, 2016                                                                                             
                         3:17 p.m.                                                                                              
                                                                                                                                
3:17:00 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Thompson called the House Finance Committee                                                                            
meeting to order at 3:17 p.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                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Jane  Pierson, Staff,  Representative Steve  Thompson; David                                                                    
Teal,     Director,     Legislative    Finance     Division;                                                                    
Representative    Andy   Josephson;    Representative   Lora                                                                    
Reinbold; Representative Gabrielle LeDoux.                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 245    PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS                                                                                 
                                                                                                                                
          HB 245 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
Co-Chair Thompson reviewed the meeting agenda.                                                                                  
                                                                                                                                
HOUSE BILL NO. 245                                                                                                            
                                                                                                                                
     "An  Act   relating  to  the  Alaska   permanent  fund;                                                                    
     relating  to  appropriations   to  the  dividend  fund;                                                                    
     relating  to  income  of  the  Alaska  permanent  fund;                                                                    
     relating to  the earnings reserve account;  relating to                                                                    
     the Alaska  permanent fund dividend;  making conforming                                                                    
     amendments; and providing for an effective date."                                                                          
                                                                                                                                
3:17:48 PM                                                                                                                    
                                                                                                                                
Co-Chair  Neuman  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute    for   HB    245,   Work    Draft   29-GH2859\L                                                                    
(Wallace/Martin, 6/6/16).  There being NO OBJECTION,  it was                                                                    
so ordered.                                                                                                                     
                                                                                                                                
Co-Chair  Thompson indicated  that David  Teal, director  of                                                                    
the Legislative  Finance Division (LFD), would  be providing                                                                    
an analysis.                                                                                                                    
                                                                                                                                
JANE  PIERSON, STAFF,  REPRESENTATIVE  STEVE THOMPSON,  read                                                                    
from  a document  titled "Corrected  HB  245 Explanation  of                                                                    
Changes version I to version L" (copy on file):                                                                                 
                                                                                                                                
     HB 245 Explanation of Changes version I to version L                                                                       
                                                                                                                                
     Page 1,  Lines 6-7 TITLE CHANGE  regarding unrestricted                                                                    
     state revenues available for appropriation.                                                                                
                                                                                                                                
     Deleted  Section   4  from  version  I.   This  section                                                                    
     conforms to  not getting rid  of the Amerada  Hess case                                                                    
     settlement money  being directed to the  Alaska capital                                                                    
     income fund.                                                                                                               
                                                                                                                                
     Page  4,  Lines 25-28.  States  that  the Amerada  Hess                                                                    
     money will not be accounted  for in the amount of money                                                                    
     available for distribution.                                                                                                
                                                                                                                                
     Page 4, Line  30 and line 31 the  word "calculated" was                                                                    
     removed, since  this is  an amount in  the fund,  not a                                                                    
     calculation.                                                                                                               
                                                                                                                                
     Page 5,  Line 7  removes "adjusted for  inflation" from                                                                    
     the  revenue  limit threshold.  Automatic  inflationary                                                                    
     increases  will  certainly  reduce the  impact  of  the                                                                    
     limit and  might make  the limit  as irrelevant  as the                                                                    
     existing constitutional spending limit.                                                                                    
                                                                                                                                
     Page 5,  Line 14  removes language  regarding inflation                                                                    
     proofing.                                                                                                                  
                                                                                                                                
     Page  6,  Line  5  -  15 A  new  section  is  added  AS                                                                    
     37.13.148 - Appropriation of  Revenue. This new section                                                                    
     creates  a spending  rule that  states,  if the  amount                                                                    
     available  for appropriation  in  the preceding  fiscal                                                                    
     year  is  greater  than the  amount  appropriated,  the                                                                    
    legislature may appropriate the excess as follows:                                                                          
          (1) 50 percent to the Permanent Fund                                                                                  
          (2) 50 percent to the CBR                                                                                             
                                                                                                                                
     Page 9,  Line 13 -  AS 37.14.145(d) is  eliminated from                                                                    
     the repealers.  This has  to do  with the  Amerada Hess                                                                    
     settlement money.                                                                                                          
                                                                                                                                
     Page  9 -  Section 24  was removed  in version  L. This                                                                    
     allows for transfer  of the management of  the CBR from                                                                    
     DOR to the  Permanent Fund to happen this  year and not                                                                    
     in 2017.                                                                                                                   
                                                                                                                                
3:21:53 PM                                                                                                                    
                                                                                                                                
Representative Gara asked for  detail on two changes related                                                                    
to inflation proofing on page 5.                                                                                                
                                                                                                                                
Ms.  Pierson  replied  that  page  5,  line  7  removed  the                                                                    
language  "adjusted for  inflation" related  to the  revenue                                                                    
limit.  The change  would  hold the  limit  to $1.2  billion                                                                    
without  the ability  to rise  with inflation.  Inflationary                                                                    
increases may make the revenue limit irrelevant.                                                                                
                                                                                                                                
Co-Chair  Thompson   asked  which  bill  version   the  page                                                                    
references  (provided  by  Ms.   Pierson)  related  to.  Ms.                                                                    
Pierson answered the changes appeared  in the "L" version of                                                                    
the bill.                                                                                                                       
                                                                                                                                
Representative  Gara  spoke to  the  revenue  limit of  $1.2                                                                    
billion.  He surmised  the combination  of  oil revenue  and                                                                    
Percent of Market  Value (POMV) earnings remained  at a flat                                                                    
$4 billion. He asked for  the accuracy of his statements. He                                                                    
asked  for  verification  the  $1.2  billion  would  not  be                                                                    
adjusted for inflation.                                                                                                         
                                                                                                                                
Ms. Pierson  responded in the affirmative.  She deferred the                                                                    
question to LFD for further  detail. She mentioned a handout                                                                    
in members'  packets provided by the  division [titled "PFPA                                                                    
Payout/Revenue Split" (copy on file)].                                                                                          
                                                                                                                                
3:23:41 PM                                                                                                                    
                                                                                                                                
Representative Gara  asked if  the other  inflation proofing                                                                    
reference  on page  5 also  related to  the same  issue. Ms.                                                                    
Pierson answered in the affirmative.                                                                                            
                                                                                                                                
Representative  Gara pointed  to page  6 of  the legislation                                                                    
that  included  a  new  provision   on  50  percent  to  the                                                                    
Permanent Fund  and 50 percent to  the Constitutional Budget                                                                    
Reserve (CBR). He asked for detail.                                                                                             
                                                                                                                                
Ms.  Pierson  answered  that if  the  amount  available  for                                                                    
appropriation in the preceding  fiscal year was greater than                                                                    
the  amount appropriated,  the  legislature may  appropriate                                                                    
the excess as follows: 1)  50 percent to the Permanent Fund;                                                                    
and 2)  50 percent  to the CBR.  She noted  members' packets                                                                    
included an  LFD chart describing  the savings  rule [titled                                                                    
"Savings Rule" (copy on file)].                                                                                                 
                                                                                                                                
Vice-Chair  Saddler  noted  that  there  appeared  to  be  a                                                                    
misalignment  of pages  in the  documents under  discussion.                                                                    
Ms. Pierson responded that any  deleted material came out of                                                                    
the "I" version  of the legislation. She  believed the other                                                                    
information should align.                                                                                                       
                                                                                                                                
3:25:47 PM                                                                                                                    
                                                                                                                                
Representative Kawasaki  pointed to page 6,  lines 5 through                                                                    
15  and believed  the  change actually  applied  to lines  8                                                                    
through  18. He  discussed  that under  the legislation  the                                                                    
appropriation of  revenue would  be split, dividing  half to                                                                    
the Permanent Fund  and half to the CBR. He  referred to the                                                                    
language "the  legislature may appropriate" and  wondered if                                                                    
it  meant  the  legislature  could put  the  money  into  an                                                                    
earnings reserve account.                                                                                                       
                                                                                                                                
Ms.  Pierson  replied  that  the  legislature  could  always                                                                    
appropriate as it saw fit.                                                                                                      
                                                                                                                                
Co-Chair Thompson noted Mr. Teal had joined the meeting.                                                                        
                                                                                                                                
Representative  Gara wondered  if the  two provisions  never                                                                    
let  state appropriations  get  adjusted  for inflation.  He                                                                    
referred to  new Section  37.13.148 on  page 6.  He observed                                                                    
the  section was  not binding  as it  included the  language                                                                    
"the   legislature  may   appropriate";   however,  if   the                                                                    
legislature followed  the section, appropriations  would not                                                                    
be  adjusted  for inflation.  He  surmised  if the  cost  of                                                                    
inflation  for the  same number  of services  made the  cost                                                                    
increase,  they would  be able  to adjust  for the  increase                                                                    
with  the revenue.  He surmised  they would  not "just  keep                                                                    
cutting."                                                                                                                       
                                                                                                                                
DAVID TEAL,  DIRECTOR, LEGISLATIVE FINANCE  DIVISION, agreed                                                                    
that the  change would flatten  the expenditure  line (there                                                                    
was  a dollar-for-dollar  reduction of  the payout  from the                                                                    
Permanent  Fund earnings  reserve account).  He noted  there                                                                    
were [LFD]  graphs available to  provide further  detail. He                                                                    
clarified  the  line  was  flat only  in  reference  to  oil                                                                    
production.  He expounded  if there  was other  revenue from                                                                    
any  source other  than production  tax  and royalties,  the                                                                    
line would  not remain  flat. He added  the revenue  was all                                                                    
spendable.                                                                                                                      
                                                                                                                                
3:28:58 PM                                                                                                                    
                                                                                                                                
Representative  Gara wondered  if the  state would  still be                                                                    
limited to the prior year's  spending level if it brought in                                                                    
more  revenue   (from  Permanent   Fund  earnings   and  oil                                                                    
combined) than it had spent  the preceding year. He surmised                                                                    
the situation could go on  in perpetuity and could result in                                                                    
falling  behind  inflation if  those  were  the two  revenue                                                                    
sources.                                                                                                                        
                                                                                                                                
Mr. Teal  suggested reviewing the sectional  analysis before                                                                    
he answered questions.                                                                                                          
                                                                                                                                
3:30:51 PM                                                                                                                    
                                                                                                                                
Ms. Pierson read the sectional analysis (copy on file):                                                                         
                                                                                                                                
     Section 1: Legislative intent that the legislature                                                                         
     reevaluate the use of the earnings of the Permanent                                                                        
     Fund in three years                                                                                                        
                                                                                                                                
     Section 2: Language requiring the Alaska Permanent                                                                         
     Fund Corporation to adopt regulations similar to the                                                                       
     State's procurement code                                                                                                   
                                                                                                                                
     Section 3:  Adds the Alaska Permanent  Fund Corporation                                                                    
     to the  list of  those state  agencies that  are exempt                                                                    
     from the State's procurement code                                                                                          
                                                                                                                                
     Section 4:  Transfers the management and  investment of                                                                    
     the Constitutional  Budget Reserve from  the Department                                                                    
    of Revenue to the Alaska Permanent Fund Corporation                                                                         
                                                                                                                                
     Section   5:  Requires   the   Alaska  Permanent   Fund                                                                    
     Corporation to prepare an annual  report on the balance                                                                    
     and returns of the Constitutional Budget Reserve fund                                                                      
                                                                                                                                
     Section  6:  Dedicated  deposits of  royalties  to  the                                                                    
     Permanent  Fund  are  reduced from  the  current  25/50                                                                    
     split on  old/new leases to the  constitutional minimum                                                                    
     of 25 percent                                                                                                              
                                                                                                                                
     Section   7:  Requires   the   Alaska  Permanent   Fund                                                                    
     Corporation  to   determine  the  net  income   of  the                                                                    
     earnings  reserve  account   excluding  the  unrealized                                                                    
     gains or losses                                                                                                            
                                                                                                                                
     Section  8: (b)  Defines  the Percent  of Market  Value                                                                    
     payout as  5.25 percent of the  average year-end market                                                                    
     value  of  the  Permanent  Fund  and  Earnings  Reserve                                                                    
     Account  for  the  first  five  of  the  most  recently                                                                    
     completed six  fiscal years. The payout  may not exceed                                                                    
     the year-end  balance of  the earnings  reserve account                                                                    
     for the fiscal year just ended                                                                                             
                                                                                                                                
Representative Gattis  asked about Section 8,  which defined                                                                    
the POMV payout  up to 5.25 percent. She wondered  if it was                                                                    
just 5.25 percent instead of up to 5.25 percent.                                                                                
                                                                                                                                
Mr. Teal  responded that it  was a more technical  issue and                                                                    
was  the  same  issue  that Representative  Gara  wanted  to                                                                    
address.  He  explained that  as  oil  prices increased  the                                                                    
payout  from the  earnings reserve  account  to the  General                                                                    
Fund  would fall.  He expounded  the payout  would begin  to                                                                    
fall  at about  $75 [per  barrel].  By the  time oil  prices                                                                    
reached $105, the  payout from the reserve  account would be                                                                    
zero. In that  scenario, the rate should not be  set at 5.25                                                                    
percent because  it would conflict  with the  revenue limit,                                                                    
which reduced the payout as oil prices rose.                                                                                    
                                                                                                                                
3:33:50 PM                                                                                                                    
                                                                                                                                
Representative Gattis  confirmed that  the language  "up to"                                                                    
was correct.                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  asked where  the words "up  to" occurred                                                                    
in the  legislation.  He  read from the  sectional analysis:                                                                    
"Defines  the  Percent  of  Market   Value  payout  as  5.25                                                                    
percent." He noted it did not  include the words "up to." He                                                                    
added that  Section 8 on page  4 of the legislation  did not                                                                    
include the language either.                                                                                                    
                                                                                                                                
3:35:07 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:36:20 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Ms.  Pierson answered  that  the  "may appropriate"  section                                                                    
under discussion  could be found  in Section  10, subsection                                                                    
(e) of the bill. She read from the section:                                                                                     
                                                                                                                                
     Each  year the  legislature  may  appropriate from  the                                                                    
     earnings reserve account to the  general fund an amount                                                                    
     that  does   not  exceed   the  amount   available  for                                                                    
     distribution under AS 37.13.140(b) and (c).                                                                                
                                                                                                                                
Representative Gara  surmised the amount was  not really 5.2                                                                    
percent. He  asked for verification  it was 5.25  percent of                                                                    
the last  five years,  which translated into  something like                                                                    
4.8 percent of the current balance.                                                                                             
                                                                                                                                
Mr. Teal spoke to the  long six-year lookback related to the                                                                    
provision. He stated in theory  the balance of the Permanent                                                                    
Fund would be  increasing each year. He  stated that looking                                                                    
back six  years gave a  payout that was  approximately equal                                                                    
to  the balance  of about  three years  back. The  effective                                                                    
payout  was 5  percent  of a  three-year-old balance,  which                                                                    
amounted to  less than 5 percent  (if taken as a  percent of                                                                    
the current balance).                                                                                                           
                                                                                                                                
Representative   Gara  asked   for   an   estimate  of   the                                                                    
percentage. He  had previously heard  4.8 percent.  Mr. Teal                                                                    
answered the number was correct.                                                                                                
                                                                                                                                
Ms.  Pierson  continued  to  read  the  sectional  analysis,                                                                    
beginning with Section 8, subsection (c):                                                                                       
                                                                                                                                
     Section 8: (c)  Reserves 20 percent of  the POMV payout                                                                    
     for dividends.  The remaining 80 percent  of the payout                                                                    
     is subject to a dollar  for dollar reduction as oil and                                                                    
     gas revenue rises above $1.2 billion.                                                                                      
                                                                                                                                
        1. Oil and gas Unrestricted General Fund revenue                                                                        
          excluding the amount to be paid as 20 percent of                                                                      
         the prior year royalties to the dividend                                                                               
                                                                                                                                
        2. $1,200,000 revenue limit                                                                                             
                                                                                                                                
     Section  9:  Deals  with   distribution  of  the  money                                                                    
     awarded in the Amerada Hess case                                                                                           
                                                                                                                                
3:39:15 PM                                                                                                                    
                                                                                                                                
Ms. Pierson continued to read from the sectional analysis:                                                                      
                                                                                                                                
     Section 10:  AS 37.13.145 is the  Disposition of Income                                                                    
     of the Permanent Fund statute                                                                                              
                                                                                                                                
        a) Unchanged - Establishes the ERA and identifies                                                                       
          the ERA as holding earnings of the Permanent Fund                                                                     
          and ERA                                                                                                               
        b) Repealed in this bill - dividends based on                                                                           
          statutory net income                                                                                                  
       c) Repealed in this bill - inflation proofing                                                                            
        d) Repealed in this bill - segregation of Amerada                                                                       
          Hess                                                                                                                  
        e) Added in this section - each year the legislature                                                                    
          may  appropriate to  the General  Fund the  amount                                                                    
          available  for  distribution   from  the  Earnings                                                                    
          Reserve Account under the POMV  in Sec. 10 (b) and                                                                    
          the limit calculation in AS 37.13.140(b) & (c)                                                                        
        f) Inflation proofing mechanism (when the balance of                                                                    
          the ERA reaches 4x the maximum amount available                                                                       
          for distribution                                                                                                      
                                                                                                                                
     Section  11:   Appropriations  to  the   dividend  fund                                                                    
     Dividends  are  comprised of  20  percent  of the  5.25                                                                    
     percent POMV outlined  in Sec. 4(b), and  20 percent of                                                                    
     prior year  royalties, excludes those dedicated  to the                                                                    
     Permanent  Fund  or  School   Fund  (25.5  percent  are                                                                    
     dedicated)                                                                                                                 
                                                                                                                                
     Appropriation of  revenue. If the amount  available for                                                                    
     appropriation in  the preceding fiscal year  is greater                                                                    
     than  the  amount  appropriated,  the  legislature  may                                                                    
     appropriate the excess as follows:                                                                                         
               (1) 50 percent to the Permanent Fund                                                                             
               (2) 50 percent to the CBR                                                                                        
                                                                                                                                
     Section   12:    Conforming   language    relating   to                                                                    
     procurement                                                                                                                
                                                                                                                                
     Section 13:  Mental Health Trust Fund  and Amerada Hess                                                                    
     monies  may  not  be included  in  the  computation  of                                                                    
     income available for distribution under the POMV                                                                           
                                                                                                                                
     Section  14: Transfer  of money  to  the Dividend  Fund                                                                    
     requires an appropriation                                                                                                  
                                                                                                                                
     Section 15: The amount  of each Permanent Fund Dividend                                                                    
     for fiscal years 2017, 2018, and 2019 shall be $1,000                                                                      
                                                                                                                                
     Section 16: Conforms  to Sec. 12, which  moves money to                                                                    
     the Dividend Fund by appropriation                                                                                         
                                                                                                                                
     Section 17:  Once the  money is  in the  Dividend Fund,                                                                    
     the Department of Revenue  shall annually pay dividends                                                                    
     without further appropriation                                                                                              
                                                                                                                                
     Section   18:   Repeals   language  relating   to   the                                                                    
     subaccount  of the  Constitutional Budget  Reserve, the                                                                    
     former   dividend   calculation,   inflation   proofing                                                                    
     calculation                                                                                                                
                                                                                                                                
     Section  19:  Repeals Sec.  15  -  $1,000 dividend  for                                                                    
     three years                                                                                                                
                                                                                                                                
     Section  20: Transition  Language: The  Commissioner of                                                                    
     Revenue and  the Alaska Permanent Fund  Corporation may                                                                    
     adopt   regulations,   policies   and   procedures   to                                                                    
     implement this Act                                                                                                         
                                                                                                                                
     Section 21: Retroactivity clause                                                                                           
                                                                                                                                
     Section 22:  Effective date for  sections 2, 3,  12, 20                                                                    
     and 21, immediate                                                                                                          
                                                                                                                                
     Section 23: Effective Date, July 1, 2016                                                                                   
                                                                                                                                
3:42:39 PM                                                                                                                    
                                                                                                                                
Representative Gara  remarked that  the state would  not get                                                                    
any additional  revenue (revenue would  be flat) up  to $110                                                                    
per  barrel of  oil (or  so). He  noted it  started at  $1.2                                                                    
billion in oil revenue; he wondered when it ended.                                                                              
                                                                                                                                
Mr. Teal  stated Representative Gara was  speaking about the                                                                    
payout limit. He  relayed his preference to  wait to address                                                                    
the issue in order to avoid confusion.                                                                                          
                                                                                                                                
Representative  Wilson referred  to  Section  11 that  would                                                                    
enable  the   legislature  to  appropriate  50   percent  of                                                                    
[excess] revenue  to the  Permanent Fund  and 50  percent to                                                                    
the CBR.  She wondered why the  money would not be  added to                                                                    
the Permanent Fund Dividend instead.                                                                                            
                                                                                                                                
Mr. Teal replied  that it had been a proposal  that had been                                                                    
made by others.  He could not provide detail on  why, but it                                                                    
was part  of the modeling  package. He suggested  waiting to                                                                    
discuss  the  issue  until  he  reached  the  topic  in  his                                                                    
upcoming presentation.                                                                                                          
                                                                                                                                
Representative Wilson referred to  Section 15 that would set                                                                    
the dividend  to $1,000 for FY  17 through FY 19.  She asked                                                                    
if the  modeling indicated revenue  the bill would  bring in                                                                    
if the $1,000 cap was not included.                                                                                             
                                                                                                                                
Mr. Teal replied  in the negative. He stated  the amount was                                                                    
roughly $900 if the $1,000 cap was not included.                                                                                
                                                                                                                                
Representative  Wilson   asked  if   the  amount   would  be                                                                    
approximately  $900  for all  three  years  or if  it  would                                                                    
decline over  the three-year period.  Mr. Teal  answered the                                                                    
amount  would  increase. He  explained  the  model showed  a                                                                    
fairly  steady line  at $1,000  dividends. With  no cap  the                                                                    
dividend started at  about $900 and by FY 19  it would reach                                                                    
$1,000.                                                                                                                         
                                                                                                                                
Representative Guttenberg  referred to Section 4  [page 3 of                                                                    
the  legislation]  where  management  of the  CBR  would  be                                                                    
transferred  from the  Department  of Revenue  (DOR) to  the                                                                    
Alaska Permanent Fund Corporation  (APFC) "in the manner set                                                                    
out for the  management and investment of the  assets of the                                                                    
Alaska permanent  fund under AS 37.13.120."  He believed the                                                                    
goal was to  manage at a higher rate of  return. He asked if                                                                    
the  language covered  the  transfer  of responsibility  and                                                                    
management.  He wondered  if including  the language  in the                                                                    
bill was all it took to make the change.                                                                                        
                                                                                                                                
                                                                                                                                
Mr. Teal  replied there  were two  sections relating  to the                                                                    
topic. The  first was  Section 4  that specified  APFC would                                                                    
manage the CBR. He explained  it was already in statute that                                                                    
APFC  may  manage  the  CBR.   The  second,  more  important                                                                    
component, was the transition language  in Section 20 of the                                                                    
bill.  He  detailed  there were  currently  some  investment                                                                    
limitations  on the  CBR  account that  kicked  in when  the                                                                    
funds may be used in the  next five years. He explained that                                                                    
those  limitations were  being repealed.  He expounded  that                                                                    
those provisions currently held down  the return on the CBR.                                                                    
The theory was  that by having the CBR managed  by APFC, the                                                                    
investment  limitations  would  be eliminated,  which  would                                                                    
impact  the  returns.  The CBR  had  liquidity  requirements                                                                    
because that  state may  be, or  probably would  be, drawing                                                                    
from the CBR  to fill deficits. He noted that  no matter who                                                                    
managed the account, if it was  managed on its own, it would                                                                    
have to  be very  liquid; however, by  merging the  CBR with                                                                    
APFC,  which  required  significant  liquidity,  liquid  and                                                                    
illiquid investments  would be  transferred between  the CBR                                                                    
and  the Permanent  Fund. He  explained  that the  Permanent                                                                    
Fund was  much larger  than the CBR  and the  Permanent Fund                                                                    
should be able to manage  the liquidity, which would allow a                                                                    
higher  investment  return.  He cautioned  that  the  change                                                                    
could perhaps  result in  a lower  investment return  on the                                                                    
Permanent  Fund because  it may  require some  adjustment to                                                                    
the asset  allocation. He added  that APFC had  testified it                                                                    
did not believe there would be a significant impact.                                                                            
                                                                                                                                
3:49:21 PM                                                                                                                    
                                                                                                                                
Co-Chair   Thompson  relayed   that   Angela  Rodell,   APFC                                                                    
executive director,  was present and had  testified that she                                                                    
did not have any problem with liquidity necessities.                                                                            
                                                                                                                                
Representative Guttenberg  remarked that Section 4  had been                                                                    
eliminated from prior bill version  I. He wondered about the                                                                    
result of  an immediate  effective date  and the  removal of                                                                    
the July 2017 effective date.                                                                                                   
                                                                                                                                
Mr. Teal relayed the effective  date had been changed to one                                                                    
year  out  because the  DOR  commissioner  had testified  he                                                                    
wanted time to  review and consider the  issue. He explained                                                                    
that  the commissioner  had  subsequently  testified to  the                                                                    
Senate  Finance Committee  that transferring  the management                                                                    
to  APFC was  no longer  a substantial  concern and  that it                                                                    
made  financial sense.  Given the  concern  had abated,  the                                                                    
decision had  been made  to make  the transfer  immediate at                                                                    
the  beginning  of 2017  instead  of  waiting one  year.  He                                                                    
stated  it would  possibly cause  some transition  problems,                                                                    
but he  did not believe anyone  expected it to be  a one-day                                                                    
transfer. He believed  there were details that  needed to be                                                                    
worked out, which would be up to the commissioner and APFC.                                                                     
                                                                                                                                
Representative  Munoz  stated  that  the FY  17  budget  was                                                                    
funded  with a  $3.2 billion  draw from  the CBR.  She asked                                                                    
what  the actual  draw  would  be if  the  bill passed.  She                                                                    
wondered if  extra CBR funds would  remain in the CBR  or be                                                                    
deposited into the General Fund.                                                                                                
                                                                                                                                
Mr.  Teal  answered  that  the   current  draw  without  the                                                                    
legislation was  approximately $3.2 billion. With  the bill,                                                                    
there  was  a transfer  of  roughly  $2.4 billion  from  the                                                                    
Permanent Fund earnings reserve  account to the General Fund                                                                    
($700  million of  the amount  would  pay the  PFD from  the                                                                    
General  Fund).  The  net  transfer  should  be  about  $1.6                                                                    
billion.  He  explained the  bill  would  cut the  CBR  draw                                                                    
roughly in half  to $1.6 billion. He  detailed precisely how                                                                    
much would  come from  the CBR  versus the  earnings reserve                                                                    
account was  not known;  it depended  on what  happened with                                                                    
appropriation  bills  including  supplemental bills  in  the                                                                    
following year. The CBR draw could  be cut in half, but that                                                                    
did not mean it would be.                                                                                                       
                                                                                                                                
Representative Munoz  asked if  the amount not  necessary to                                                                    
fund the  budget remain in  the CBR  or go into  the General                                                                    
Fund.                                                                                                                           
                                                                                                                                
Mr.  Teal  responded  that  the CBR  draw  approved  in  the                                                                    
operating  budget  was  the   amount  necessary  to  balance                                                                    
expenditures and  appropriations. He furthered if  there was                                                                    
money  coming  in  as  revenue  from  the  earnings  reserve                                                                    
account, the amount necessary to  balance would drop so only                                                                    
$1.6  billion would  be drawn.  The  remaining $1.6  billion                                                                    
would stay in the CBR.                                                                                                          
                                                                                                                                
3:53:18 PM                                                                                                                    
                                                                                                                                
Representative  Munoz asked  for verification  the remaining                                                                    
money  in  the CBR  would  be  managed  by APFC  [under  the                                                                    
legislation]. Mr. Teal replied in the affirmative.                                                                              
                                                                                                                                
                                                                                                                                
Representative  Gara  spoke to  the  idea  that the  revenue                                                                    
could  not  exceed  the amount  appropriated  in  the  prior                                                                    
fiscal year. He mentioned inflation  issues. He spoke to the                                                                    
FY 17  budget that  was "cobbled together"  with some  FY 16                                                                    
and  some  FY  17  money. He  stated  expenditures  for  the                                                                    
upcoming  year were  roughly $3.8  billion or  approximately                                                                    
$500 million  more than  was appropriated out  of the  FY 17                                                                    
funds. He noted about $500 million  had been spent out of FY                                                                    
16 [for FY  17]. He asked if the cap  would reflect what was                                                                    
identified as  FY 17 spending;  therefore, it would  be $500                                                                    
million short of FY 17 expenditures.                                                                                            
                                                                                                                                
Mr. Teal  answered that Representative  Gara was  looking at                                                                    
the savings rule [on slide 5].  He explained it was the last                                                                    
page  of  the  presentation.  He preferred  to  address  the                                                                    
slides in order for clarity.                                                                                                    
                                                                                                                                
3:55:53 PM                                                                                                                    
                                                                                                                                
Mr.  Teal  turned to  slide  1:  "LFD Fiscal  Model,"  which                                                                    
reflected the  status quo. He  relayed the scenario  was not                                                                    
workable.  He pointed  to an  upper left  chart titled  "UGF                                                                    
Revenue/Budget,"  which showed  expenditures  of roughly  $5                                                                    
billion  in  the  out-years. The  lower  left  chart  titled                                                                    
"Budget Reserves" indicated there  would be no CBR, earnings                                                                    
reserve  account,  or any  money  remaining  to support  the                                                                    
expenditure level.  He pointed to  the upper left  chart and                                                                    
detailed  that the  blue bar  represented  oil revenue,  the                                                                    
orange bar  represented a draw  from the CBR  (which stopped                                                                    
in  FY 18  when  the CBR  was  out of  money),  and the  red                                                                    
represented  drawing  from   the  earnings  reserve  account                                                                    
(beginning in FY 19). The  earnings reserve account would be                                                                    
emptied by  FY 22 and the  state would be out  of money. The                                                                    
chart  assumed  the state  was  paying  dividends of  $2,000                                                                    
annually.  He   explained  that  the  scenario   was  highly                                                                    
improbable; the  state did not  have money to  pay dividends                                                                    
when  the budget  gap was  so pronounced  and there  were no                                                                    
reserves to fill it.                                                                                                            
                                                                                                                                
Representative  Wilson referred  to  the black  line on  the                                                                    
upper left chart on slide 1.  She wondered why the chart did                                                                    
not show decreasing the budget.  She asked if it was because                                                                    
the budget had continued to grow in the past few years.                                                                         
                                                                                                                                
Mr. Teal responded  that the black line going from  FY 16 to                                                                    
FY  17 depicted  some massive  budget reductions;  there had                                                                    
been  $1  billion-plus  in budget  reductions  in  the  past                                                                    
couple of years. Some argued there  was no way to have a no-                                                                    
growth budget  - inflation alone  would cause the  budget to                                                                    
increase. He stated "do we say  it can't go both up and down                                                                    
- we're going  to just hold it constant."  He furthered that                                                                    
exactly where the  line went was up to  the legislature; the                                                                    
model merely held it constant.                                                                                                  
                                                                                                                                
Representative Wilson referred to  the decrease shown on the                                                                    
chart and surmised  it was primarily related  to the capital                                                                    
budget.  She believed  very little  was related  to everyday                                                                    
operations.                                                                                                                     
                                                                                                                                
Mr. Teal answered that the FY  16 to FY 17 change in day-to-                                                                    
day agency  operations dropped $216 million.  He underscored                                                                    
there had  been a real  reduction in agency  operations. The                                                                    
capital  budget  was  down  about   $33  million  and  could                                                                    
probably not be  reduced much more. The  reduction shown was                                                                    
roughly $250  million and was  not related to  retirement or                                                                    
tax credits. He tried to  filter those two components out of                                                                    
presentations because LFD did  not know what the legislature                                                                    
would be doing  with tax credits and  the retirement savings                                                                    
had already been accounted for in the FY 17 budget.                                                                             
                                                                                                                                
4:00:18 PM                                                                                                                    
                                                                                                                                
Representative Wilson remarked that  the spring forecast was                                                                    
one of  the lowest  forecasts in some  time. She  added that                                                                    
[the  price  of]  oil  was now  known  to  be  substantially                                                                    
different. She asked if Mr.  Teal would demonstrate what the                                                                    
slide would  look like when  accounting for the  current oil                                                                    
prices.                                                                                                                         
                                                                                                                                
Mr. Teal  stated that he did  but it would require  an Excel                                                                    
version of  his chart,  which he  did not  have on  hand. He                                                                    
offered to show the model itself,  but noted it did not have                                                                    
much  to do  with the  bill. He  explained the  current bill                                                                    
reacted to  prices just as the  status quo would react  to a                                                                    
different set of oil prices.                                                                                                    
                                                                                                                                
Representative Wilson  disagreed. She reasoned the  bill was                                                                    
before the committee because of  the current oil prices. She                                                                    
stated that  having a  real look at  the current  oil prices                                                                    
could  give  a  completely  different  scenario  related  to                                                                    
whether the bill  was necessary in the  current or following                                                                    
year (with a rebound in oil prices).                                                                                            
                                                                                                                                
Vice-Chair Saddler asked  if the proper title  for the slide                                                                    
was  "status  quo."  Mr.  Teal agreed  [note:  slide  1  was                                                                    
actually titled "LFD Fiscal Model"].                                                                                            
                                                                                                                                
4:02:19 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler pointed to a  chart in the upper right of                                                                    
the slide  titled "Dividend  Check." He  asked if  the chart                                                                    
indicated the  dividend would remain  at about  $2,000 under                                                                    
the status quo.                                                                                                                 
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Vice-Chair   Saddler  referred   to  predictions   that  the                                                                    
dividend would go  away in two or three years  if the status                                                                    
quo  continued. He  asked  Mr. Teal  to  help reconcile  the                                                                    
predictions with the charts on slide 1.                                                                                         
                                                                                                                                
Mr. Teal  reiterated his testimony  that the status  quo was                                                                    
not a  valid scenario due  to the  white space in  the upper                                                                    
left graph or  the zero balance in the lower  left graph. He                                                                    
explained the  graph [on the  upper right]  showed continued                                                                    
payment  of  dividends  because they  were  simply  dividend                                                                    
calculations. The  charts on  the left  showed there  was no                                                                    
money to pay  the dividends. A calculation  versus a payment                                                                    
- two  different things. He  did not believe the  status quo                                                                    
scenario was worth spending much  time looking at; it simply                                                                    
did not  work. To  address Representative  Wilson's concerns                                                                    
he  believed it  was necessary  to turn  to the  next slide,                                                                    
which indicated what would occur under the model.                                                                               
                                                                                                                                
Co-Chair Neuman  remarked that LFD  generally looked  at the                                                                    
budget based  on the status  quo of the present  time period                                                                    
because  LFD could  not  predict what  would  happen in  the                                                                    
future (if the price of oil was  going to go up or down). He                                                                    
asked if his statement was correct.                                                                                             
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Representative Gara  believed it was clear  the presentation                                                                    
used the  spring revenue price  forecast and not  the status                                                                    
quo price.  He referred to the  chart on the bottom  left of                                                                    
slide 1 titled "Budget Reserves."  He referred to the orange                                                                    
portion of the bars pertaining  to the CBR balance. He asked                                                                    
for  verification  the   amount  represented  the  remaining                                                                    
amount at  the end  of the  end of the  next fiscal  year to                                                                    
spend in FY 18. He surmised it  was not until FY 18 that the                                                                    
earnings reserve would be impacted.                                                                                             
                                                                                                                                
4:04:32 PM                                                                                                                    
                                                                                                                                
Mr. Teal  agreed. He detailed  the balance of the  CBR would                                                                    
be  somewhere  between  $3 billion  and  $4  billion,  which                                                                    
assumed a  $600 million  settlement coming in.  Without that                                                                    
[settlement money] the amount would  be closer to $3 billion                                                                    
and the draw would perhaps not  be sufficient for FY 18. The                                                                    
graph showed that the CBR balance  came close to zero at the                                                                    
end of FY 18.                                                                                                                   
                                                                                                                                
Representative  Gara mentioned  the $600  million settlement                                                                    
that would go  to the CBR. He surmised that  even though the                                                                    
chart showed  the CBR funds  would essentially  disappear in                                                                    
FY  18, if  the  settlement  money came  in  there would  be                                                                    
enough CBR money to fund  the FY 18 budget without impacting                                                                    
the earnings reserve account.                                                                                                   
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Vice-Chair Saddler  requested to hear  the name of  the next                                                                    
slide when it was addressed.                                                                                                    
                                                                                                                                
Mr.  Teal  relayed that  material  on  slide 2  titled  "LFD                                                                    
Fiscal Model"  assumed the passage  of the bill.  He pointed                                                                    
to  the upper  left  graph titled  "UGF Revenue/Budget"  and                                                                    
explained the  orange segments of  the bars  indicated there                                                                    
was  still  a  deficit  [orange represented  CBR  draw].  He                                                                    
pointed to  reserve balances and  deficit in a table  on the                                                                    
lower left. He explained that  even with the legislation the                                                                    
FY  17 deficit  was projected  to  be $1.5  billion to  $1.6                                                                    
billion.  He  stated  that  in response  to  a  question  by                                                                    
Representative Wilson  about whether the bill  would fix the                                                                    
problem and  what would happen  if oil prices  increased. He                                                                    
explained  that on  its  own,  the bill  did  not solve  the                                                                    
problem;  the  state  would  still  have  deficits  of  $1.5                                                                    
billion early  on, which  would decline  to $700  million to                                                                    
$800  million in  the out  years. He  detailed that  the CBR                                                                    
would  still be  fully depleted  by  2023 when  it would  be                                                                    
necessary  to  begin  drawing   from  the  earnings  reserve                                                                    
account.  The red  portion of  the  bars in  the upper  left                                                                    
chart on slide  2 represented the earnings  reserve draw. He                                                                    
specified that  the money coming  from the  earnings reserve                                                                    
account was in  excess of what the rules  allowed. The green                                                                    
bar represented the POMV payout.                                                                                                
4:07:43 PM                                                                                                                    
                                                                                                                                
Representative Wilson remarked  that unless state government                                                                    
was reduced, the  model outlined on slide 2  would not work.                                                                    
She underscored  that unless  government spending  was under                                                                    
control, the  bill or any  other option would not  solve the                                                                    
deficit. She  reasoned that based on  the state's population                                                                    
it  was not  possible  to  tax its  way  out of  maintaining                                                                    
government at its  current size. She emphasized  she did not                                                                    
believe the  bill would solve  the problem. She  opined that                                                                    
the state  needed to  get smarter  in the  way it  spent its                                                                    
money.  She  spoke to  the  goal  of ensuring  the  earnings                                                                    
reserve   remained  strong   (without  knowing   what  other                                                                    
revenues may come  in and how industries such  as mining and                                                                    
oil  may  increase)  and  questioned  whether  it  would  be                                                                    
possible  to  pay $1,200  per  Alaskan  to get  through  the                                                                    
budget  for the  current  year instead  of implementing  the                                                                    
bill and changing the entire structure.                                                                                         
                                                                                                                                
4:09:15 PM                                                                                                                    
                                                                                                                                
Mr. Teal replied  the question was difficult  because it was                                                                    
a  policy question.  He believed  Governor  Bill Walker  had                                                                    
been  clear in  stating his  policy that  the administration                                                                    
was looking at  the revenue forecast as a given  and if more                                                                    
money came in, great. He  specified there were three ways to                                                                    
address  the problem,  one was  to  reduce expenditures.  He                                                                    
believed  there  was  no  question  the  governor  had  made                                                                    
reductions and  the legislature had  made further  cuts (and                                                                    
would probably  continue to  put pressure  on expenditures).                                                                    
The second  option was  to increase  revenue -  the governor                                                                    
had  offered legislation  towards that  goal. The  third and                                                                    
most  impactful  was  the   Permanent  Fund  Protection  Act                                                                    
[offered  by  the  governor]. He  explained  the  tax  bills                                                                    
combined  would produce  potentially  $300  million to  $400                                                                    
million. The bill  before the committee would  close the gap                                                                    
by $1.6  billion and  more in later  years as  the Permanent                                                                    
Fund  grew and  the payout  grew. The  bill was  by far  the                                                                    
largest  tool. He  underscored that  absent  the bill,  much                                                                    
larger reductions  or revenue  increases would  be necessary                                                                    
in order to achieve the same  result. He could not speak for                                                                    
the governor, but he guessed  the reason for introducing the                                                                    
bill was  that it  was the most  powerful and  least harmful                                                                    
tool available.                                                                                                                 
                                                                                                                                
                                                                                                                                
Representative Wilson  disagreed. She believed the  bill was                                                                    
very harmful. She  stated "the governor was going  to cut 16                                                                    
percent, which  would have helped  as well."  She emphasized                                                                    
that  the  bill  or  a   similar  option  would  reduce  the                                                                    
dividend.  She detailed  that money  went into  the earnings                                                                    
reserve  from the  corpus of  the Permanent  Fund, at  which                                                                    
point the  legislature determined how  much to put  into the                                                                    
General Fund to  pay out a dividend. She stated  that any of                                                                    
the  amounts could  be reduced  if government  could not  be                                                                    
reduced  that  quickly.   Alternatively,  she  believed  the                                                                    
governor  could redline  the  amount in  half  and it  would                                                                    
still accomplish the same result  as the bill. She asked for                                                                    
the accuracy of her statements.                                                                                                 
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Representative Kawasaki remarked that  many people looked at                                                                    
the graph on  the right side of slide 2  related to what the                                                                    
dividend check  could have been  versus the  proposal (shown                                                                    
in purple).  He remarked  that it was  necessary to  look at                                                                    
both  sides. He  requested  a model  showing  a dividend  at                                                                    
$1,000,  $1,200,  $1,400,  $1,600, $1,800,  and  $2,000.  He                                                                    
believed it  would be  helpful to  get an  idea of  what the                                                                    
graph on the left would look like over time.                                                                                    
                                                                                                                                
4:12:50 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  referred to  the header  "Permanent Fund                                                                    
Plans" in the center of  the chart. He noted that underneath                                                                    
the  header there  was  a column  showing  "Governor" and  a                                                                    
column  showing  "n." The  row  below  those items  included                                                                    
"$3,300."  He  asked  if  the amount  was  $3.3  million  or                                                                    
$3,300.                                                                                                                         
                                                                                                                                
Mr.  Teal  replied  that  the "n"  by  the  governor's  plan                                                                    
indicated the governor's  plan was not being  modeled in the                                                                    
scenario  on slide  2.  The  $3,300 was  the  amount of  the                                                                    
sustainable  draw suggested  by the  governor. He  noted the                                                                    
amount could  be crossed  off because  it was  irrelevant to                                                                    
slide 2. He  referred to a separate row  under the Permanent                                                                    
Fund Plans  header, which indicated  a custom plan  (HB 245)                                                                    
was being modeled.                                                                                                              
                                                                                                                                
Vice-Chair  Saddler clarified  that he  considered the  bill                                                                    
before the committee  as the governor's plan.  He pointed to                                                                    
the chart  in the  upper right of  slide 2  titled "Dividend                                                                    
Check."  He asked  if the  three  bars in  red, purple,  and                                                                    
yellow were calculations or actual figures.                                                                                     
                                                                                                                                
Mr.  Teal relayed  that  the red  line  showed the  dividend                                                                    
under  current law,  which was  a calculation.  He indicated                                                                    
that as  shown on slide 1,  it was a calculation  that would                                                                    
not be a  valid scenario. He stated the  dividend would fall                                                                    
to  zero when  there was  no money  remaining (indicated  by                                                                    
white space on the  graphs). The more appropriate comparison                                                                    
was that the dividend would remain  until FY 20 or FY 21 and                                                                    
would  subsequently drop  to zero.  The alternatives  were a                                                                    
$2,000 for  approximately four years  and no  dividend after                                                                    
that  time versus  a $1,000  dividend, which  would continue                                                                    
into the future.                                                                                                                
                                                                                                                                
Vice-Chair Saddler  asked for  verification the  purple line                                                                    
at   $1,000  represented   what   would   occur  under   the                                                                    
legislation. Mr. Teal answered in the affirmative.                                                                              
                                                                                                                                
Co-Chair Thompson noted the bill  also included a three-year                                                                    
review.                                                                                                                         
                                                                                                                                
4:15:42 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler asked  if  the  yellow line  represented                                                                    
what the dividend would be under a separate bill [HB 224].                                                                      
                                                                                                                                
Mr. Teal answered that the  only thing valid in the modeling                                                                    
on  slide  2  was  what  would occur  under  HB  245.  Other                                                                    
scenarios were  shown that were  essentially zeroed  out. He                                                                    
suggested  focusing on  the $1,000  line [in  purple], which                                                                    
represented what the bill expected to pay in dividends.                                                                         
                                                                                                                                
Vice-Chair Saddler  referred to the upper  left chart titled                                                                    
"UGF Revenue/Budget"  on slide  2. He  pointed to  the green                                                                    
portion of  the bars which  represented the POMV  payout. He                                                                    
then  referred  to  the  lower  left  chart  titled  "Budget                                                                    
Reserves"  and  observed  the  green  portion  of  the  bars                                                                    
represented  the  earnings  reserve account.  He  asked  for                                                                    
verification  it was  merely a  coincidence that  both items                                                                    
were shown  in green. He  believed there was  no correlation                                                                    
between the two.                                                                                                                
                                                                                                                                
Mr. Teal answered  it was not coincidental.  He detailed the                                                                    
orange bars  on the  upper chart  represented the  draw from                                                                    
the  CBR,  whereas  the  orange  bars  on  the  lower  chart                                                                    
represented the  CBR balance.  The green  bars on  the upper                                                                    
chart represented the  draw with a payout  from the earnings                                                                    
reserve account, whereas, the green  bars on the lower chart                                                                    
represented the earnings reserve balance.                                                                                       
                                                                                                                                
Representative Gara  referred to the footnote  at the bottom                                                                    
of slides  1 and 2,  which indicated the modeling  assumed a                                                                    
$250  million  annual  appropriation  for oil  and  gas  tax                                                                    
credits. He believed the state  owed roughly $800 million in                                                                    
the current  year and he did  not know what a  new bill that                                                                    
came out  of conference committee  would do, which  he noted                                                                    
was less than the amount passed by the House.                                                                                   
                                                                                                                                
Co-Chair  Neuman  asked  that  comments  were  kept  to  the                                                                    
subject of the bill.                                                                                                            
                                                                                                                                
Representative  Gara countered  that  every  portion of  his                                                                    
question was relevant to the current conversation.                                                                              
                                                                                                                                
Co-Chair Thompson  asked to keep  questions to  the scenario                                                                    
on slide  2. He added  the committee would have  the ability                                                                    
to ask additional questions the following week.                                                                                 
                                                                                                                                
4:18:12 PM                                                                                                                    
                                                                                                                                
Representative  Gara pointed  to  the  relevant footnote  on                                                                    
slides  1  and   2  that  assumed  a   $250  million  annual                                                                    
appropriation for oil and gas  tax credits. He remarked that                                                                    
$800 million was  owed [for oil and gas tax  credits] in the                                                                    
current year and  it was not yet known what  had come out of                                                                    
a  conference  committee  [on  the  subject]  that  day.  He                                                                    
reasoned  it   seemed  the  money  would   disappear  faster                                                                    
assuming  the  amount  owed.  He   noted  the  $250  million                                                                    
assumption was not accurate for the current year.                                                                               
                                                                                                                                
Mr.  Teal stated  it was  the  purpose of  the footnote.  He                                                                    
explained that  LFD had no  idea what the  legislature would                                                                    
pay  in  tax  credits.  The  amount  paid  would  be  up  to                                                                    
individual  legislatures  in  the   future.  The  LFD  model                                                                    
recognized  that the  anticipated credits  to be  earned was                                                                    
approximately $2 billion  (including existing credits owed),                                                                    
which was  an average  of $250 million  per year.  Under the                                                                    
bill it  started as  an expected payout  of $600  million to                                                                    
$700  million and  fell to  less  than $200  million in  the                                                                    
future. He reiterated  that LFD had no idea  what the actual                                                                    
scenario would  be. The model  assumed that  sometime during                                                                    
the period  credits would  be in the  $2 billion  range, the                                                                    
model spread  them evenly over  time. He stated if  a bigger                                                                    
credit payment  was paid  early on  and payments  faded away                                                                    
over  time,  the  early expenditures  would  be  higher  and                                                                    
reserves would  be depleted faster.  However, at the  end of                                                                    
2025 the same  result would occur regardless  of whether the                                                                    
legislature paid $250 million per  year or $1 billion in the                                                                    
current  year  and a  small  amount  for the  remainder.  He                                                                    
explained  LFD had  chosen to  make  the easiest  assumption                                                                    
about credits,  which meant spreading  the cost  evenly over                                                                    
time.                                                                                                                           
                                                                                                                                
Representative  Gara referred  to  slide 2  and believed  it                                                                    
related to the current bill  proposal. He asked if the slide                                                                    
assumed  all  state  revenues as  they  existed  at  present                                                                    
(including small taxes).                                                                                                        
                                                                                                                                
Mr.  Teal  replied  that  it  did not  assume  any  new  tax                                                                    
revenue, but existing taxes were included.                                                                                      
                                                                                                                                
Vice-Chair Saddler  referred to Representative  Gara's prior                                                                    
statement that the  state would owe $800 million  in oil tax                                                                    
credits. He  asked if the  $800 million included or  did not                                                                    
include $200  million that had  been vetoed by  the governor                                                                    
from the FY 16 budget.                                                                                                          
                                                                                                                                
Co-Chair  Thompson asked  how the  question  applied to  the                                                                    
bill.                                                                                                                           
                                                                                                                                
Vice-Chair  Saddler remarked  that he  had heard  the number                                                                    
$800 million and  wanted to make sure he  understood what it                                                                    
meant.                                                                                                                          
                                                                                                                                
Co-Chair Neuman  thought the committee  was getting  way off                                                                    
topic.                                                                                                                          
                                                                                                                                
Co-Chair  Thompson  asked  the  committee to  stick  to  the                                                                    
presentation.                                                                                                                   
                                                                                                                                
Representative  Wilson asked  how  the  slide addressed  the                                                                    
$1.2  billion spending  limit in  the bill.  She provided  a                                                                    
scenario where $1.2  billion was used, but  $1.6 billion was                                                                    
brought in.                                                                                                                     
                                                                                                                                
4:22:19 PM                                                                                                                    
                                                                                                                                
Mr. Teal  skipped slide  3 and continued  on slide  4 titled                                                                    
"PFPA  Payout/Revenue Limit."  The  slide  included a  chart                                                                    
showing UGF  revenue without  the payout  limit and  a chart                                                                    
showing  UGF revenue  with the  payout limit.  The breakeven                                                                    
point on the left chart (no  payout limit) was about $85 per                                                                    
barrel.  He  detailed  that  the red  portion  of  the  bars                                                                    
represented nonvolatile revenue  (i.e. non-oil revenue), the                                                                    
green  portion represented  the  POMV payout,  and the  blue                                                                    
portion represented oil revenue  (i.e. volatile revenue). He                                                                    
added  the  chart  used  an expenditure  line  of  about  $5                                                                    
billion [shown  as a solid black  line] including dividends;                                                                    
the  chart  also  depicted  an  expenditure  line  excluding                                                                    
dividends  [shown as  a dotted  black line].  He stated  the                                                                    
lines  crossed  at  about  $85.   The  graph  on  the  right                                                                    
reflected a payout limit. The  numbers were the same, but at                                                                    
oil  prices of  about $75  per barrel  the green  line [POMV                                                                    
after  payout limit]  began  to fade  away.  He detailed  it                                                                    
faded dollar-for-dollar  for every bit of  oil revenue above                                                                    
$1.2  billion. Under  the scenario  the CBR  draw (shown  in                                                                    
orange)  continued out  farther and  the breakeven  price of                                                                    
oil   required   to   balance  the   budget   increased   to                                                                    
approximately $105. He explained  the green bar (POMV) would                                                                    
not drop  all the way  to zero; the small  remaining portion                                                                    
reflected  the dividend  payout  from  the earnings  reserve                                                                    
account.  He  continued  that the  line  climbed  slowly  as                                                                    
revenue  climbed  and then  began  to  flatten out;  at  the                                                                    
breakeven point (about  where the POMV payout  went to zero)                                                                    
there would be a surplus.  He specified the surplus occurred                                                                    
above about $105.                                                                                                               
                                                                                                                                
4:25:33 PM                                                                                                                    
                                                                                                                                
He turned  to slide  5: "Savings  Rule." The  rule indicated                                                                    
that when the state had  money exceeding what was needed for                                                                    
expenditures,  it  would be  saved  -  50 percent  would  be                                                                    
deposited into  the CBR  and 50  percent into  the Permanent                                                                    
Fund  principal.  The  line was  not  completely  flat  when                                                                    
looking at the  sum of the red  [nonvolatile revenue], green                                                                    
[POMV  after   payout  limit],  and  blue   [total  volatile                                                                    
revenue]  bars -  the revenue  climbed slowly  and flattened                                                                    
out, albeit not completely.  Once the dollar-for-dollar loss                                                                    
of the POMV  payout was passed, revenue  began to accelerate                                                                    
fairly  rapidly.  He  hoped  the  slides  answered  numerous                                                                    
questions including  ones related  to the $1.2  billion (the                                                                    
dollar-for-dollar   tradeoff),   where  the   price   points                                                                    
occurred,  where the  money started  to fade,  and what  the                                                                    
surplus could be used for when  it came back. The slides did                                                                    
not  address   what  would   happen  when   surplus  revenue                                                                    
occurred.  He explained  that  as the  bill  was drafted  it                                                                    
asked  whether  revenue  had exceeded  expenditures  in  the                                                                    
previous year.  He relayed  it was  a difficult  question to                                                                    
answer until the year closed.  He imagined there would be an                                                                    
appropriation   much   like   with  current   CBR   language                                                                    
specifying that  in the event revenue  exceeded expenditures                                                                    
it  was  distributed  "this  way."  He  explained  what  the                                                                    
amounts would be  would not be known until six  or so months                                                                    
after a year had closed.                                                                                                        
                                                                                                                                
Representative Gara returned to  his previous questions. His                                                                    
understanding  was  that  there  was a  combined  draw  from                                                                    
savings of FY  16 and FY 17  money to be spent in  FY 17. He                                                                    
stated that  the next  year's revenue  could not  exceed the                                                                    
prior  year's appropriations.  He  referred  to the  current                                                                    
budget as an example and  detailed that roughly $500 million                                                                    
of FY 16 money  had been used that would be  spent in FY 17.                                                                    
He asked if under the formula  the $500 million would not be                                                                    
counted. Alternatively,  he asked  if the budget  would have                                                                    
to  be  reduced  by  $500  million  to  fit  what  had  been                                                                    
withdrawn as FY 17 revenue.                                                                                                     
                                                                                                                                
Mr.  Teal explained  that  the  bill had  a  loop hole  that                                                                    
allowed FY  23 expenditures to be  used in the FY  24 budget                                                                    
process  (supplemental  appropriations).  Under  a  scenario                                                                    
where  the  legislature was  working  on  the FY  24  budget                                                                    
nearing the  end of FY 23  and it knew there  was $1 billion                                                                    
left  over, there  could be  supplemental appropriations  to                                                                    
spend some of the remaining  money, which would take it away                                                                    
from  the  savings portion.  The  only  way to  prevent  the                                                                    
situation  was  to insert  a  spending  limit in  the  state                                                                    
constitution,  which  would  prevent the  money  from  being                                                                    
spent.  Otherwise,  the  legislature could  spend  available                                                                    
funds in the supplemental budget process.                                                                                       
                                                                                                                                
4:30:05 PM                                                                                                                    
                                                                                                                                
Representative Gara used the current  year as an example and                                                                    
included the  assumption the bill  was adopted.  He believed                                                                    
FY  17  spending would  utilize  FY  16 (approximately  $500                                                                    
million)  and FY  17  appropriations.  When considering  the                                                                    
allowable  revenue  for expenditure  in  the  next year,  he                                                                    
wondered  if the  legislature  would have  to  cut the  $500                                                                    
million that was used from FY 16 appropriations.                                                                                
                                                                                                                                
Co-Chair Thompson interjected they  were looking to the next                                                                    
year's  budget already.  He stated  if  the legislature  was                                                                    
going to reduce the next  year's budget more than it reduced                                                                    
the budget  for the current  year, it would probably  eat up                                                                    
some of the amount. He  reasoned they did not currently know                                                                    
where they  were headed  "with any of  this" at  present. He                                                                    
believed  they  were  getting ahead  of  themselves  in  the                                                                    
present discussion. He  understood where Representative Gara                                                                    
was coming  from, but he  wondered how the  question related                                                                    
to the bill currently before the committee.                                                                                     
                                                                                                                                
Representative Gara  stated he was trying  to understand the                                                                    
formula for what revenue the  legislature was allowed to use                                                                    
based on how much it had  appropriated in the prior year. He                                                                    
asked if  the amount of  revenue the state would  be allowed                                                                    
to  use   in  the  next  year   was  based  on  the   FY  17                                                                    
appropriations alone  or also included  the $500  million in                                                                    
FY 16 appropriations (assuming the passage of the bill).                                                                        
                                                                                                                                
Mr.  Teal   replied  that   it  would   only  cover   FY  17                                                                    
appropriations. He  detailed it was  not really a  matter of                                                                    
the  appropriations  that  occurred  in  the  normal  budget                                                                    
process (those  appropriations would be  supplemental budget                                                                    
items). The  legislature was able  to pass the  $500 million                                                                    
supplemental budgets  because the  language in  the previous                                                                    
year's  budget authorized  the legislature  to  spend up  to                                                                    
$500 million  more in  supplemental expenditures  with money                                                                    
from the  CBR. He furthered that  if the CBR language  had a                                                                    
lower  limit,  the  legislature  could  spend  less  in  the                                                                    
supplemental process.  He believed it was  important to note                                                                    
that CBR draws  would be necessary until  oil prices reached                                                                    
the $100  per barrel range.  He continued there was  still a                                                                    
deficit,  which could  be filled  by  expenditure cuts,  tax                                                                    
increases, or by drawing from the  CBR. The chart on slide 5                                                                    
showed a  CBR draw.  He relayed  that the  legislature could                                                                    
limit supplemental spending if it wanted to.                                                                                    
                                                                                                                                
Mr.  Teal provided  a scenario  where oil  reached $115  per                                                                    
barrel, which  resulted in  a surplus for  the FY  18 budget                                                                    
process.  He   emphasized  that  the  money   would  not  be                                                                    
available  for  expenditure in  FY  17  -  it would  not  be                                                                    
available  until FY  18. He  explained that  the legislature                                                                    
may be able  to spend the money in the  FY 19 budget process                                                                    
as a  supplemental FY 18  expenditure. He detailed  it would                                                                    
depend on  whether a CBR draw  was required and on  what the                                                                    
legislature did. He emphasized  a legislature could not bind                                                                    
future legislatures. The rule could  be written in a tougher                                                                    
way,  much  like the  current  CBR  language that  specified                                                                    
appropriations  for the  prior year  that were  made in  the                                                                    
prior   calendar   year.   In  other   words,   supplemental                                                                    
appropriations were specifically  excluded. However, if that                                                                    
change was  made, the rule  would be so restrictive  that in                                                                    
the  event  of  a  bad  wildfire year,  there  would  be  no                                                                    
flexibility to appropriate money to  fight the fires. If the                                                                    
bill  did  not  include some  flexibility,  the  legislature                                                                    
would find itself  forced to break the rules  in the future.                                                                    
The  point  was  to  get  a set  of  rules  that  were  good                                                                    
guidelines,  but  that they  were  not  so strict  that  the                                                                    
legislature would be forced to  break them. He reasoned that                                                                    
once  rules were  broken,  there was  a  tendency to  ignore                                                                    
them.  He concluded  that the  wheels were  not as  tight as                                                                    
some people may want them to be.                                                                                                
                                                                                                                                
4:35:26 PM                                                                                                                    
                                                                                                                                
Representative Gara asked for  verification that if the bill                                                                    
language   was  followed   in  determining   how  much   the                                                                    
legislature  could appropriate  the following  year, it  was                                                                    
not allowed  to count the $500  million that was made  as an                                                                    
FY 16 appropriation.                                                                                                            
                                                                                                                                
Mr. Teal replied in the affirmative.                                                                                            
                                                                                                                                
Representative  Gara  asked  for  verification  the  funding                                                                    
would  be  short the  $500  million.  Mr. Teal  agreed,  but                                                                    
reminded  the committee  that the  scenario  would not  come                                                                    
into play unless oil prices reached $110 per barrel.                                                                            
                                                                                                                                
Co-Chair Neuman remarked that the  debt would still be owed.                                                                    
He detailed  there were approximately  $430 million  to $500                                                                    
million in  credits due the  current year. He  remarked that                                                                    
the supplemental for FY 16  was $70 million. He reasoned the                                                                    
debt was still incurred and  could not merely be swept under                                                                    
the rug. He added the legislature  had chosen to pay off the                                                                    
debt with available money. He  reiterated the debt still had                                                                    
to be accounted for in future years.                                                                                            
                                                                                                                                
4:37:02 PM                                                                                                                    
                                                                                                                                
Mr. Teal replied  that it was important to  realize the $430                                                                    
million of the prior year's money  (FY 16) was used to pay a                                                                    
debt. He explained if the  money had been appropriated as FY                                                                    
17 money, there would have  been a smaller FY 16 expenditure                                                                    
and a larger  FY 17 expenditure. He underscored  that at the                                                                    
end of FY  17 the result would be exactly  the same; it made                                                                    
no   difference  whether   they  were   FY  16   or  FY   17                                                                    
expenditures.  He reminded  the committee  that whenever  it                                                                    
paid the  $430 million, it  was $430 million  less liability                                                                    
that the state would owe at some point in the future.                                                                           
                                                                                                                                
Representative   Wilson   stated   her   understanding   the                                                                    
legislature  was  putting  guidelines  in  place  that  were                                                                    
merely  guidelines in  terms of  the savings  component. She                                                                    
referred  to  taking  money away  from  the  Permanent  Fund                                                                    
Dividend and asked how much  related money would be mandated                                                                    
by the legislation.                                                                                                             
                                                                                                                                
Mr. Teal answered that in  theory the legislature would want                                                                    
to follow all of the  guidelines including the 20 percent of                                                                    
royalty  that  went  to dividends.  He  explained  that  the                                                                    
savings rule would  kick in at prices above  $110 per barrel                                                                    
and would put  the savings towards the CBR  or the Permanent                                                                    
Fund  corpus. He  reminded the  committee that  at high  oil                                                                    
prices  royalties  increased   substantially  (20  percent);                                                                    
therefore, dividends  would increase. A portion  of the high                                                                    
oil prices would go straight into dividends.                                                                                    
                                                                                                                                
4:39:19 PM                                                                                                                    
                                                                                                                                
Representative Wilson  clarified her question  pertaining to                                                                    
slide  5.   She  underscored   that  guidelines   were  very                                                                    
different  than  statute  that  had  to  be  followed  in  a                                                                    
specific  way. She  surmised the  savings  component of  the                                                                    
legislation  was  a  guideline  that   may  or  may  not  be                                                                    
followed, whereas, how the dividend  would be paid at $1,000                                                                    
and how  the legislature  would put  money into  the General                                                                    
Fund would be mandated as state law.                                                                                            
                                                                                                                                
Mr. Teal stressed that the  components would all be the same                                                                    
and would all be in state  law. The difference was that none                                                                    
of  the  statutes  were mandated.  The  statute  showed  how                                                                    
dividends   were   calculated   and   specified   that   the                                                                    
legislature  may not  appropriate  more  than 5.25  percent;                                                                    
however, the legislature could appropriate  10 percent if it                                                                    
chose  to.  He explained  the  situation  merely equated  to                                                                    
breaking  the rule.  The point  of the  rules was  to follow                                                                    
them,  because  doing so  put  the  state  on  a path  to  a                                                                    
sustainable budget. Alternatively,  if the legislature chose                                                                    
to break the rules it would veer from that path.                                                                                
                                                                                                                                
Representative  Wilson remarked  that  she thought  statutes                                                                    
were laws  not merely  suggestions. She  pointed to  slide 5                                                                    
and asked  what price  of oil the  current budget  was based                                                                    
on. She rephrased her question  and asked what oil price was                                                                    
required for the current budget to be self-sustainable.                                                                         
                                                                                                                                
Mr. Teal  referred to the  [DOR] spring forecast,  which was                                                                    
roughly $45 per  barrel. He explained at that  price the CBR                                                                    
draw  would be  slightly over  $1 billion.  He detailed  the                                                                    
orange segments  of the  bars [representing  budget deficit]                                                                    
disappeared  at oil  prices of  around $105  per barrel;  at                                                                    
that  point the  combination  of non-oil  revenue (in  red),                                                                    
dividends, and oil  revenue (in blue) created  a surplus. He                                                                    
continued that  if oil prices  reached $105 per  barrel, the                                                                    
savings rule would kick in.  At prices below $105 per barrel                                                                    
the  guideline on  slide 5  was  irrelevant. He  underscored                                                                    
that   the  legislature   could  make   appropriations  that                                                                    
followed statute or  it could appropriate as it  saw fit. He                                                                    
emphasized the  legislature was not  required to  follow any                                                                    
of the specific  rules; however, the hope was  that it would                                                                    
follow them.                                                                                                                    
                                                                                                                                
4:43:12 PM                                                                                                                    
                                                                                                                                
Representative  Wilson did  not understand  the need  to put                                                                    
something in statute  if all of the items  were merely rules                                                                    
the  legislature could  chose  to follow  or disregard.  She                                                                    
clarified that if the current  budget required oil prices of                                                                    
$105 per  barrel, the legislature would  perpetually have to                                                                    
hope for oil prices of that  amount if it failed to decrease                                                                    
the budget.                                                                                                                     
                                                                                                                                
Co-Chair Thompson  relayed the  bill would be  considered by                                                                    
the committee again the following week.                                                                                         
                                                                                                                                
Representative  Pruitt explained  that  the legislature  had                                                                    
already funded  the Permanent Fund Dividend  in its recently                                                                    
passed budget.  He wondered if  the bill passed  whether the                                                                    
governor would have to veto  a portion of the budget related                                                                    
to the dividend.                                                                                                                
                                                                                                                                
Mr. Teal replied  that it was not a  simple question because                                                                    
if   the  bill   passed  it   would  have   no  accompanying                                                                    
appropriation   bill.   He   specified   that   unless   the                                                                    
legislature  passed another  appropriation  bill making  the                                                                    
appropriations suggested  in the bill, no  money would move.                                                                    
He  furthered  that  Representative Pruitt  was  correct  in                                                                    
assuming the  operating budget passed by  both houses funded                                                                    
dividends in FY  17. Whether the governor would  veto all or                                                                    
a  portion  of  the  appropriation,  he  did  not  know.  He                                                                    
elaborated that with  HB 245 the committee had  an option of                                                                    
starting    an   appropriation    bill   and    making   the                                                                    
appropriations  required   to  comply  with  the   bill.  He                                                                    
detailed that  if that route  was taken, dividends  would be                                                                    
set at  $1,000 under  the legislation,  but at  $2,000 under                                                                    
the  operating budget.  He  did  not see  that  as a  likely                                                                    
outcome and he anticipated the  governor would veto all or a                                                                    
portion of the dividends in the operating budget.                                                                               
                                                                                                                                
Representative  Pruitt surmised  that  if the  bill did  not                                                                    
pass, but the  governor still wanted to  do essentially some                                                                    
of the same  things, he would have the ability  to line item                                                                    
veto  any   amount  of  the   number  appropriated   by  the                                                                    
legislature.                                                                                                                    
                                                                                                                                
Mr. Teal  responded that the  governor could  line-item veto                                                                    
anything in  the operating budget  regardless of  whether or                                                                    
not HB 245  passed. He detailed that if the  bill passed, it                                                                    
would  not   require  an  accompanying   appropriation  bill                                                                    
because  it  could  all  be  handled  through  the  existing                                                                    
appropriations.                                                                                                                 
                                                                                                                                
Representative Gara referred  to the two graphs  on slide 4.                                                                    
He asked  for verification  that with  a payout  limit there                                                                    
would be a deficit all the way  up to oil prices of $100 per                                                                    
barrel  and  without  the payout  limit  the  deficit  would                                                                    
disappear at $80 per barrel.                                                                                                    
                                                                                                                                
Mr. Teal agreed and clarified  that the numbers were roughly                                                                    
$105  [with  a  payout  limit] and  $85  [without  a  payout                                                                    
limit].                                                                                                                         
                                                                                                                                
HB  245  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Thompson  addressed the schedule for  the following                                                                    
week. He recessed the meeting to  a call of the chair [note:                                                                    
the meeting never reconvened].                                                                                                  
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
4:47:06 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 4:47 p.m.                                                                                          

Document Name Date/Time Subjects
HB 245 Explanation of Changes version I to L.pdf HFIN 6/6/2016 3:00:00 PM
HB 245
HB 245 20-20 plan cashflow_w Surplus Split (002).pdf HFIN 6/6/2016 3:00:00 PM
HB 245
HB 245 CS WORKDRAFT FIN vL.pdf HFIN 6/6/2016 3:00:00 PM
HB 245
Sectional version __ 6.6.16.pdf HFIN 6/6/2016 3:00:00 PM
HB 245
HB 245 Corrected Explanation of Changes version I to L.pdf HFIN 6/6/2016 3:00:00 PM
HB 245
HB 245 CS L NEW FN DOR-T&T.pdf HFIN 6/6/2016 3:00:00 PM
HB 245
HB 245 CS L NEW FN DOR-PFD-Op.pdf HFIN 6/6/2016 3:00:00 PM
HB 245