Legislature(2015 - 2016)BILL RAY CENTER 208
06/06/2016 03:00 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB245 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 245 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
June 6, 2016
3:17 p.m.
3:17:00 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 3:17 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Jane Pierson, Staff, Representative Steve Thompson; David
Teal, Director, Legislative Finance Division;
Representative Andy Josephson; Representative Lora
Reinbold; Representative Gabrielle LeDoux.
SUMMARY
HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 245 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson reviewed the meeting agenda.
HOUSE BILL NO. 245
"An Act relating to the Alaska permanent fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska permanent fund;
relating to the earnings reserve account; relating to
the Alaska permanent fund dividend; making conforming
amendments; and providing for an effective date."
3:17:48 PM
Co-Chair Neuman MOVED to ADOPT the proposed committee
substitute for HB 245, Work Draft 29-GH2859\L
(Wallace/Martin, 6/6/16). There being NO OBJECTION, it was
so ordered.
Co-Chair Thompson indicated that David Teal, director of
the Legislative Finance Division (LFD), would be providing
an analysis.
JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, read
from a document titled "Corrected HB 245 Explanation of
Changes version I to version L" (copy on file):
HB 245 Explanation of Changes version I to version L
Page 1, Lines 6-7 TITLE CHANGE regarding unrestricted
state revenues available for appropriation.
Deleted Section 4 from version I. This section
conforms to not getting rid of the Amerada Hess case
settlement money being directed to the Alaska capital
income fund.
Page 4, Lines 25-28. States that the Amerada Hess
money will not be accounted for in the amount of money
available for distribution.
Page 4, Line 30 and line 31 the word "calculated" was
removed, since this is an amount in the fund, not a
calculation.
Page 5, Line 7 removes "adjusted for inflation" from
the revenue limit threshold. Automatic inflationary
increases will certainly reduce the impact of the
limit and might make the limit as irrelevant as the
existing constitutional spending limit.
Page 5, Line 14 removes language regarding inflation
proofing.
Page 6, Line 5 - 15 A new section is added AS
37.13.148 - Appropriation of Revenue. This new section
creates a spending rule that states, if the amount
available for appropriation in the preceding fiscal
year is greater than the amount appropriated, the
legislature may appropriate the excess as follows:
(1) 50 percent to the Permanent Fund
(2) 50 percent to the CBR
Page 9, Line 13 - AS 37.14.145(d) is eliminated from
the repealers. This has to do with the Amerada Hess
settlement money.
Page 9 - Section 24 was removed in version L. This
allows for transfer of the management of the CBR from
DOR to the Permanent Fund to happen this year and not
in 2017.
3:21:53 PM
Representative Gara asked for detail on two changes related
to inflation proofing on page 5.
Ms. Pierson replied that page 5, line 7 removed the
language "adjusted for inflation" related to the revenue
limit. The change would hold the limit to $1.2 billion
without the ability to rise with inflation. Inflationary
increases may make the revenue limit irrelevant.
Co-Chair Thompson asked which bill version the page
references (provided by Ms. Pierson) related to. Ms.
Pierson answered the changes appeared in the "L" version of
the bill.
Representative Gara spoke to the revenue limit of $1.2
billion. He surmised the combination of oil revenue and
Percent of Market Value (POMV) earnings remained at a flat
$4 billion. He asked for the accuracy of his statements. He
asked for verification the $1.2 billion would not be
adjusted for inflation.
Ms. Pierson responded in the affirmative. She deferred the
question to LFD for further detail. She mentioned a handout
in members' packets provided by the division [titled "PFPA
Payout/Revenue Split" (copy on file)].
3:23:41 PM
Representative Gara asked if the other inflation proofing
reference on page 5 also related to the same issue. Ms.
Pierson answered in the affirmative.
Representative Gara pointed to page 6 of the legislation
that included a new provision on 50 percent to the
Permanent Fund and 50 percent to the Constitutional Budget
Reserve (CBR). He asked for detail.
Ms. Pierson answered that if the amount available for
appropriation in the preceding fiscal year was greater than
the amount appropriated, the legislature may appropriate
the excess as follows: 1) 50 percent to the Permanent Fund;
and 2) 50 percent to the CBR. She noted members' packets
included an LFD chart describing the savings rule [titled
"Savings Rule" (copy on file)].
Vice-Chair Saddler noted that there appeared to be a
misalignment of pages in the documents under discussion.
Ms. Pierson responded that any deleted material came out of
the "I" version of the legislation. She believed the other
information should align.
3:25:47 PM
Representative Kawasaki pointed to page 6, lines 5 through
15 and believed the change actually applied to lines 8
through 18. He discussed that under the legislation the
appropriation of revenue would be split, dividing half to
the Permanent Fund and half to the CBR. He referred to the
language "the legislature may appropriate" and wondered if
it meant the legislature could put the money into an
earnings reserve account.
Ms. Pierson replied that the legislature could always
appropriate as it saw fit.
Co-Chair Thompson noted Mr. Teal had joined the meeting.
Representative Gara wondered if the two provisions never
let state appropriations get adjusted for inflation. He
referred to new Section 37.13.148 on page 6. He observed
the section was not binding as it included the language
"the legislature may appropriate"; however, if the
legislature followed the section, appropriations would not
be adjusted for inflation. He surmised if the cost of
inflation for the same number of services made the cost
increase, they would be able to adjust for the increase
with the revenue. He surmised they would not "just keep
cutting."
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, agreed
that the change would flatten the expenditure line (there
was a dollar-for-dollar reduction of the payout from the
Permanent Fund earnings reserve account). He noted there
were [LFD] graphs available to provide further detail. He
clarified the line was flat only in reference to oil
production. He expounded if there was other revenue from
any source other than production tax and royalties, the
line would not remain flat. He added the revenue was all
spendable.
3:28:58 PM
Representative Gara wondered if the state would still be
limited to the prior year's spending level if it brought in
more revenue (from Permanent Fund earnings and oil
combined) than it had spent the preceding year. He surmised
the situation could go on in perpetuity and could result in
falling behind inflation if those were the two revenue
sources.
Mr. Teal suggested reviewing the sectional analysis before
he answered questions.
3:30:51 PM
Ms. Pierson read the sectional analysis (copy on file):
Section 1: Legislative intent that the legislature
reevaluate the use of the earnings of the Permanent
Fund in three years
Section 2: Language requiring the Alaska Permanent
Fund Corporation to adopt regulations similar to the
State's procurement code
Section 3: Adds the Alaska Permanent Fund Corporation
to the list of those state agencies that are exempt
from the State's procurement code
Section 4: Transfers the management and investment of
the Constitutional Budget Reserve from the Department
of Revenue to the Alaska Permanent Fund Corporation
Section 5: Requires the Alaska Permanent Fund
Corporation to prepare an annual report on the balance
and returns of the Constitutional Budget Reserve fund
Section 6: Dedicated deposits of royalties to the
Permanent Fund are reduced from the current 25/50
split on old/new leases to the constitutional minimum
of 25 percent
Section 7: Requires the Alaska Permanent Fund
Corporation to determine the net income of the
earnings reserve account excluding the unrealized
gains or losses
Section 8: (b) Defines the Percent of Market Value
payout as 5.25 percent of the average year-end market
value of the Permanent Fund and Earnings Reserve
Account for the first five of the most recently
completed six fiscal years. The payout may not exceed
the year-end balance of the earnings reserve account
for the fiscal year just ended
Representative Gattis asked about Section 8, which defined
the POMV payout up to 5.25 percent. She wondered if it was
just 5.25 percent instead of up to 5.25 percent.
Mr. Teal responded that it was a more technical issue and
was the same issue that Representative Gara wanted to
address. He explained that as oil prices increased the
payout from the earnings reserve account to the General
Fund would fall. He expounded the payout would begin to
fall at about $75 [per barrel]. By the time oil prices
reached $105, the payout from the reserve account would be
zero. In that scenario, the rate should not be set at 5.25
percent because it would conflict with the revenue limit,
which reduced the payout as oil prices rose.
3:33:50 PM
Representative Gattis confirmed that the language "up to"
was correct.
Vice-Chair Saddler asked where the words "up to" occurred
in the legislation. He read from the sectional analysis:
"Defines the Percent of Market Value payout as 5.25
percent." He noted it did not include the words "up to." He
added that Section 8 on page 4 of the legislation did not
include the language either.
3:35:07 PM
AT EASE
3:36:20 PM
RECONVENED
Ms. Pierson answered that the "may appropriate" section
under discussion could be found in Section 10, subsection
(e) of the bill. She read from the section:
Each year the legislature may appropriate from the
earnings reserve account to the general fund an amount
that does not exceed the amount available for
distribution under AS 37.13.140(b) and (c).
Representative Gara surmised the amount was not really 5.2
percent. He asked for verification it was 5.25 percent of
the last five years, which translated into something like
4.8 percent of the current balance.
Mr. Teal spoke to the long six-year lookback related to the
provision. He stated in theory the balance of the Permanent
Fund would be increasing each year. He stated that looking
back six years gave a payout that was approximately equal
to the balance of about three years back. The effective
payout was 5 percent of a three-year-old balance, which
amounted to less than 5 percent (if taken as a percent of
the current balance).
Representative Gara asked for an estimate of the
percentage. He had previously heard 4.8 percent. Mr. Teal
answered the number was correct.
Ms. Pierson continued to read the sectional analysis,
beginning with Section 8, subsection (c):
Section 8: (c) Reserves 20 percent of the POMV payout
for dividends. The remaining 80 percent of the payout
is subject to a dollar for dollar reduction as oil and
gas revenue rises above $1.2 billion.
1. Oil and gas Unrestricted General Fund revenue
excluding the amount to be paid as 20 percent of
the prior year royalties to the dividend
2. $1,200,000 revenue limit
Section 9: Deals with distribution of the money
awarded in the Amerada Hess case
3:39:15 PM
Ms. Pierson continued to read from the sectional analysis:
Section 10: AS 37.13.145 is the Disposition of Income
of the Permanent Fund statute
a) Unchanged - Establishes the ERA and identifies
the ERA as holding earnings of the Permanent Fund
and ERA
b) Repealed in this bill - dividends based on
statutory net income
c) Repealed in this bill - inflation proofing
d) Repealed in this bill - segregation of Amerada
Hess
e) Added in this section - each year the legislature
may appropriate to the General Fund the amount
available for distribution from the Earnings
Reserve Account under the POMV in Sec. 10 (b) and
the limit calculation in AS 37.13.140(b) & (c)
f) Inflation proofing mechanism (when the balance of
the ERA reaches 4x the maximum amount available
for distribution
Section 11: Appropriations to the dividend fund
Dividends are comprised of 20 percent of the 5.25
percent POMV outlined in Sec. 4(b), and 20 percent of
prior year royalties, excludes those dedicated to the
Permanent Fund or School Fund (25.5 percent are
dedicated)
Appropriation of revenue. If the amount available for
appropriation in the preceding fiscal year is greater
than the amount appropriated, the legislature may
appropriate the excess as follows:
(1) 50 percent to the Permanent Fund
(2) 50 percent to the CBR
Section 12: Conforming language relating to
procurement
Section 13: Mental Health Trust Fund and Amerada Hess
monies may not be included in the computation of
income available for distribution under the POMV
Section 14: Transfer of money to the Dividend Fund
requires an appropriation
Section 15: The amount of each Permanent Fund Dividend
for fiscal years 2017, 2018, and 2019 shall be $1,000
Section 16: Conforms to Sec. 12, which moves money to
the Dividend Fund by appropriation
Section 17: Once the money is in the Dividend Fund,
the Department of Revenue shall annually pay dividends
without further appropriation
Section 18: Repeals language relating to the
subaccount of the Constitutional Budget Reserve, the
former dividend calculation, inflation proofing
calculation
Section 19: Repeals Sec. 15 - $1,000 dividend for
three years
Section 20: Transition Language: The Commissioner of
Revenue and the Alaska Permanent Fund Corporation may
adopt regulations, policies and procedures to
implement this Act
Section 21: Retroactivity clause
Section 22: Effective date for sections 2, 3, 12, 20
and 21, immediate
Section 23: Effective Date, July 1, 2016
3:42:39 PM
Representative Gara remarked that the state would not get
any additional revenue (revenue would be flat) up to $110
per barrel of oil (or so). He noted it started at $1.2
billion in oil revenue; he wondered when it ended.
Mr. Teal stated Representative Gara was speaking about the
payout limit. He relayed his preference to wait to address
the issue in order to avoid confusion.
Representative Wilson referred to Section 11 that would
enable the legislature to appropriate 50 percent of
[excess] revenue to the Permanent Fund and 50 percent to
the CBR. She wondered why the money would not be added to
the Permanent Fund Dividend instead.
Mr. Teal replied that it had been a proposal that had been
made by others. He could not provide detail on why, but it
was part of the modeling package. He suggested waiting to
discuss the issue until he reached the topic in his
upcoming presentation.
Representative Wilson referred to Section 15 that would set
the dividend to $1,000 for FY 17 through FY 19. She asked
if the modeling indicated revenue the bill would bring in
if the $1,000 cap was not included.
Mr. Teal replied in the negative. He stated the amount was
roughly $900 if the $1,000 cap was not included.
Representative Wilson asked if the amount would be
approximately $900 for all three years or if it would
decline over the three-year period. Mr. Teal answered the
amount would increase. He explained the model showed a
fairly steady line at $1,000 dividends. With no cap the
dividend started at about $900 and by FY 19 it would reach
$1,000.
Representative Guttenberg referred to Section 4 [page 3 of
the legislation] where management of the CBR would be
transferred from the Department of Revenue (DOR) to the
Alaska Permanent Fund Corporation (APFC) "in the manner set
out for the management and investment of the assets of the
Alaska permanent fund under AS 37.13.120." He believed the
goal was to manage at a higher rate of return. He asked if
the language covered the transfer of responsibility and
management. He wondered if including the language in the
bill was all it took to make the change.
Mr. Teal replied there were two sections relating to the
topic. The first was Section 4 that specified APFC would
manage the CBR. He explained it was already in statute that
APFC may manage the CBR. The second, more important
component, was the transition language in Section 20 of the
bill. He detailed there were currently some investment
limitations on the CBR account that kicked in when the
funds may be used in the next five years. He explained that
those limitations were being repealed. He expounded that
those provisions currently held down the return on the CBR.
The theory was that by having the CBR managed by APFC, the
investment limitations would be eliminated, which would
impact the returns. The CBR had liquidity requirements
because that state may be, or probably would be, drawing
from the CBR to fill deficits. He noted that no matter who
managed the account, if it was managed on its own, it would
have to be very liquid; however, by merging the CBR with
APFC, which required significant liquidity, liquid and
illiquid investments would be transferred between the CBR
and the Permanent Fund. He explained that the Permanent
Fund was much larger than the CBR and the Permanent Fund
should be able to manage the liquidity, which would allow a
higher investment return. He cautioned that the change
could perhaps result in a lower investment return on the
Permanent Fund because it may require some adjustment to
the asset allocation. He added that APFC had testified it
did not believe there would be a significant impact.
3:49:21 PM
Co-Chair Thompson relayed that Angela Rodell, APFC
executive director, was present and had testified that she
did not have any problem with liquidity necessities.
Representative Guttenberg remarked that Section 4 had been
eliminated from prior bill version I. He wondered about the
result of an immediate effective date and the removal of
the July 2017 effective date.
Mr. Teal relayed the effective date had been changed to one
year out because the DOR commissioner had testified he
wanted time to review and consider the issue. He explained
that the commissioner had subsequently testified to the
Senate Finance Committee that transferring the management
to APFC was no longer a substantial concern and that it
made financial sense. Given the concern had abated, the
decision had been made to make the transfer immediate at
the beginning of 2017 instead of waiting one year. He
stated it would possibly cause some transition problems,
but he did not believe anyone expected it to be a one-day
transfer. He believed there were details that needed to be
worked out, which would be up to the commissioner and APFC.
Representative Munoz stated that the FY 17 budget was
funded with a $3.2 billion draw from the CBR. She asked
what the actual draw would be if the bill passed. She
wondered if extra CBR funds would remain in the CBR or be
deposited into the General Fund.
Mr. Teal answered that the current draw without the
legislation was approximately $3.2 billion. With the bill,
there was a transfer of roughly $2.4 billion from the
Permanent Fund earnings reserve account to the General Fund
($700 million of the amount would pay the PFD from the
General Fund). The net transfer should be about $1.6
billion. He explained the bill would cut the CBR draw
roughly in half to $1.6 billion. He detailed precisely how
much would come from the CBR versus the earnings reserve
account was not known; it depended on what happened with
appropriation bills including supplemental bills in the
following year. The CBR draw could be cut in half, but that
did not mean it would be.
Representative Munoz asked if the amount not necessary to
fund the budget remain in the CBR or go into the General
Fund.
Mr. Teal responded that the CBR draw approved in the
operating budget was the amount necessary to balance
expenditures and appropriations. He furthered if there was
money coming in as revenue from the earnings reserve
account, the amount necessary to balance would drop so only
$1.6 billion would be drawn. The remaining $1.6 billion
would stay in the CBR.
3:53:18 PM
Representative Munoz asked for verification the remaining
money in the CBR would be managed by APFC [under the
legislation]. Mr. Teal replied in the affirmative.
Representative Gara spoke to the idea that the revenue
could not exceed the amount appropriated in the prior
fiscal year. He mentioned inflation issues. He spoke to the
FY 17 budget that was "cobbled together" with some FY 16
and some FY 17 money. He stated expenditures for the
upcoming year were roughly $3.8 billion or approximately
$500 million more than was appropriated out of the FY 17
funds. He noted about $500 million had been spent out of FY
16 [for FY 17]. He asked if the cap would reflect what was
identified as FY 17 spending; therefore, it would be $500
million short of FY 17 expenditures.
Mr. Teal answered that Representative Gara was looking at
the savings rule [on slide 5]. He explained it was the last
page of the presentation. He preferred to address the
slides in order for clarity.
3:55:53 PM
Mr. Teal turned to slide 1: "LFD Fiscal Model," which
reflected the status quo. He relayed the scenario was not
workable. He pointed to an upper left chart titled "UGF
Revenue/Budget," which showed expenditures of roughly $5
billion in the out-years. The lower left chart titled
"Budget Reserves" indicated there would be no CBR, earnings
reserve account, or any money remaining to support the
expenditure level. He pointed to the upper left chart and
detailed that the blue bar represented oil revenue, the
orange bar represented a draw from the CBR (which stopped
in FY 18 when the CBR was out of money), and the red
represented drawing from the earnings reserve account
(beginning in FY 19). The earnings reserve account would be
emptied by FY 22 and the state would be out of money. The
chart assumed the state was paying dividends of $2,000
annually. He explained that the scenario was highly
improbable; the state did not have money to pay dividends
when the budget gap was so pronounced and there were no
reserves to fill it.
Representative Wilson referred to the black line on the
upper left chart on slide 1. She wondered why the chart did
not show decreasing the budget. She asked if it was because
the budget had continued to grow in the past few years.
Mr. Teal responded that the black line going from FY 16 to
FY 17 depicted some massive budget reductions; there had
been $1 billion-plus in budget reductions in the past
couple of years. Some argued there was no way to have a no-
growth budget - inflation alone would cause the budget to
increase. He stated "do we say it can't go both up and down
- we're going to just hold it constant." He furthered that
exactly where the line went was up to the legislature; the
model merely held it constant.
Representative Wilson referred to the decrease shown on the
chart and surmised it was primarily related to the capital
budget. She believed very little was related to everyday
operations.
Mr. Teal answered that the FY 16 to FY 17 change in day-to-
day agency operations dropped $216 million. He underscored
there had been a real reduction in agency operations. The
capital budget was down about $33 million and could
probably not be reduced much more. The reduction shown was
roughly $250 million and was not related to retirement or
tax credits. He tried to filter those two components out of
presentations because LFD did not know what the legislature
would be doing with tax credits and the retirement savings
had already been accounted for in the FY 17 budget.
4:00:18 PM
Representative Wilson remarked that the spring forecast was
one of the lowest forecasts in some time. She added that
[the price of] oil was now known to be substantially
different. She asked if Mr. Teal would demonstrate what the
slide would look like when accounting for the current oil
prices.
Mr. Teal stated that he did but it would require an Excel
version of his chart, which he did not have on hand. He
offered to show the model itself, but noted it did not have
much to do with the bill. He explained the current bill
reacted to prices just as the status quo would react to a
different set of oil prices.
Representative Wilson disagreed. She reasoned the bill was
before the committee because of the current oil prices. She
stated that having a real look at the current oil prices
could give a completely different scenario related to
whether the bill was necessary in the current or following
year (with a rebound in oil prices).
Vice-Chair Saddler asked if the proper title for the slide
was "status quo." Mr. Teal agreed [note: slide 1 was
actually titled "LFD Fiscal Model"].
4:02:19 PM
Vice-Chair Saddler pointed to a chart in the upper right of
the slide titled "Dividend Check." He asked if the chart
indicated the dividend would remain at about $2,000 under
the status quo.
Mr. Teal replied in the affirmative.
Vice-Chair Saddler referred to predictions that the
dividend would go away in two or three years if the status
quo continued. He asked Mr. Teal to help reconcile the
predictions with the charts on slide 1.
Mr. Teal reiterated his testimony that the status quo was
not a valid scenario due to the white space in the upper
left graph or the zero balance in the lower left graph. He
explained the graph [on the upper right] showed continued
payment of dividends because they were simply dividend
calculations. The charts on the left showed there was no
money to pay the dividends. A calculation versus a payment
- two different things. He did not believe the status quo
scenario was worth spending much time looking at; it simply
did not work. To address Representative Wilson's concerns
he believed it was necessary to turn to the next slide,
which indicated what would occur under the model.
Co-Chair Neuman remarked that LFD generally looked at the
budget based on the status quo of the present time period
because LFD could not predict what would happen in the
future (if the price of oil was going to go up or down). He
asked if his statement was correct.
Mr. Teal replied in the affirmative.
Representative Gara believed it was clear the presentation
used the spring revenue price forecast and not the status
quo price. He referred to the chart on the bottom left of
slide 1 titled "Budget Reserves." He referred to the orange
portion of the bars pertaining to the CBR balance. He asked
for verification the amount represented the remaining
amount at the end of the end of the next fiscal year to
spend in FY 18. He surmised it was not until FY 18 that the
earnings reserve would be impacted.
4:04:32 PM
Mr. Teal agreed. He detailed the balance of the CBR would
be somewhere between $3 billion and $4 billion, which
assumed a $600 million settlement coming in. Without that
[settlement money] the amount would be closer to $3 billion
and the draw would perhaps not be sufficient for FY 18. The
graph showed that the CBR balance came close to zero at the
end of FY 18.
Representative Gara mentioned the $600 million settlement
that would go to the CBR. He surmised that even though the
chart showed the CBR funds would essentially disappear in
FY 18, if the settlement money came in there would be
enough CBR money to fund the FY 18 budget without impacting
the earnings reserve account.
Mr. Teal replied in the affirmative.
Vice-Chair Saddler requested to hear the name of the next
slide when it was addressed.
Mr. Teal relayed that material on slide 2 titled "LFD
Fiscal Model" assumed the passage of the bill. He pointed
to the upper left graph titled "UGF Revenue/Budget" and
explained the orange segments of the bars indicated there
was still a deficit [orange represented CBR draw]. He
pointed to reserve balances and deficit in a table on the
lower left. He explained that even with the legislation the
FY 17 deficit was projected to be $1.5 billion to $1.6
billion. He stated that in response to a question by
Representative Wilson about whether the bill would fix the
problem and what would happen if oil prices increased. He
explained that on its own, the bill did not solve the
problem; the state would still have deficits of $1.5
billion early on, which would decline to $700 million to
$800 million in the out years. He detailed that the CBR
would still be fully depleted by 2023 when it would be
necessary to begin drawing from the earnings reserve
account. The red portion of the bars in the upper left
chart on slide 2 represented the earnings reserve draw. He
specified that the money coming from the earnings reserve
account was in excess of what the rules allowed. The green
bar represented the POMV payout.
4:07:43 PM
Representative Wilson remarked that unless state government
was reduced, the model outlined on slide 2 would not work.
She underscored that unless government spending was under
control, the bill or any other option would not solve the
deficit. She reasoned that based on the state's population
it was not possible to tax its way out of maintaining
government at its current size. She emphasized she did not
believe the bill would solve the problem. She opined that
the state needed to get smarter in the way it spent its
money. She spoke to the goal of ensuring the earnings
reserve remained strong (without knowing what other
revenues may come in and how industries such as mining and
oil may increase) and questioned whether it would be
possible to pay $1,200 per Alaskan to get through the
budget for the current year instead of implementing the
bill and changing the entire structure.
4:09:15 PM
Mr. Teal replied the question was difficult because it was
a policy question. He believed Governor Bill Walker had
been clear in stating his policy that the administration
was looking at the revenue forecast as a given and if more
money came in, great. He specified there were three ways to
address the problem, one was to reduce expenditures. He
believed there was no question the governor had made
reductions and the legislature had made further cuts (and
would probably continue to put pressure on expenditures).
The second option was to increase revenue - the governor
had offered legislation towards that goal. The third and
most impactful was the Permanent Fund Protection Act
[offered by the governor]. He explained the tax bills
combined would produce potentially $300 million to $400
million. The bill before the committee would close the gap
by $1.6 billion and more in later years as the Permanent
Fund grew and the payout grew. The bill was by far the
largest tool. He underscored that absent the bill, much
larger reductions or revenue increases would be necessary
in order to achieve the same result. He could not speak for
the governor, but he guessed the reason for introducing the
bill was that it was the most powerful and least harmful
tool available.
Representative Wilson disagreed. She believed the bill was
very harmful. She stated "the governor was going to cut 16
percent, which would have helped as well." She emphasized
that the bill or a similar option would reduce the
dividend. She detailed that money went into the earnings
reserve from the corpus of the Permanent Fund, at which
point the legislature determined how much to put into the
General Fund to pay out a dividend. She stated that any of
the amounts could be reduced if government could not be
reduced that quickly. Alternatively, she believed the
governor could redline the amount in half and it would
still accomplish the same result as the bill. She asked for
the accuracy of her statements.
Mr. Teal replied in the affirmative.
Representative Kawasaki remarked that many people looked at
the graph on the right side of slide 2 related to what the
dividend check could have been versus the proposal (shown
in purple). He remarked that it was necessary to look at
both sides. He requested a model showing a dividend at
$1,000, $1,200, $1,400, $1,600, $1,800, and $2,000. He
believed it would be helpful to get an idea of what the
graph on the left would look like over time.
4:12:50 PM
Vice-Chair Saddler referred to the header "Permanent Fund
Plans" in the center of the chart. He noted that underneath
the header there was a column showing "Governor" and a
column showing "n." The row below those items included
"$3,300." He asked if the amount was $3.3 million or
$3,300.
Mr. Teal replied that the "n" by the governor's plan
indicated the governor's plan was not being modeled in the
scenario on slide 2. The $3,300 was the amount of the
sustainable draw suggested by the governor. He noted the
amount could be crossed off because it was irrelevant to
slide 2. He referred to a separate row under the Permanent
Fund Plans header, which indicated a custom plan (HB 245)
was being modeled.
Vice-Chair Saddler clarified that he considered the bill
before the committee as the governor's plan. He pointed to
the chart in the upper right of slide 2 titled "Dividend
Check." He asked if the three bars in red, purple, and
yellow were calculations or actual figures.
Mr. Teal relayed that the red line showed the dividend
under current law, which was a calculation. He indicated
that as shown on slide 1, it was a calculation that would
not be a valid scenario. He stated the dividend would fall
to zero when there was no money remaining (indicated by
white space on the graphs). The more appropriate comparison
was that the dividend would remain until FY 20 or FY 21 and
would subsequently drop to zero. The alternatives were a
$2,000 for approximately four years and no dividend after
that time versus a $1,000 dividend, which would continue
into the future.
Vice-Chair Saddler asked for verification the purple line
at $1,000 represented what would occur under the
legislation. Mr. Teal answered in the affirmative.
Co-Chair Thompson noted the bill also included a three-year
review.
4:15:42 PM
Vice-Chair Saddler asked if the yellow line represented
what the dividend would be under a separate bill [HB 224].
Mr. Teal answered that the only thing valid in the modeling
on slide 2 was what would occur under HB 245. Other
scenarios were shown that were essentially zeroed out. He
suggested focusing on the $1,000 line [in purple], which
represented what the bill expected to pay in dividends.
Vice-Chair Saddler referred to the upper left chart titled
"UGF Revenue/Budget" on slide 2. He pointed to the green
portion of the bars which represented the POMV payout. He
then referred to the lower left chart titled "Budget
Reserves" and observed the green portion of the bars
represented the earnings reserve account. He asked for
verification it was merely a coincidence that both items
were shown in green. He believed there was no correlation
between the two.
Mr. Teal answered it was not coincidental. He detailed the
orange bars on the upper chart represented the draw from
the CBR, whereas the orange bars on the lower chart
represented the CBR balance. The green bars on the upper
chart represented the draw with a payout from the earnings
reserve account, whereas, the green bars on the lower chart
represented the earnings reserve balance.
Representative Gara referred to the footnote at the bottom
of slides 1 and 2, which indicated the modeling assumed a
$250 million annual appropriation for oil and gas tax
credits. He believed the state owed roughly $800 million in
the current year and he did not know what a new bill that
came out of conference committee would do, which he noted
was less than the amount passed by the House.
Co-Chair Neuman asked that comments were kept to the
subject of the bill.
Representative Gara countered that every portion of his
question was relevant to the current conversation.
Co-Chair Thompson asked to keep questions to the scenario
on slide 2. He added the committee would have the ability
to ask additional questions the following week.
4:18:12 PM
Representative Gara pointed to the relevant footnote on
slides 1 and 2 that assumed a $250 million annual
appropriation for oil and gas tax credits. He remarked that
$800 million was owed [for oil and gas tax credits] in the
current year and it was not yet known what had come out of
a conference committee [on the subject] that day. He
reasoned it seemed the money would disappear faster
assuming the amount owed. He noted the $250 million
assumption was not accurate for the current year.
Mr. Teal stated it was the purpose of the footnote. He
explained that LFD had no idea what the legislature would
pay in tax credits. The amount paid would be up to
individual legislatures in the future. The LFD model
recognized that the anticipated credits to be earned was
approximately $2 billion (including existing credits owed),
which was an average of $250 million per year. Under the
bill it started as an expected payout of $600 million to
$700 million and fell to less than $200 million in the
future. He reiterated that LFD had no idea what the actual
scenario would be. The model assumed that sometime during
the period credits would be in the $2 billion range, the
model spread them evenly over time. He stated if a bigger
credit payment was paid early on and payments faded away
over time, the early expenditures would be higher and
reserves would be depleted faster. However, at the end of
2025 the same result would occur regardless of whether the
legislature paid $250 million per year or $1 billion in the
current year and a small amount for the remainder. He
explained LFD had chosen to make the easiest assumption
about credits, which meant spreading the cost evenly over
time.
Representative Gara referred to slide 2 and believed it
related to the current bill proposal. He asked if the slide
assumed all state revenues as they existed at present
(including small taxes).
Mr. Teal replied that it did not assume any new tax
revenue, but existing taxes were included.
Vice-Chair Saddler referred to Representative Gara's prior
statement that the state would owe $800 million in oil tax
credits. He asked if the $800 million included or did not
include $200 million that had been vetoed by the governor
from the FY 16 budget.
Co-Chair Thompson asked how the question applied to the
bill.
Vice-Chair Saddler remarked that he had heard the number
$800 million and wanted to make sure he understood what it
meant.
Co-Chair Neuman thought the committee was getting way off
topic.
Co-Chair Thompson asked the committee to stick to the
presentation.
Representative Wilson asked how the slide addressed the
$1.2 billion spending limit in the bill. She provided a
scenario where $1.2 billion was used, but $1.6 billion was
brought in.
4:22:19 PM
Mr. Teal skipped slide 3 and continued on slide 4 titled
"PFPA Payout/Revenue Limit." The slide included a chart
showing UGF revenue without the payout limit and a chart
showing UGF revenue with the payout limit. The breakeven
point on the left chart (no payout limit) was about $85 per
barrel. He detailed that the red portion of the bars
represented nonvolatile revenue (i.e. non-oil revenue), the
green portion represented the POMV payout, and the blue
portion represented oil revenue (i.e. volatile revenue). He
added the chart used an expenditure line of about $5
billion [shown as a solid black line] including dividends;
the chart also depicted an expenditure line excluding
dividends [shown as a dotted black line]. He stated the
lines crossed at about $85. The graph on the right
reflected a payout limit. The numbers were the same, but at
oil prices of about $75 per barrel the green line [POMV
after payout limit] began to fade away. He detailed it
faded dollar-for-dollar for every bit of oil revenue above
$1.2 billion. Under the scenario the CBR draw (shown in
orange) continued out farther and the breakeven price of
oil required to balance the budget increased to
approximately $105. He explained the green bar (POMV) would
not drop all the way to zero; the small remaining portion
reflected the dividend payout from the earnings reserve
account. He continued that the line climbed slowly as
revenue climbed and then began to flatten out; at the
breakeven point (about where the POMV payout went to zero)
there would be a surplus. He specified the surplus occurred
above about $105.
4:25:33 PM
He turned to slide 5: "Savings Rule." The rule indicated
that when the state had money exceeding what was needed for
expenditures, it would be saved - 50 percent would be
deposited into the CBR and 50 percent into the Permanent
Fund principal. The line was not completely flat when
looking at the sum of the red [nonvolatile revenue], green
[POMV after payout limit], and blue [total volatile
revenue] bars - the revenue climbed slowly and flattened
out, albeit not completely. Once the dollar-for-dollar loss
of the POMV payout was passed, revenue began to accelerate
fairly rapidly. He hoped the slides answered numerous
questions including ones related to the $1.2 billion (the
dollar-for-dollar tradeoff), where the price points
occurred, where the money started to fade, and what the
surplus could be used for when it came back. The slides did
not address what would happen when surplus revenue
occurred. He explained that as the bill was drafted it
asked whether revenue had exceeded expenditures in the
previous year. He relayed it was a difficult question to
answer until the year closed. He imagined there would be an
appropriation much like with current CBR language
specifying that in the event revenue exceeded expenditures
it was distributed "this way." He explained what the
amounts would be would not be known until six or so months
after a year had closed.
Representative Gara returned to his previous questions. His
understanding was that there was a combined draw from
savings of FY 16 and FY 17 money to be spent in FY 17. He
stated that the next year's revenue could not exceed the
prior year's appropriations. He referred to the current
budget as an example and detailed that roughly $500 million
of FY 16 money had been used that would be spent in FY 17.
He asked if under the formula the $500 million would not be
counted. Alternatively, he asked if the budget would have
to be reduced by $500 million to fit what had been
withdrawn as FY 17 revenue.
Mr. Teal explained that the bill had a loop hole that
allowed FY 23 expenditures to be used in the FY 24 budget
process (supplemental appropriations). Under a scenario
where the legislature was working on the FY 24 budget
nearing the end of FY 23 and it knew there was $1 billion
left over, there could be supplemental appropriations to
spend some of the remaining money, which would take it away
from the savings portion. The only way to prevent the
situation was to insert a spending limit in the state
constitution, which would prevent the money from being
spent. Otherwise, the legislature could spend available
funds in the supplemental budget process.
4:30:05 PM
Representative Gara used the current year as an example and
included the assumption the bill was adopted. He believed
FY 17 spending would utilize FY 16 (approximately $500
million) and FY 17 appropriations. When considering the
allowable revenue for expenditure in the next year, he
wondered if the legislature would have to cut the $500
million that was used from FY 16 appropriations.
Co-Chair Thompson interjected they were looking to the next
year's budget already. He stated if the legislature was
going to reduce the next year's budget more than it reduced
the budget for the current year, it would probably eat up
some of the amount. He reasoned they did not currently know
where they were headed "with any of this" at present. He
believed they were getting ahead of themselves in the
present discussion. He understood where Representative Gara
was coming from, but he wondered how the question related
to the bill currently before the committee.
Representative Gara stated he was trying to understand the
formula for what revenue the legislature was allowed to use
based on how much it had appropriated in the prior year. He
asked if the amount of revenue the state would be allowed
to use in the next year was based on the FY 17
appropriations alone or also included the $500 million in
FY 16 appropriations (assuming the passage of the bill).
Mr. Teal replied that it would only cover FY 17
appropriations. He detailed it was not really a matter of
the appropriations that occurred in the normal budget
process (those appropriations would be supplemental budget
items). The legislature was able to pass the $500 million
supplemental budgets because the language in the previous
year's budget authorized the legislature to spend up to
$500 million more in supplemental expenditures with money
from the CBR. He furthered that if the CBR language had a
lower limit, the legislature could spend less in the
supplemental process. He believed it was important to note
that CBR draws would be necessary until oil prices reached
the $100 per barrel range. He continued there was still a
deficit, which could be filled by expenditure cuts, tax
increases, or by drawing from the CBR. The chart on slide 5
showed a CBR draw. He relayed that the legislature could
limit supplemental spending if it wanted to.
Mr. Teal provided a scenario where oil reached $115 per
barrel, which resulted in a surplus for the FY 18 budget
process. He emphasized that the money would not be
available for expenditure in FY 17 - it would not be
available until FY 18. He explained that the legislature
may be able to spend the money in the FY 19 budget process
as a supplemental FY 18 expenditure. He detailed it would
depend on whether a CBR draw was required and on what the
legislature did. He emphasized a legislature could not bind
future legislatures. The rule could be written in a tougher
way, much like the current CBR language that specified
appropriations for the prior year that were made in the
prior calendar year. In other words, supplemental
appropriations were specifically excluded. However, if that
change was made, the rule would be so restrictive that in
the event of a bad wildfire year, there would be no
flexibility to appropriate money to fight the fires. If the
bill did not include some flexibility, the legislature
would find itself forced to break the rules in the future.
The point was to get a set of rules that were good
guidelines, but that they were not so strict that the
legislature would be forced to break them. He reasoned that
once rules were broken, there was a tendency to ignore
them. He concluded that the wheels were not as tight as
some people may want them to be.
4:35:26 PM
Representative Gara asked for verification that if the bill
language was followed in determining how much the
legislature could appropriate the following year, it was
not allowed to count the $500 million that was made as an
FY 16 appropriation.
Mr. Teal replied in the affirmative.
Representative Gara asked for verification the funding
would be short the $500 million. Mr. Teal agreed, but
reminded the committee that the scenario would not come
into play unless oil prices reached $110 per barrel.
Co-Chair Neuman remarked that the debt would still be owed.
He detailed there were approximately $430 million to $500
million in credits due the current year. He remarked that
the supplemental for FY 16 was $70 million. He reasoned the
debt was still incurred and could not merely be swept under
the rug. He added the legislature had chosen to pay off the
debt with available money. He reiterated the debt still had
to be accounted for in future years.
4:37:02 PM
Mr. Teal replied that it was important to realize the $430
million of the prior year's money (FY 16) was used to pay a
debt. He explained if the money had been appropriated as FY
17 money, there would have been a smaller FY 16 expenditure
and a larger FY 17 expenditure. He underscored that at the
end of FY 17 the result would be exactly the same; it made
no difference whether they were FY 16 or FY 17
expenditures. He reminded the committee that whenever it
paid the $430 million, it was $430 million less liability
that the state would owe at some point in the future.
Representative Wilson stated her understanding the
legislature was putting guidelines in place that were
merely guidelines in terms of the savings component. She
referred to taking money away from the Permanent Fund
Dividend and asked how much related money would be mandated
by the legislation.
Mr. Teal answered that in theory the legislature would want
to follow all of the guidelines including the 20 percent of
royalty that went to dividends. He explained that the
savings rule would kick in at prices above $110 per barrel
and would put the savings towards the CBR or the Permanent
Fund corpus. He reminded the committee that at high oil
prices royalties increased substantially (20 percent);
therefore, dividends would increase. A portion of the high
oil prices would go straight into dividends.
4:39:19 PM
Representative Wilson clarified her question pertaining to
slide 5. She underscored that guidelines were very
different than statute that had to be followed in a
specific way. She surmised the savings component of the
legislation was a guideline that may or may not be
followed, whereas, how the dividend would be paid at $1,000
and how the legislature would put money into the General
Fund would be mandated as state law.
Mr. Teal stressed that the components would all be the same
and would all be in state law. The difference was that none
of the statutes were mandated. The statute showed how
dividends were calculated and specified that the
legislature may not appropriate more than 5.25 percent;
however, the legislature could appropriate 10 percent if it
chose to. He explained the situation merely equated to
breaking the rule. The point of the rules was to follow
them, because doing so put the state on a path to a
sustainable budget. Alternatively, if the legislature chose
to break the rules it would veer from that path.
Representative Wilson remarked that she thought statutes
were laws not merely suggestions. She pointed to slide 5
and asked what price of oil the current budget was based
on. She rephrased her question and asked what oil price was
required for the current budget to be self-sustainable.
Mr. Teal referred to the [DOR] spring forecast, which was
roughly $45 per barrel. He explained at that price the CBR
draw would be slightly over $1 billion. He detailed the
orange segments of the bars [representing budget deficit]
disappeared at oil prices of around $105 per barrel; at
that point the combination of non-oil revenue (in red),
dividends, and oil revenue (in blue) created a surplus. He
continued that if oil prices reached $105 per barrel, the
savings rule would kick in. At prices below $105 per barrel
the guideline on slide 5 was irrelevant. He underscored
that the legislature could make appropriations that
followed statute or it could appropriate as it saw fit. He
emphasized the legislature was not required to follow any
of the specific rules; however, the hope was that it would
follow them.
4:43:12 PM
Representative Wilson did not understand the need to put
something in statute if all of the items were merely rules
the legislature could chose to follow or disregard. She
clarified that if the current budget required oil prices of
$105 per barrel, the legislature would perpetually have to
hope for oil prices of that amount if it failed to decrease
the budget.
Co-Chair Thompson relayed the bill would be considered by
the committee again the following week.
Representative Pruitt explained that the legislature had
already funded the Permanent Fund Dividend in its recently
passed budget. He wondered if the bill passed whether the
governor would have to veto a portion of the budget related
to the dividend.
Mr. Teal replied that it was not a simple question because
if the bill passed it would have no accompanying
appropriation bill. He specified that unless the
legislature passed another appropriation bill making the
appropriations suggested in the bill, no money would move.
He furthered that Representative Pruitt was correct in
assuming the operating budget passed by both houses funded
dividends in FY 17. Whether the governor would veto all or
a portion of the appropriation, he did not know. He
elaborated that with HB 245 the committee had an option of
starting an appropriation bill and making the
appropriations required to comply with the bill. He
detailed that if that route was taken, dividends would be
set at $1,000 under the legislation, but at $2,000 under
the operating budget. He did not see that as a likely
outcome and he anticipated the governor would veto all or a
portion of the dividends in the operating budget.
Representative Pruitt surmised that if the bill did not
pass, but the governor still wanted to do essentially some
of the same things, he would have the ability to line item
veto any amount of the number appropriated by the
legislature.
Mr. Teal responded that the governor could line-item veto
anything in the operating budget regardless of whether or
not HB 245 passed. He detailed that if the bill passed, it
would not require an accompanying appropriation bill
because it could all be handled through the existing
appropriations.
Representative Gara referred to the two graphs on slide 4.
He asked for verification that with a payout limit there
would be a deficit all the way up to oil prices of $100 per
barrel and without the payout limit the deficit would
disappear at $80 per barrel.
Mr. Teal agreed and clarified that the numbers were roughly
$105 [with a payout limit] and $85 [without a payout
limit].
HB 245 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson addressed the schedule for the following
week. He recessed the meeting to a call of the chair [note:
the meeting never reconvened].
ADJOURNMENT
4:47:06 PM
The meeting was adjourned at 4:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 245 Explanation of Changes version I to L.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| HB 245 20-20 plan cashflow_w Surplus Split (002).pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| HB 245 CS WORKDRAFT FIN vL.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| Sectional version __ 6.6.16.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| HB 245 Corrected Explanation of Changes version I to L.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| HB 245 CS L NEW FN DOR-T&T.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |
| HB 245 CS L NEW FN DOR-PFD-Op.pdf |
HFIN 6/6/2016 3:00:00 PM |
HB 245 |