Legislature(2017 - 2018)HOUSE FINANCE 519

02/06/2017 01:30 PM FINANCE

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Audio Topic
01:34:33 PM Start
01:34:33 PM Presentation: a Framework for Analyzing Fiscal Plans
02:45:13 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ A Framework for Analyzing Fiscal plans by TELECONFERENCED
David Teal, Director, Div. of Legislative
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      February 6, 2017                                                                                          
                         1:34 p.m.                                                                                              
1:34:33 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Seaton called the House Finance Committee meeting                                                                      
to order at 1:34 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Steve Thompson                                                                                                   
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative Scott Kawasaki                                                                                                   
ALSO PRESENT                                                                                                                  
David Teal, Director, Legislative Finance Division;                                                                             
Representative Dan Saddler.                                                                                                     
PRESENTATION:  A FRAMEWORK FOR ANALYZING FISCAL PLANS                                                                           
               LEGISLATIVE FINANCE DIVISION                                                                                     
Co-Chair Seaton addressed the meeting agenda.                                                                                   
^PRESENTATION: A FRAMEWORK FOR ANALYZING FISCAL PLANS                                                                         
1:34:33 PM                                                                                                                    
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
provided a  PowerPoint presentation  titled "A Framework  for                                                                   
Analyzing  Fiscal  Plans" dated  February  6,  2017 (copy  on                                                                   
file).  He   highlighted  that   the  legislature   would  be                                                                   
discussing  several  versions  of  fiscal  plans  during  the                                                                   
current session;  the committee had heard the  first plan the                                                                   
previous week.  He noted that  some of the bills,  plans, and                                                                   
provisions   were   fairly   complex.    He   explained   the                                                                   
presentation  did not  focus on  a particular  plan or  bill.                                                                   
The presentation  stemmed from  a conversation with  Co-Chair                                                                   
Seaton  about  the  difficulty  of comparing  one  plan  with                                                                   
others.  He had  concluded that  a presentation  of one  bill                                                                   
after  another may  not be the  best route  to consensus,  at                                                                   
least not without  a framework to help  legislators determine                                                                   
the advantages  and disadvantages of various  provisions. The                                                                   
framework in the presentation addressed four questions.                                                                         
Co-Chair  Seaton noted  Representative Grenn  had joined  the                                                                   
1:36:41 PM                                                                                                                    
Mr. Teal  moved to slide  2 and stated  that answering  a few                                                                   
questions  could  help  get  to  a  basic  fiscal  plan/bill.                                                                   
However,  there   were  also  options  to  consider   if  the                                                                   
legislature  wanted a  more comprehensive  plan. He  compared                                                                   
the situation  to knowing  that a truck  would be  better for                                                                   
hauling  wood  than  a  [Toyota]  Prius.  The  challenge  was                                                                   
trying  to figure  out what the  truck should  look like.  He                                                                   
stated that the  decision was difficult, but  whether a truck                                                                   
was needed  at all may be  the start of the  discussion. From                                                                   
that point  it would be  necessary to  decide on the  type of                                                                   
truck. He  stated there were  vastly different trucks  on the                                                                   
market and  some of the fiscal  plans could be  different. He                                                                   
urged the  committee to focus  on the  basics and to  not get                                                                   
bogged down in optional add-ons in a plan.                                                                                      
Co-Chair  Seaton  remarked  that  Representative  Pruitt  had                                                                   
joined  the   meeting  and   recognized  Representative   Dan                                                                   
Saddler in the audience.                                                                                                        
1:38:22 PM                                                                                                                    
Mr. Teal moved  to slide 3 and addressed: "1)  Do you want to                                                                   
use earnings of  the Permanent Fund to help  Balance Alaska's                                                                   
Budget?" He referred  to a presentation by the  Department of                                                                   
Revenue  (DOR)  the  previous  week that  had  addressed  the                                                                   
structural  budget  deficit that  had  been  going  on for  a                                                                   
number  of years.  The presentation  had  also conveyed  that                                                                   
the revenue  forecast showed continued deficits.  He believed                                                                   
committee members  understood how bad the situation  was, but                                                                   
that  they also  understood  there  were tools  available  to                                                                   
address the problem.  The tools included budget  cuts, taxes,                                                                   
use of  investment earnings of  the Permanent Fund,  or using                                                                   
reserves. Legislators  also knew that reserves  had been used                                                                   
and cuts had  been made. At present, reserves  were declining                                                                   
rapidly and neither  cuts nor taxes would fill  the deficits.                                                                   
He stated  that there was no  tool out there that  could fill                                                                   
more than  about one-third  of the  existing deficit  and use                                                                   
of [Permanent Fund]  earnings was capable of  filling half or                                                                   
more of  the deficit.  He detailed that  the use  of earnings                                                                   
would  have far  less  economic impact  than  either cuts  or                                                                   
taxes. He elaborated  that cuts and taxes removed  money from                                                                   
the  economy,  whereas  Permanent   Fund  earnings  were  not                                                                   
currently in the  economy; therefore, using earnings  did not                                                                   
take anything away  from the existing economic  structure. He                                                                   
noted that  the remainder  of the  presentation would  not be                                                                   
very  useful   if  someone  was   not  interested   in  using                                                                   
Permanent  Fund   earnings.  The  presentation   assumed  the                                                                   
legislature had chosen to use earnings.                                                                                         
1:40:26 PM                                                                                                                    
Mr.  Teal turned  to  slide 4  and  addressed:  "Do you  want                                                                   
transfers  to  the  general  fund to  be  based  on  earnings                                                                   
directly  or  on a  POMV  (percent  of  market value  of  the                                                                   
Permanent Fund) payout?" He discussed  considerations related                                                                   
to the  question. First, governments  and economies  were not                                                                   
very  good at  dealing with  volatile revenue.  He asked  the                                                                   
committee  to imagine  the government  deciding that  because                                                                   
there  were no  Permanent Fund  Dividends (PFD)  one year  it                                                                   
would shut down the entire [PFD]  division, but the following                                                                   
year there were dividends again.  He reasoned that restarting                                                                   
the division  would not be an  easy process. He  relayed that                                                                   
government  functioned much  better  with stability.  Second,                                                                   
earnings  are volatile  and can  be negative.  The state  had                                                                   
done what it could to remove volatility  from earnings with a                                                                   
five-year moving  average (like  the process used  for PFDs).                                                                   
However, dividends had remained  volatile - ranging from $700                                                                   
to $2,200 per year.                                                                                                             
Mr. Teal addressed  the third point on slide 4  - the balance                                                                   
of  a fund  is  more stable  than  the stream  of  investment                                                                   
earnings  on  the same  fund  and  that POMV  offers  greater                                                                   
stability than  earnings. Unfortunately, adopting  POMV would                                                                   
change  the  existing  method of  calculating  dividends.  He                                                                   
elaborated that  there was nothing  wrong with a  POMV payout                                                                   
method -  it was the most  common method used  for endowments                                                                   
worldwide. However, the Permanent  Fund had used earnings for                                                                   
a number  of years  and he  believed there  were a  number of                                                                   
people who were not looking forward  to changing the process.                                                                   
It was  more a  matter of  facing change  rather than  facing                                                                   
something that was a disadvantage.  He did not believe it was                                                                   
a disadvantage.                                                                                                                 
1:42:46 PM                                                                                                                    
Mr.  Teal spoke  to slide  5 titled  "Payout  to the  General                                                                   
Fund under  a Plan  Sending 50  percent of Realized  Earnings                                                                   
to  the  General  Fund (Assuming  Earnings  Repeat  the  Most                                                                   
Recent 9 Years)."  He noted that the presentation  included a                                                                   
couple of  graphs to  demonstrate how  volatility can  differ                                                                   
[slides 5 and 6].  The graph on slide 6 showed  the use of 50                                                                   
percent  of  realized  earnings  going to  the  General  Fund                                                                   
(GF).  He relayed  that models  the committee  may have  seen                                                                   
presented  showed a  steady  earnings of  approximately  6.95                                                                   
percent.  When   a  constant   earnings  rate  was   assumed,                                                                   
anything  related  to  those   earnings  was  also  constant.                                                                   
However,  in the  real  world, 6.95  percent  was not  earned                                                                   
annually. The graph  showed repeating the past  nine years of                                                                   
actual earnings  and showing  what the  payout for  dividends                                                                   
or  GF  would  have  been.  The  graph  used  50  percent  of                                                                   
realized earnings  to the GF and  50 percent to  earnings. He                                                                   
addressed  the volatility  of using earnings  and pointed  to                                                                   
jumps shown  where there  was a  gain of  $1 billion.  If the                                                                   
graph  began  with  later years  and  went  backwards,  there                                                                   
would be reductions  of $1 billion in a year.  He observed it                                                                   
was not a great way to run government.                                                                                          
1:44:24 PM                                                                                                                    
Mr. Teal  advanced to  slide 6 and  addressed "Payout  to the                                                                   
General Fund under  a Plan Sending a Percent  of Market Value                                                                   
to  the  General  Fund (Assuming  Earnings  Repeat  the  Most                                                                   
Recent  9 Years."  The graph  indicated  that all  volatility                                                                   
was  not eliminated,  but a  plan  using POMV  was much  less                                                                   
volatile than using  earnings. He did not believe  there were                                                                   
any  statistical  arguments  that  needed to  be  made  about                                                                   
measuring volatility.                                                                                                           
Mr.  Teal  turned to  slide  7  and addressed  the  following                                                                   
question: "Assuming POMV is selected,  what is an appropriate                                                                   
payout rate?" He moved to a chart  on slide 8 that showed the                                                                   
POMV payout  at various  payout  rates to the  GF. The  chart                                                                   
assumed  a  $50  billion  fund  earning  6.95  percent  -  it                                                                   
depicted  the Permanent  Fund  at present  and projected  its                                                                   
earnings into  the future. The  chart showed payout  rates of                                                                   
4,  4.5, 4.75,  5, and  6 percent.  He pointed  out that  the                                                                   
lower the  payout rate, the lower  the payout at  present. He                                                                   
continued that "as you go through  this" the payout was small                                                                   
and the  fund remained larger,  which resulted in  larger and                                                                   
larger payouts. Over a period  of 40 years a 4 percent payout                                                                   
would be  greater than a  higher percentage payout.  Whereas,                                                                   
the  higher  percentage  payout would  mean  larger  payments                                                                   
earlier  on. He continued  that  the payout  rate was not  as                                                                   
important  as many  people seemed  to think.  A 5.25  percent                                                                   
payout had  been looked at the  previous year, which  DOR had                                                                   
expressed   was  very   aggressive.  He   agreed  with   that                                                                   
assessment. However,  based on more recent modeling,  DOR had                                                                   
specified  it was  possible to  make it with  a 5.25  percent                                                                   
payout. He  communicated that the  number did not have  to be                                                                   
that high. He  reiterated that a lower payout  rate would pay                                                                   
less at present, but more in the  long-term (beyond 20 years'                                                                   
time). He encouraged  the legislature to just  pick something                                                                   
- anywhere  between  4.25 and  5.25 percent  would work.  The                                                                   
goal was  to find a  good balance between  high payout  and a                                                                   
safe payout. He  relayed that if a 7 percent  payout was used                                                                   
it would start  at about $3.5 billion per year,  but it would                                                                   
decline  over  the  years  because  it  exceeded  the  fund's                                                                   
earning rate  of 6.95  percent. The  rate was important,  but                                                                   
rates of 4.5, 4.75, and 5.25 percent  were just a balance and                                                                   
it could be  argued that none  of them would make or  break a                                                                   
1:48:09 PM                                                                                                                    
Vice-Chair  Gara asked  for  detail on  what  Mr. Teal  meant                                                                   
that  selecting the  numbers between  4.25  and 5.25  percent                                                                   
would not make or break a plan.                                                                                                 
Mr. Teal  referred to  slide 8 and  explained that  the rates                                                                   
were  nominal. He  detailed  that a  4  percent payout  would                                                                   
give  a $2  million  [billion], whereas  a  5 percent  payout                                                                   
would amount to  about $2.5 [billion] at present.  He relayed                                                                   
it was about $100  to $150 million per year  for each quarter                                                                   
point  added  on.  If  a  slightly   lower  payout  rate  was                                                                   
selected there would  be less GF, which meant  there would be                                                                   
more pressure  to  cut the budget  or more  pressure to  find                                                                   
some other way  to fill the remaining gap.  There was nothing                                                                   
specifying there  had to be a constant rate.  The legislature                                                                   
could pick  a rate of  5.25 percent for  FY 18 and FY  19 and                                                                   
could  reduce the  rate to  5 percent  for two  years and  to                                                                   
4.75 percent after that. The situation was flexible.                                                                            
Vice-Chair Gara  referred to Mr. Teal's statement  that there                                                                   
was  a  current  budget  crisis.  He asked  if  it  would  be                                                                   
rational to  use a rate of  5.25 percent with a  reduction to                                                                   
5 percent later on.                                                                                                             
Mr.  Teal  answered  that  the   approach  was  rational.  He                                                                   
continued  that  the  legislature  may  determine  that  a  5                                                                   
percent payout  did not  generate the  desired amount  in the                                                                   
far-term.  He explained  that  it  was about  present  versus                                                                   
future.  It was easy  to say  "let's worry  about more  about                                                                   
the present" because  the future was in the  far distance. He                                                                   
agreed that  picking a  high rate at  present and  phasing it                                                                   
into a lower rate over time was a rational approach.                                                                            
Representative  Ortiz spoke  to the  positives and  negatives                                                                   
of the different  rates. He asked  if Mr. Teal had  looked at                                                                   
existing  savings accounts  and  their ability  to sustain  a                                                                   
spending level (assuming  a budget gap remained)  long enough                                                                   
to get to  a point when  higher payout rates occurred  in the                                                                   
1:51:51 PM                                                                                                                    
Mr.  Teal replied  in the  affirmative. He  relayed that  the                                                                   
graph on  slide 8 was  designed to show  that a multitude  of                                                                   
payout  rates  would  probably  all work.  The  question  was                                                                   
whether there  was more concern  about present or  future. To                                                                   
view how the  payout rates worked they needed  to be included                                                                   
in a  model to  show how  they would  work with reserves.  He                                                                   
shared that  a 4.75  percent rate  starting at present  would                                                                   
extend reserves  and theoretically solved the  fiscal problem                                                                   
(or most of  it). A 5.25 percent  rate for a few  years would                                                                   
not substantially  alter reserve balances because  they money                                                                   
would be  paid out  and reserves would  be burned.  He stated                                                                   
that  if less  was  paid out  at  present it  would  maintain                                                                   
reserves,  but  $125  million connected  to  each  additional                                                                   
quarter   point   in   payout   did   not   impact   reserves                                                                   
substantially.  He stated  that  $125 million  seemed like  a                                                                   
significant  amount of  money,  but the  model  was not  that                                                                   
precise.  What   the  actual   returns,  cuts,  and   revenue                                                                   
measures would be  in the future were unknown  quantities. He                                                                   
relayed that  anything above  a payout  rate of 4.75  percent                                                                   
would  extend  the life  of  reserves.  At rates  below  4.75                                                                   
percent, the  payout was not  quite enough for  government to                                                                   
maintain its current level of expenditures.                                                                                     
1:54:08 PM                                                                                                                    
Representative  Wilson  asked if  legislation  was needed  to                                                                   
switch to  a POMV.  She wondered if  the percentage  could be                                                                   
looked  at  annually because  the  future  price of  oil  and                                                                   
other  revenues  were not  yet  known.  She wondered  if  the                                                                   
percentage  had  to  go  into  statute  or  if  it  could  be                                                                   
specified in the budget.                                                                                                        
Mr. Teal answered  that the percentage did not have  to be in                                                                   
statute. He detailed  that in the governor's  proposed budget                                                                   
he  had included  an  appropriation  for POMV.  The  language                                                                   
specified  transferring   5.25  percent  of   the  [Permanent                                                                   
Fund's] market value  into GF. He added that a  POMV bill had                                                                   
not  passed the  previous  year,  but the  governor's  budget                                                                   
request  included  a  provision  to  transfer  the  money  as                                                                   
calculated in FY 17 to GF.                                                                                                      
Representative  Guttenberg spoke  to variable interest  rates                                                                   
and removing  the question  from the  political "whim"  chart                                                                   
from  one year  to the  next.  He asked  what mechanisms  had                                                                   
been  used in  other places  to lock  a plan  in place  other                                                                   
than the will  of the legislative body and  the annual budget                                                                   
Mr.  Teal responded  that  some  sovereign wealth  funds  may                                                                   
have  the   ability  to   decide  those   things  (e.g.   the                                                                   
government  in Saudi Arabia  was basically  family run),  but                                                                   
for  the  State  of Alaska  the  choices  were  constitution,                                                                   
statute,  or  appropriation  language.  He  stated  that  the                                                                   
action  could be  taken  through  an appropriation  bill  and                                                                   
statute  provided guidelines  and  some  direction to  future                                                                   
legislatures.  Some people  may say  it was  a better way  to                                                                   
act  because  that  guideline   was  often  followed  by  the                                                                   
legislature.  However,  he  underscored   that  it  was  just                                                                   
statute, which  could not bind  future legislatures  or limit                                                                   
the  legislature's  power  of  appropriation.  He  emphasized                                                                   
that a  plan in statute  was nothing  more than a  guideline.                                                                   
If the legislature  wanted the solution to be  something that                                                                   
took  away  the legislature's  annual  discretion,  it  would                                                                   
require a constitutional amendment.                                                                                             
Representative  Guttenberg  believed  that  historically  the                                                                   
legislature  has a  record of  what  it had  done with  money                                                                   
available  for appropriations  and  the public  did not  care                                                                   
about the  past, but as  the legislature started  touching it                                                                   
[the Permanent  Fund],  the legislature  would never get  its                                                                   
hands  out.  He  believed  a  framework  and  rules  for  the                                                                   
legislature's action were necessary.                                                                                            
1:58:21 PM                                                                                                                    
Mr.  Teal   addressed  slide  9   "How  Much  Should   go  to                                                                   
Dividends?" He stated  that the issue was not  something that                                                                   
most endowments  had to deal with  - a sovereign  wealth fund                                                                   
would pay out  to the government. He continued  that deciding                                                                   
how much  should go to dividends  was not merely  a political                                                                   
choice.  He   detailed  that   higher  dividends   translated                                                                   
directly  into the need  for some  combination of  additional                                                                   
revenue, additional  budget reductions, or larger  draws from                                                                   
reserves. He  moved to slide 10  and addressed the  impact of                                                                   
dividends  on the  ability to  fill the deficit  with a  POMV                                                                   
payout. He  credited Allen Mitchell  who had developed  GCI's                                                                   
model  - the  information  in  the current  presentation  had                                                                   
been modified  to include  POMV. He  discussed what  changing                                                                   
dividends would mean  to a $48 million five-year  average. He                                                                   
relayed that a  $1,000 PFD would cost $675  million per year,                                                                   
leaving  a payout  of $1.850  billion  to GF  and about  $820                                                                   
million  of deficit  remaining. The  remaining deficit  would                                                                   
need  to  be  filled with  spending  cuts,  new  revenue,  or                                                                   
Mr.  Teal  continued to  address  slide  10 and  provided  an                                                                   
example  showing  increased  dividends   -  higher  dividends                                                                   
would  mean  a  lower  payout,  which  would  mean  a  larger                                                                   
remaining  deficit   to  fill   with  additional   cuts,  new                                                                   
revenue, or reserves.                                                                                                           
2:01:34 PM                                                                                                                    
Mr. Teal  continued to manipulate  the chart on slide  10 and                                                                   
reduced  the  dividend  to  $257 per  Alaskan  -  much  lower                                                                   
dividend cost  meant that  much more of  the payout  would go                                                                   
to  GF, leaving  the  state  with  a much  smaller  remaining                                                                   
deficit. The key  point was it did not really  matter whether                                                                   
the  dividends went  through  the GF  or  were paid  directly                                                                   
from the earnings  reserve account (ERA). As soon  as the ERA                                                                   
was  used to  make transfers  to the  GF, dividends  competed                                                                   
with the  transfer and other  expenditures. He  dispelled the                                                                   
belief  that the competition  had  to do with  the ERA  being                                                                   
reclassified   as  unrestricted   general   fund  (UGF).   He                                                                   
explained that it  was simply the fact that a  portion of the                                                                   
ERA would be used  to fill a portion of the  state's deficit.                                                                   
The greater  the portion  filled with the  ERA, the  less the                                                                   
state would have to fill with other sources.                                                                                    
Representative    Wilson    thought   everything    was    in                                                                   
competition. She  named the higher education fund,  the Power                                                                   
Cost  Equalization Fund,  and  other funds  as examples.  She                                                                   
expounded that  different things were important  to different                                                                   
people. She  surmised that at  the end of the  day everything                                                                   
was  competing  to fill  the  budget  gap. The  question  was                                                                   
whether residents  - by way of  use of PFDs - filled  the gap                                                                   
solely  or   whether  the   legislature  looked   outside  to                                                                   
tourists  or  outside  workers  coming  in.  She  the  bigger                                                                   
political question was who would pay to fill the gap.                                                                           
Mr.  Teal  agreed   that  every  expenditure   competed  with                                                                   
another.  For  example,  K-12 competed  with  Medicaid  under                                                                   
that line of  reasoning. It was important to  understand that                                                                   
dividends  were paid  directly from  the ERA;  they were  not                                                                   
counted as revenue  or expenditures in the  budget. Dividends                                                                   
were  below  the line  and  did  not currently  compete  with                                                                   
anything  else -  they  came from  a different  fund  source,                                                                   
which was  used for nothing else.  He explained that  as soon                                                                   
as the ERA  was used to put  money into the GF, if  there was                                                                   
a payout  of $2.5 billion,  it could all  be placed in  GF or                                                                   
more  and more  could be  put  to dividends.  The more  money                                                                   
allocated to  dividends, the less  there would be to  pay for                                                                   
other  things including  education  and  Medicaid. It  really                                                                   
would change  the world  "as we  know it"  if money  from the                                                                   
ERA was transferred to GF.                                                                                                      
2:05:55 PM                                                                                                                    
Representative  Wilson understood where  Mr. Teal  was coming                                                                   
from, but  she did not believe  Alaskans felt quite  the same                                                                   
way because they  felt that their dividends had  been cut the                                                                   
previous year to  fund government - although that  had been a                                                                   
misconception.  She  asked  where the  discussion  was  about                                                                   
what dividends  did for the  economy - how dividends  boosted                                                                   
the  economy when  many other  things were  getting cut.  She                                                                   
asked  when the  topic  became part  of  the discussion.  She                                                                   
considered  how   cuts  to  dividends  may  result   in  some                                                                   
individuals  ending  up  on public  assistance  or  Medicaid.                                                                   
Additionally, she  wondered how some private  businesses that                                                                   
had   become  dependent   on  certain   money  coming   their                                                                   
direction, would be impacted.                                                                                                   
Mr.  Teal  believed   the  discussions  had  to   occur  when                                                                   
considering  how much  would go  to dividends.  He posed  the                                                                   
question of  the amount  of money  the legislature  wanted to                                                                   
go to  the people versus the  amount of services  they wanted                                                                   
to go  to the  people. He did  not think  there would  be too                                                                   
many people  who would  answer the question  in the  same way                                                                   
and  legislators certainly  had  varying  opinions about  the                                                                   
topic.  He  stated  it  was  a  discussion  that  legislators                                                                   
needed  to  have to  determine  the  level of  dividends  and                                                                   
therefore the level  of transfers to the GF  and services. He                                                                   
could  not answer  the question  for the  legislature and  he                                                                   
believed  legislators  would   all  have  different  answers.                                                                   
There  were a  range  of dividends,  which  would impact  the                                                                   
range  of   transfers  and  the   level  of  government   the                                                                   
legislature  wanted or  could  support.  He underscored  that                                                                   
the  committee  needed  to  answer  that  question  prior  to                                                                   
passing a bill.                                                                                                                 
Vice-Chair   Gara  spoke  about   liberal  and   conservative                                                                   
friends who  supported an income  tax. He understood  that an                                                                   
income  tax  alone  could  bring  in  $500  million  to  $700                                                                   
million, but  it would not  solve the deficit.  Other friends                                                                   
supported  a sales  tax, which  would bring  in between  $400                                                                   
million to $700  million depending on the tax.  Other friends                                                                   
supported  cutting   the  dividend,  which  could   bring  in                                                                   
between $1  billion to  $1.8 billion.  He stressed  that none                                                                   
of the  items would  solve the  deficit on  their own  due to                                                                   
its size.                                                                                                                       
Mr.  Teal  answered that  with  $2.7  billion to  $3  billion                                                                   
budget  deficit  none of  the  items  alone would  solve  the                                                                   
problem.  Some  combination  of  the  items  could  fill  the                                                                   
deficit;  it was up  to the  legislature to  debate how  much                                                                   
needed  to   be  done.  For  example,   it  was  up   to  the                                                                   
legislature to decide  if the solution could be  a basic plan                                                                   
that  took money  from  the ERA  and if  it  would allow  the                                                                   
state to  get by without  an income tax  or massive  cuts. He                                                                   
stated the  model would answer  the questions and  would also                                                                   
show what  things would look  like if  an income tax  or cuts                                                                   
were   added  in.   He  noted   that  the   purpose  of   the                                                                   
presentation  to put a  framework for  analyzing some  of the                                                                   
big decisions  on trying to get  a bill that  addressed POMV,                                                                   
not the  entire fiscal  problem. He added  that it  would not                                                                   
be enough to  decide that the POMV was the  largest component                                                                   
available to fill  the gap. The legislature  would still need                                                                   
to answer other questions to turn it into a useful tool.                                                                        
2:11:05 PM                                                                                                                    
Co-Chair  Seaton believed  there were a  couple of  different                                                                   
questions.  He  spoke  to  dividends   competing  with  other                                                                   
allocations.  He  looked at  slide  10  and referred  to  the                                                                   
split between what  payout would go to the  dividend and what                                                                   
would  go GF. He  stated that  under a  governor's bill,  the                                                                   
distribution  all went  to  GF and  then  a distribution  was                                                                   
made  from  there  - meaning  items  would  directly  compete                                                                   
within  allocations  (e.g.  PFD,  education,  public  safety,                                                                   
transportation, and  other). He addressed the  current payout                                                                   
method  where  funds went  from  the  ERA to  pay  dividends,                                                                   
which  was separate  from the  amount deposited  into GF  for                                                                   
allocations. He asked Mr. Teal to address the issue.                                                                            
Mr.  Teal  believed it  was  part  of  something he  had  not                                                                   
articulated  well during  a  prior overview  presentation  to                                                                   
the  committee.  He  addressed   Co-Chair  Seaton's  question                                                                   
about  what  would  happen  if the  dividends  were  not  run                                                                   
through the  GF. He provided a  scenario of a payout  of $2.5                                                                   
billion with  $700 million spent  on PFDs, which  left $1.838                                                                   
billion. He explained  that it would not make  any difference                                                                   
whether  the  full   $2.5  billion  went  into   GF  and  the                                                                   
designated  amount   was  spent   on  dividends.   In  either                                                                   
scenario the  remainder for  use on  other programs  would be                                                                   
$1.838  billion.   He  elaborated  that  if  the   money  for                                                                   
dividends  did not  flow through  the  GF, the  GF would  not                                                                   
show the money  as revenue or expenditures.  The decision was                                                                   
about  whether the  legislature  wanted dividends  to be  "on                                                                   
budget"  (a change  from  the current  method)  or below  the                                                                   
line  ("off-budget").  He  stated  there  was  no  difference                                                                   
between the options.                                                                                                            
Co-Chair  Seaton agreed  that  the number  and final  outcome                                                                   
did  not  make   a  difference;  however,   politically  when                                                                   
developing a UGF  budget a different calculation  had to take                                                                   
place around  the committee  table (regarding the  allocation                                                                   
of  funds  to   different  programs  such  as   the  PFD  and                                                                   
education). He explained  that if all of the  money went into                                                                   
GF, the  legislature would  reallocate the  funds and  may or                                                                   
may  not  follow  the  established   distribution  model.  He                                                                   
furthered  that statute  could not force  the legislature  to                                                                   
act  in  a  certain way.  He  continued  that  the  political                                                                   
question would  be up  for debate  annually when the  process                                                                   
involved  determining  how  to   allocate  UGF  spending.  He                                                                   
contrasted the  method with keeping  the dividend  outside of                                                                   
the GF  as a  separate mechanism  - politically  it was  much                                                                   
more stable.  He communicated  that it had  been the  case in                                                                   
the past - the  legislature had the ability to  take from the                                                                   
ERA, but it  had not done that; however, dividends  were paid                                                                   
from the ERA  annually. He believed one of  the questions the                                                                   
committee needed  to answer was  how stable or  how insulated                                                                   
it wanted the Permanent Fund payout formula to be.                                                                              
2:16:35 PM                                                                                                                    
Mr.  Teal   agreed  it  was   a  political  discussion,   but                                                                   
mathematically  it  was the  same  result. He  surmised  that                                                                   
maybe   it  should   be  the   same   both  politically   and                                                                   
mathematically  because  the result  was  the same.  However,                                                                   
math  is not  something  that  people necessarily  grasp.  He                                                                   
reasoned that  some people  may want  the dividend  paid from                                                                   
the  ERA because  it had  always been  done that  way and  it                                                                   
would  assuage the  concern that  the money  may be spent  on                                                                   
other things if  it went through the General  Fund. The truth                                                                   
was, it  was about  what the  legislature set  up in  statute                                                                   
and assuming  the legislature  followed the guidelines  - for                                                                   
example if  the legislature  set the  dividend total  at $687                                                                   
million  or  $1,000  per  person  - it  would  not  make  any                                                                   
difference where  the money came from. Mathematically  it did                                                                   
not  matter,  but  he acknowledged  that  the  issue  may  be                                                                   
something the committee wanted to discuss.                                                                                      
Mr. Teal  continued  to address  slide 10.  He switched  to a                                                                   
tab in  Excel that was not  included in the  presentation. He                                                                   
relayed  that he  had included  revenue  limit first  because                                                                   
the  topic  had  received  significant  debate  the  previous                                                                   
year.  He noted  that  the  governor considered  the  revenue                                                                   
limit  as  a  very important  part  of  the  legislation.  He                                                                   
pointed  to  a  chart  titled  "UGF  Revenue  without  Payout                                                                   
Limit"  and  explained  it should  reflect  oil  prices,  but                                                                   
there was a  technical glitch in the chart.  He detailed that                                                                   
the  information  showed  a  single  year  with  varying  oil                                                                   
prices.  The  information  reflected  non-volatile  (non-oil)                                                                   
revenue;  it  was fairly  flat  and  did increase  as  prices                                                                   
rose,  but it  was  not hugely  variable.  The  green in  the                                                                   
chart  represented  the POMV  payout  -  a fixed  number.  He                                                                   
stated that  the oil money depended  on the price of  oil: at                                                                   
low prices there was lower revenue and a deficit.                                                                               
2:20:35 PM                                                                                                                    
AT EASE                                                                                                                         
2:21:46 PM                                                                                                                    
Mr.  Teal continued  to address  slide 10  (charts that  were                                                                   
not included  in the presentation).  He continued  to address                                                                   
the chart  related to  UGF Revenue  without Payout  Limit. He                                                                   
stated that  as oil  prices rise, oil  revenue rose,  and the                                                                   
deficit shrank.  At oil prices  of around $80 per  barrel the                                                                   
deficits  went   away  and  a  surplus  was   generated.  The                                                                   
governor  believed  that  would   not  take  place,  and  had                                                                   
included  a revenue  limit in  the bill to  ensure the  state                                                                   
did not  end up with a surplus  while still getting  the POMV                                                                   
payout.  He  moved  to  a graph  on  the  right  titled  "UGF                                                                   
Revenue with Payout  Limit." The limit specified  that as oil                                                                   
prices rise,  the state would  lose $1.00 of POMV  payout for                                                                   
every $1.00  of oil  revenue. He pointed  to a graph  showing                                                                   
when oil  revenue reached $1.2  billion at about  $75/barrel,                                                                   
the POMV  payout would start  phasing out, which  resulted in                                                                   
a flat  revenue line (shown in  black on the  charts) between                                                                   
approximately  $75 and  $105 per  barrel. At  some point  the                                                                   
POMV payout  went to zero  and surplus revenue  resulted, but                                                                   
the surplus  revenue was  lower because  the POMV payout  was                                                                   
not being used.                                                                                                                 
Mr.  Teal  stated  that unfortunately,  even  at  the  limit,                                                                   
there could  be a  deficit. He noted  that the deficit  would                                                                   
go away in later  years at higher oil prices.  He stated that                                                                   
"it seems odd that  you would have that." Some  people may be                                                                   
happy  that  the  revenue  limit   would  continue  to  exert                                                                   
pressure  on the budget;  the  state would  need to hold  the                                                                   
budget  down in  order  to  eliminate deficits.  He  remarked                                                                   
that  the previous  year some  people  had characterized  the                                                                   
revenue limit  as a  clever way  of encouraging income  taxes                                                                   
or  another broad-based  tax,  because only  oil revenue  was                                                                   
subject  to  the revenue  limit;  if  a broad-based  tax  was                                                                   
implemented, there  would be more  money to spend.  He stated                                                                   
it was something  the legislature could debate.  He discussed                                                                   
that the  revenue limit did not  have to be flat  (dollar for                                                                   
dollar). He  referred to  a limit that  was less  severe that                                                                   
would not  keep revenue flat.  For example, a limit  of $0.50                                                                   
on  the  $1.00 would  not  get  flat  and would  extend  POMV                                                                   
payouts  way out  at higher  oil prices.  The scenario  would                                                                   
continue  a  smoother  curve  and  would  eliminate  deficits                                                                   
earlier.  Another  option was  to  raise the  revenue  limit,                                                                   
which would  eliminate deficits earlier. The  governor's bill                                                                   
included a  revenue limit. He  recognized that it may  not be                                                                   
the  limit desired  by  the  legislature. For  instance,  the                                                                   
limit did  not have  to be  fixed over  time. He stated  that                                                                   
the  governor had  a $1.2  billion  trigger that  he did  not                                                                   
want  to increase  with  inflation.  He detailed  that  Vice-                                                                   
Chair  Gara  had argued  at  the  time  that  it was  not  an                                                                   
acceptable  limit   and  there  had  to  be   some  room  for                                                                   
expansion.  He acknowledged  the  validity  of the  argument,                                                                   
but he reminded  the committee that the flat  portion was not                                                                   
a time  series. He continued that  over time the  limit would                                                                   
not be flat because the POMV payout increased over time.                                                                        
2:27:38 PM                                                                                                                    
Mr. Teal  stated the point was  that the choice of  the limit                                                                   
was based  on the selected payout  rate. A lower  payout rate                                                                   
would  result in  lower POMV  payments  and larger  deficits;                                                                   
therefore,  the legislature  may determine  a higher  trigger                                                                   
value  (above $1.2  billion)  would  be necessary.  He  added                                                                   
that it  also depended on  how much pressure  the legislature                                                                   
wanted to  maintain to reduce  the budget. He  continued that                                                                   
if the  trigger was  set too  high, the  revenue limit  would                                                                   
become ineffective,  but if it  was set too low,  there would                                                                   
be  deficits  in  the  future.  All of  the  items  could  be                                                                   
debated by the legislature.                                                                                                     
Mr. Teal discussed  a spending limit as opposed  to a revenue                                                                   
limit.  He  stated  that  a  spending  limit  could  be  very                                                                   
similar to  a revenue  limit. He  continued that it  depended                                                                   
on  whether the  legislature  expected  a spending  limit  to                                                                   
impact  the  budget   annually.  He  detailed   that  it  was                                                                   
possible to  set a  spending limit with  that impact,  but it                                                                   
was  essentially what  the revenue  limit  did. The  spending                                                                   
limit could kick  after the revenue limit had  exerted all of                                                                   
its possible  impact. At  very high  oil prices, the  revenue                                                                   
limit, still  provided surplus  revenue, which was  where the                                                                   
spending limit  could kick in.  The spending limit  should be                                                                   
designed to address  windfall revenue - very  high oil prices                                                                   
that were  unexpected. The complications  in setting  a limit                                                                   
were  severe -  it would  be necessary  to  decide what  fund                                                                   
group  the  legislature  wanted covered.  Some  people  would                                                                   
support  only  covering  UGF   because  that  was  where  the                                                                   
deficit  resided.   While  others   would  argue   that  only                                                                   
limiting  UGF still  allowed switching  UGF  into other  fund                                                                   
categories. He agreed  that it had happened in  the past. The                                                                   
legislature  could designate  that it wanted  to include  all                                                                   
funds in  the revenue limit. He  noted that if  the Permanent                                                                   
Fund  did very  well  and management  fees  increased by  $50                                                                   
million -  it would mean the  legislature would have  to find                                                                   
$50 million  to cut from  somewhere else. Therefore,  perhaps                                                                   
the legislature may  decide to limit only UGF  and designated                                                                   
general  funds  (DGF),  and  to  exclude  other  [funds].  He                                                                   
explained that the  same issue would arise.  For example, the                                                                   
University  may   raise  tuition   by  $100  million   -  the                                                                   
legislature  would   have  to  find  $100  million   in  cuts                                                                   
somewhere  else   because  it  was  limiting   too  much.  He                                                                   
concluded  that  the  situation  may  seem  to  promote  only                                                                   
limiting UGF,  but it would  mean legislators could  be faced                                                                   
with considering  whether they could prevent  the legislature                                                                   
from  what  some people  referred  to  as "shell  games."  He                                                                   
countered that  it was not really  a shell game.  He detailed                                                                   
that the  legislature could  not move money  from UGF  to DGF                                                                   
without  passing   a  law  to   do  it.  He   explained  that                                                                   
designated  funds, were by  definition, something  designated                                                                   
by the  legislature for a specific  use. For example,  it was                                                                   
not possible to  just reclassify $500 million  worth of money                                                                   
and call it DGF instead of UGF.                                                                                                 
Mr. Teal  addressed cumulative  limits versus annual  limits,                                                                   
which  was  also  complex.  The  legislature  would  have  to                                                                   
determine  what to do  with tax  credits. He elaborated  that                                                                   
it  was  fine as  long  as  the legislature  elected  to  pay                                                                   
minimum tax  credits, but if  the legislature ever  wanted to                                                                   
pay more  than the minimum in  tax credits and the  limit was                                                                   
tight, it would  be bumping the limit. Any  large expenditure                                                                   
such as  a gasline or large  capital projects could  do that.                                                                   
He   elaborated   that   there  were   also   legal   issues.                                                                   
Specifically, the  legislature could  not limit the  power of                                                                   
the   legislature  to   appropriate  money   other  than   by                                                                   
constitution.  Therefore, arguably a  spending limit  must be                                                                   
constitutional  in order  to be fully  effective. His  advice                                                                   
on spending limits  was to talk about them,  but he suggested                                                                   
putting them  in a  different bill due  to the complexity  of                                                                   
the  topic  that he  believed  the  legislature may  want  to                                                                   
avoid in deciding on POMV provisions.                                                                                           
2:33:32 PM                                                                                                                    
Mr.  Teal  turned to  a  graph  on slide  15  titled:  Budget                                                                   
History/Revenue  Projections with  POMV,  Revenue Limit,  and                                                                   
Existing  Spending Limit  "Forecast Oil  Price Scenario."  He                                                                   
explained  that  the  black  line  represented  the  existing                                                                   
constitutional  spending limit.  The  dark green  represented                                                                   
the total UGF  revenue and future revenue forecast.  The blue                                                                   
bars  represented  expenditures.  He  pointed  out  that  the                                                                   
state  had never bumped  up against  the limit;  it had  come                                                                   
close.  Based on  his recollection,  he had  never known  the                                                                   
state was  that close  to the limit.  He elaborated  that "we                                                                   
simply had  stopped calculating  the limit because  we'd been                                                                   
so  far below  it -  that didn't  really think  that we  were                                                                   
perhaps  approaching  that  limit   as  close  as  we  were."                                                                   
Regardless,  the expenditures  were currently  far below  the                                                                   
limit  and if  there  was a  flat budget  the  constitutional                                                                   
limit  "just runs  away." The  graph did not  show any  limit                                                                   
the state  was hitting  because  the limit  was so far  above                                                                   
expenditures. He  stated it was  even with a POMV  payout. He                                                                   
pointed  to a dashed  line on  the graph  and explained  that                                                                   
oil revenue  never reached  the $1.2  billion revenue  limit.                                                                   
Under DOR oil  forecast projections, the state  would not hit                                                                   
the revenue  limit, the  POMV would not  be limited,  and the                                                                   
revenue  plus POMV  got  nowhere near  the  limit. The  graph                                                                   
also showed  that a  flat budget near  $5 billion  would mean                                                                   
deficits would be declining because the POMV was declining.                                                                     
2:35:40 PM                                                                                                                    
Mr. Teal  turned to slide  16 titled: Budget  History/Revenue                                                                   
Projections with  POMV, Revenue Limit, and  Existing Spending                                                                   
Limit "Higher  Oil Price Scenario."  The graph  showed higher                                                                   
revenue like  the 2007 through  2013 period. The  orange line                                                                   
represented  the   constitutional  spending  limit   with  an                                                                   
adjustment   factor  of  one-half   inflation  and   one-half                                                                   
population.  He  rephrased  that   inflation  and  population                                                                   
adjustments would  be half of their current  total, resulting                                                                   
in a limit  that would have  kicked in during  those periods.                                                                   
The limit  would kick in  again if a  much smaller  spike was                                                                   
repeated  at present.  In  FY 18  there  was regular  revenue                                                                   
(shown in dark  green) plus the POMV (shown  in light green),                                                                   
as they  passed the dashed  black line ($1.2  billion revenue                                                                   
limit)  the POMV  would  go away.  At  very  high oil  prices                                                                   
there would  be no POMV  at all; there  would be a  peak that                                                                   
may hit the spending  limit. The graph was a  sample only and                                                                   
did not represent  a projection. He furthered  that the graph                                                                   
showed  that  a  revenue  limit   would  reduce  the  revenue                                                                   
available  for  spending and  did  not  impact the  peaks  as                                                                   
much. Whereas,  a spending limit  was really designed  to cut                                                                   
off  the windfall  revenue.  He noted  that  it could  become                                                                   
complicated by legal and other matters.                                                                                         
2:38:02 PM                                                                                                                    
Mr.  Teal moved  to  slide 17  titled  "Surplus Buckets."  He                                                                   
recommended  leaving a  spending limit  out, but  if a  limit                                                                   
was  included  he  much preferred  a  limit  specifying  what                                                                   
could be  done with  surplus money,  not simply that  nothing                                                                   
could be  done with  it. He  explained that  if no  uses were                                                                   
specified,  the  surplus  money   would  be  swept  into  the                                                                   
Constitutional Budget Reserve (CBR).                                                                                            
Mr. Teal  moved on to slide  18 and addressed planned  use of                                                                   
excess  revenues.  There  were many  possibilities,  but  the                                                                   
chart  demonstrated a  cascading  scenario  of where  surplus                                                                   
revenue  may   go.  For  example,   repaying  some   CBR,  an                                                                   
increased  capital  budget  for   deferred  maintenance,  and                                                                   
other.  The order  of  the buckets  shown  on  the slide  was                                                                   
something  that may enter  discussions  on a spending  limit.                                                                   
He advanced  to slide  19 and  discussed inflation  proofing.                                                                   
There  was   currently  annual  inflation  proofing   on  the                                                                   
Permanent  Fund that was  based on  the Consumer Price  Index                                                                   
(CPI). Under  a POMV  system there  would be no  mathematical                                                                   
reason to  move money from  the ERA to  the principal  of the                                                                   
fund.  However, politically  the  legislature  may prefer  to                                                                   
occasionally  have  money  going   into  the  fund  principal                                                                   
because it was  locked up (in the ERA it could  be accessed).                                                                   
He  continued  that  mathematically  speaking,  the  ERA  was                                                                   
invested  with the  fund corpus,  it earned  the same  money,                                                                   
and it  was included  in the payout.  He underscored  that to                                                                   
the  workings of  POMV it  made no  difference whether  money                                                                   
was  in the  ERA or  in the  corpus.  There was  a "4  times"                                                                   
method in HB  61 that transferred money when  the balance was                                                                   
sufficiently  large. Alternatively, it  would be  possible to                                                                   
make  appropriations  from  the   ERA  to  principal  as  the                                                                   
legislature chose.                                                                                                              
2:40:27 PM                                                                                                                    
Mr. Teal directed  attention to slide 20 and  relayed that HB                                                                   
61 also changed  the flow of royalties. Currently  25 percent                                                                   
of royalties was  dedicated by constitution to  the principal                                                                   
of the  Permanent  Fund. By law  there was  an additional  25                                                                   
percent  on  new  wells (wells  in  production  since  1979),                                                                   
which  was roughly  $50  million, rising  to  $60 million  as                                                                   
prices increased.  He relayed that the revenue  was currently                                                                   
going to the Permanent  Fund - it could be redirected  to the                                                                   
General  Fund. However,  if  the  funds were  redirected,  it                                                                   
would  reduce  the  value  of  the  Permanent  Fund  and  the                                                                   
payout. He  explained that the  choice was fairly  simple. He                                                                   
continued  that  HB 61  also  included some  royalties  going                                                                   
into the dividend,  in response to some people's  belief that                                                                   
royalties  reflected   an  ownership  share   and  therefore,                                                                   
should be  counted as  part of the  dividend. He  stated that                                                                   
the  provision would  not make  much  difference -  royalties                                                                   
made dividends  more volatile,  but if the legislature  chose                                                                   
a POMV  with a constant  share going to dividends,  dividends                                                                   
would lose  much of their  volatility. In other  words, there                                                                   
were  other  ways   to  adjust  the  dividend;   it  was  not                                                                   
necessary  to put  royalties there  at all.  He reminded  the                                                                   
committee  that once  the legislature  used the  ERA for  the                                                                   
General  Fund,   higher  dividends   meant  less   money  for                                                                   
government operations.                                                                                                          
Mr.  Teal made  concluding remarks.  He relayed  that if  the                                                                   
legislature  decided on  a basic  plan, it  may be unable  to                                                                   
fill  the deficit  in the  near  future and  probably in  the                                                                   
longer  term (the  next  six to  seven  years  at least).  He                                                                   
suggested  other, more comprehensive  things the  legislature                                                                   
may want  to be consider  like an income  tax. He  noted that                                                                   
it depended on  how comprehensive the legislature  wanted the                                                                   
plan to be.  He stated that if  the aim was for  the simplest                                                                   
POMV possible,  income tax was  a complicated topic  that the                                                                   
legislature   may   want  to   put   in  a   separate   bill.                                                                   
Alternatively,  the committee  may  decide  to fully  address                                                                   
fiscal planning and make income tax a part of the bill.                                                                         
Co-Chair  Seaton believed  Mr. Teal had  covered the  subject                                                                   
well related  to basic  decisions that needed  to be  made by                                                                   
the legislature.                                                                                                                
2:44:29 PM                                                                                                                    
AT EASE                                                                                                                         
2:44:42 PM                                                                                                                    
Co-Chair  Seaton addressed  the  schedule  for the  following                                                                   
2:45:13 PM                                                                                                                    
The meeting was adjourned at 2:45 p.m.                                                                                          

Document Name Date/Time Subjects
2 6 17 HFC Framework for Fiscal Plans.pdf HFIN 2/6/2017 1:30:00 PM
LFD Framework Presentation HFIN