Legislature(2017 - 2018)HOUSE FINANCE 519
02/02/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB61 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 61 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 2, 2017
1:31 p.m.
1:31:26 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:31 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 Scott Kawasaki
Representative Dan Ortiz
Representative Lance Pruitt
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
Representative Steve Thompson
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue.
SUMMARY
HB 61 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 61 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the meeting agenda.
HOUSE BILL NO. 61
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
1:32:22 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Permanent Fund
Protection Act" (copy on file). The Permanent Fund
Protection Act was a key part of the governor's fiscal plan
to resolve the state's budget deficit. He referred to two
companion documents: a white paper called The Alaska
Permanent Fund and the Permanent Fund Protection Act dated
January 2017 (copy on file) and a single page document
titled Permanent Fund Protection Act dated January 31, 2017
(copy on file). He addressed slide 2 of the presentation.
1:35:31 PM
Commissioner Hoffbeck moved to slide 3 and provided a
presentation overview. He addressed the problem facing the
state on slide 5:
1. Low oil revenues
2. Persistent deficit
3. Diminished budget reserves
Commissioner Hoffbeck elaborated on slide 5. From 2014 to
2017, the state was in a "low oil price environment." He
thought this was the new norm. He spoke to the need for an
alternative revenue source in order to avoid depleting
savings. He moved to slide 6 and spoke to low oil revenue.
From 2005 to 2014, over 90 percent of the undesignated
general funds (UGF) revenues came from petroleum. Between
2012 and 2015, oil revenue had fallen 88 percent or $7.8
billion. He spoke to the net impact of lower oil prices on
slide 7 titled "Deficit Spending." Although the UGF budget
had been cut by 44 percent since 2013, the deficit
persisted. The state had used its savings to cover the
deficit, leaving only one more year in which such action
would be possible. He pointed to the blue dashed line on
the graph, representing the UGF budget, the yellow bar
representing the UGF revenue displayed the aforementioned
sharp drop, and the red hatch marks representing the
overall deficit. He provided detail about the chart on the
slide. Revenues had dropped due to decreased price and
production. Long before the state ran out of the deficit,
it would run out of savings.
1:39:34 PM
Commissioner Hoffbeck moved to slide 8 titled "Diminished
Budget Reserves." In 2013 the state had about $16.3 billion
in the combined Statutory Budget Reserve (SBR) and the
Constitutional Budget Reserve (CBR). For the end of FY 17,
he projected $4.6 billion, and $2.1 billion at the end of
FY 18, which would be the last budget year to rely on
savings before they were depleted. The status quo would
mean the state would run out of time. He spoke to the need
to save money in the CBR for unexpected expenditures, to
meet budgetary expectations in a given year, and as a
liquidity bank in order to pay the state's bills on a daily
basis. The best way to do this was to use the CBR as the
liquidity portion for the Permanent Fund Earnings Reserve
to pay back as gains are realized so the fund is not forced
to realize gains artificially to cover cash draws.
1:41:36 PM
Commissioner Hoffbeck addressed the question of how to best
solve the fiscal crisis with a sustainable draw and
dividend on slide 9. He turned to slide 11 and addressed
the Permanent Fund structure, which included the principle
($39.4 billion non-spendable funds plus $4.7 billion in
unrealized gains), and the earnings reserve account
($8.6 billion), which was available for expenditure. He
directed attention to slide 12 and addressed how the
Permanent Fund worked. He referred to statutory net income,
which included realized gains from dividends, fixed income,
real estate investments, sold equities, and anything that
generated cash on an annual basis; it flowed from the
principle of the fund to the Earnings Reserve Account (ERA)
for a total of about $3 billion annually. He explained a
five-year average was used to determine the amount
available for appropriation. Half of that amount paid the
dividend. The remainder was used to inflation-proof the
Permanent Fund.
1:44:30 PM
Commissioner Hoffbeck moved to slide 13 titled "The
Permanent Fund: Earnings." He shared the money generated by
the fund far exceeded oil and gas tax and other
unrestricted revenues. He stated it was unlikely the oil
price would exceed earnings from the fund, with the
exception of a few anomalous years. The Permanent Fund was
the state's largest asset and would continue to be going
into the future. He addressed the problem on slide 14. He
detailed that absent change, the earnings reserve would
also be depleted by 2023. It would create a situation where
the state could not pay the bills or pay the dividend.
Something more forward-looking was needed.
1:46:25 PM
Commissioner Hoffbeck spoke to slide 16 titled "Why Use
Permanent Fund Earnings?" The current UGF budget was about
$4.2 billion, which created a $2.8 billion budget gap in
FY 18. He addressed potential tools to address the gap
including a motor fuel tax increase, another broad-based
tax increase, a corporate income tax increase, oil tax
credit reform, and maximum proposed cuts of $750 million.
The items totaled $1.6 billion. The only thing capable of
solving the total problem was using earnings from the
Permanent Fund.
Representative Wilson asked which of the options fell under
current or future proposed legislation. She asked for
clarification on the items listed on slide 16.
1:49:12 PM
Commissioner Hoffbeck replied the motor fuel tax bill was
currently in play. There was no broad-based tax bill at
present. The corporate income tax legislation had been
prepared by the governor and another related bill had been
proposed by Vice-Chair Gara. As he understood it, the House
was talking about introducing a bill related to oil and gas
tax credit reform. The cuts proposed item was based on
modelling. The cuts proposed on the slide used the Senate's
number.
1:50:23 PM
Commissioner Hoffbeck moved to slide 17 titled "How Should
We Use the Permanent Fund?" He referred to significant
discussion about the reason for the establishment of the
fund. He read language from the ballot initiative that had
established the constitutional amendment for the Permanent
Fund:
"This proposal, if approved, would amend the
Constitution of the State of Alaska by …
establish[ing] a constitutional permanent fund into
which at least 25 percent of all [mineral royalties]
received by the State would be paid. The principal of
the fund would be used only for income-producing
investments permitted by law and the income from the
fund would be deposited in the general fund of the
State and be available to be appropriated for
expenditure by the State unless otherwise provided by
law."
Commissioner Hoffbeck highlighted that the constitutional
language does not include availability of the income from
the fund for appropriation for expenditure, but had been on
the ballot initiative.
Co-Chair Foster recognized Representative Kawasaki had
joined the meeting.
Commissioner Hoffbeck moved to slide 18 and addressed how
the state should use the fund. He stated the fund was
intended to be multi-generational and needed to be
sustainable over the long-term; the fund needed to grow at
the rate of inflation at a minimum. The fund needed to
provide a dividend. As long as the earnings reserve was
being utilized as a conduit for the cash for appropriation,
the account had to be able to bridge years with lower
earnings.
1:53:54 PM
Representative Grenn asked if there would be an investment
philosophy change within the Alaska Permanent Fund
Corporation (APFC) regarding the management of the fund if
the funds began to be used for the state.
Commissioner Hoffbeck answered the modelling did not assume
a change in fund management. He outlined that the dividend
was the only draw and that inflation-proofing was the other
large draw but went back into the corpus, whereas what was
proposed was twice that size. He believed it would be
possible to work out a plan where the CBR was used for
daily expenditures and when gains were realized they would
be transferred to DOR to pay back the CBR. Currently, the
projections from the APFC showed that it earned around
90 percent of its earnings every year. The fund should be
realizing more than enough annually without having to
change its structure.
1:56:09 PM
Commissioner Hoffbeck continued to address slide 20 related
to how the fund should be used. He stated that the plan
needed to be rule-based. It need to have rules for saving,
spending, and paying out the dividend. He thought that once
new rules were in place, the legislature would follow those
rules, which were international best practice. He briefly
highlighted slide 21 that included examples of rule-based
frameworks used for other sovereign wealth funds. Examples
included Singapore, Kazakhstan, and Norway.
Vice-Chair Gara asked for verification the administration
was proposing a 5.5 percent draw from the Permanent Fund.
He referred to talk about whether it should be a
4.25 percent or other draw. He asked for verification that
none of the numbers would work in a catastrophic year.
Commissioner Hoffbeck answered that in the event of
multiple catastrophic years in a row, it was a fair
statement, but that it was not the history of the market
for this to occur. In the proposal, there was a provision
for a three-year review which would act as a safety net,
allowing for adjustment. It would not work with three or
four years of catastrophic returns in any number.
Vice-Chair Gara stated he was not being critical, it was
just the reality. He spoke to the structure of the ERA,
which was based on realized earnings rather than the actual
growth of the Permanent Fund. He noted that net earnings
would present a problem regardless of whether the draw was
moved by a quarter percent.
Commissioner Hoffbeck answered "fair enough."
2:02:00 PM
Commissioner Hoffbeck moved to slide 22 and continued to
address how the Permanent Fund should be used. He stated
that the system needed to remove volatility. The graph
presented UGF revenue in the yellow line and the blue
dashed line represented UGF budget. The volatility was
apparent, particularly in the revenue. He specified that FY
07 and FY 08 showed $11 billion [in UGF revenue], and by FY
16 revenues had been about $1 billion. The change meant
that ten years later the state had to figure out how to
deal with $10 billion less revenue. Flattening out some of
the volatility was a desirable result that should be sought
in any proposed plan. He spoke to volatility that had been
shown to create slower economic growth within the market.
With nearly 100 percent reliance on a commodity with highly
volatile prices, there is a situation of tremendous
volatility. Returns were volatile too, but that could be
accounted by using a five-year lookback and a draw
component.
2:04:11 PM
Commissioner Hoffbeck turned to slide 23 and spoke to the
need to maximize the use of Permanent Fund earnings. The
modelling mantra was to fill as much of the gap as
possible, yet even with that method there was still a
significant gap of $700 million to $1 billion to be filled.
Leaving significant money on the table was not using the
fund as effectively as possible.
2:05:33 PM
Commissioner Hoffbeck addressed the bill summary on
slide 25. The plan before the committee was essentially the
result of the hearing process from the previous year. The
bill included language that had passed the Senate the
previous year.
Last year, the 29th Legislature held 39 hearings on
the Alaska Permanent Fund Protection Act (SB128,
HB245, and SB5001):
· SSTA: 10 hearings, including 2 days of public
testimony
· SFIN: 10 hearings, including 1 days of public
testimony
· HFIN: 19 hearings, including 4 days of public
testimony
Other bills addressing the use of permanent fund
earnings were also considered:
· SB114 (Sen. McGuire): 7 hearings in SSTA, 9
hearings in SFIN
· HB303 (Rep. Millet): 4 hearings in HFIN
· HB224 (Sen. Hawker): 4 hearings in HFIN
HB61 is the same as the CS for SB128, but without
provisions re.:
· CBR management
· APFC procurement
· Spending cap
2:07:30 PM
Vice-Chair Gara requested projections for how each of the
items would impact future dividends.
Commissioner Hoffbeck spoke to modelling that would be
presented in the committee the following day.
Representative Wilson asked why the CBR management, APFC
procurement, and the spending cap had been removed from the
current bill.
Commissioner Hoffbeck answered there had been concern the
CBR was not generating great enough returns and that the
Permanent Fund could generate higher returns if the CBR was
moved there. He referred to a study done that stated that
it was inconsequential whether the money stayed where it
was or moved to the Permanent Fund, with similar costs and
returns. It had earned more the previous year because it
needed to be set aside in a safe and liquid fashion as it
would be needed for government services. If it were sitting
in the Permanent Fund, the same restrictions would apply.
One of the things the Permanent Fund was not set up for was
cash management on a daily basis - there was only one draw
annually to pay the statutory net income into the earnings
reserve. The DOR had to pay bills daily, and had a
sophisticated cash management system in place. The
structure would have to be recreated in the Permanent Fund,
and did not exist at present. Once a fiscal plan had been
developed, it could be approached much more aggressively
and see similar strong returns.
2:11:46 PM
Commissioner Hoffbeck continued to answer the question from
Representative Wilson. He addressed Permanent Fund
procurement and the spending cap. The department agreed
that the Permanent Fund should have the procurement
exemptions, but felt that it did not need to be addressed
in the current proposed legislation. The spending cap dealt
with issues other than oil and gas revenues and the
Permanent Fund dealt with a spending cap on other revenues
that came into the UGF. It did not impact restructuring of
the Permanent Fund but was a broader cap for all government
spending and it was felt that it should be heard outside
the current legislation.
Representative Wilson thought the spending cap was one of
the most important parts of a current plan. She wondered
why using the existing structure could not get to the same
point, perhaps with a check in place in the form of a set
amount.
Commissioner Hoffbeck replied he would address the question
later in the presentation.
Representative Pruitt asked if the intent was to move money
once per year or whether some kind of cash management of
the ERA would be put in place.
Commissioner Hoffbeck answered that the idea was to create
a structure where cash could be accessed as needed, rather
than a large pool. The CBR could be the liquidity bank. The
Department of Revenue (DOR) could borrow money from the CBR
as long as it paid back the money by the end of the fiscal
year. Once gains were realized, the money would be
transferred over. A portion of the CBR would not have great
returns due to the liquidity.
Representative Pruitt surmised the CBR could be managed by
APFC as long as the money was paid back. He asked whether
the issue was ensuring that DOR maintained control of the
money. He spoke to the provision that the funds needed to
be liquid. He wondered if the provision was statutory or
constitutional.
2:16:49 PM
Commissioner Hoffbeck answered the department could manage
the CBR without legislative action. The department had a
robust cash management system for around $400 million per
month, and tried to have liquid as short a period of time
as possible. In order to move the CBR to the Permanent
Fund, it would have to establish a process for doing the
same thing, so it was a simpler process to leave it where
it was.
Commissioner Hoffbeck turned to slide 26 and continued to
address the bill summary. The bill outlined a long-term
plan with three formulas. There were two components to the
sustainable draw: 5.25 percent Percent of Market
Value (POMV) draw and a draw limit. The sustainable dividend
formula was 20 percent of UGF and 20 percent of the POMV to
pay dividends. Inflation-proofing would become a four times
draw process.
Commissioner Hoffbeck turned to slide 27 and continued to
address the bill summary.
Co-Chair Seaton pointed to slide 26 and the 5.25 percent
POMV sustainable draw formula. He pointed to the white
paper, page 4, which gave average return of 5 percent. He
asked the commissioner to address the average return.
2:20:02 PM
Commissioner Hoffbeck replied he would address the question
on slide 28.
Vice-Chair Gara discussed the constitutional requirement to
put 25 percent into the CBR. He furthered that at some
point the amount for new fields had been changed to 50
percent, but former Representative Norm Rokeburg had
subsequently reduced the requirement back to 25 percent. He
asked why that did not succeed.
Commissioner Hoffbeck answered the previous bill had a
trigger which calculated that the reduction in the deposit
into the corpus would reduce an individual's dividend by $7
and had an automatic trigger which shut it off after a few
years.
2:21:20 PM
Commissioner Hoffbeck addressed slide 27 and highlighted
that 25 percent of the royalties would go into the
principle of the fund. As with the current structure,
statutory net income would be how the money from the
principle of the fund moved into the ERA. The ERA would pay
into the General Fund rather than into the dividend fund
under the legislation, making it available for
appropriation, and under the 20/20 formula, 20 percent of
the POMV draw and 20 percent of the monies outside the
corpus would create the dividend. Money would flow through
the General Fund into the dividend fund, rather than
directly into the dividend fund. The other difference was
in the inflation-proofing transfer from the ERA back into
the principle, where in the current legislation there was a
four times draw structure. The reason they had tried to
limit the number of changes as much as possible was to give
confidence to the public of the plan's durability.
2:23:25 PM
Commissioner Hoffbeck moved to slide 28 and spoke to the
5.25 POMV draw. The average fund value was calculated by
using the first five of the last six years and the 5.25
percent was applied to that average to determine the fund
draw. For 2012 to 2017, the average fund balance was $48.1
billion, 5.25 percent of which was $2.5 billion for paying
dividend and government expenditures.
Representative Guttenberg asked about the reasoning behind
the formula.
Commissioner Hoffbeck answered that using the first five of
the six years avoided trying to calculate for the most
recent year, which would not be fully audited and closed
out when it was needed. He returned to addressing slide 28
stating 5.25 percent of $48.1 billion was $2.5 billion. As
long as the fund was increasing in value, that equated to a
4.7 percent draw for 2017. He conceded the method was
aggressive, but thought it was sustainable.
2:26:34 PM
Commissioner Hoffbeck turned to slide 29 and addressed what
would happen if there was a POMV draw that was added to
current revenue. The chart showed the impact of oil
revenues. The bottom line of the chart represented oil
prices. The full earnings reserve draw was needed in order
to get to the high $3 billion and to close the gap enough.
If oil prices reached $95 to $100 per barrel, the draw
would not be needed; the draw would be shut off during
those times.
Representative Wilson did not understand why all of the
other changes were necessary. She believed the yellow
portion of the chart reflected the 5.25 percent.
Commissioner Hoffbeck answered in the affirmative: the
yellow represented the 5.25 percent POMV draw. The blue was
current revenues from oil and gas, and the green
represented other revenues.
Representative Wilson asked whether there would be a
sustainable budget without all of the other changes in the
bill.
Commissioner Hoffbeck answered in the affirmative. He
stated that few were forecasting oil prices higher than $55
per barrel. He underscored that the graph was not a time
series, but represented various price points for oil per
barrel.
Representative Wilson stated the way she read the chart
meant they were not that far off. She did not believe they
needed to go much further and could reach a sustainable
budget without necessarily making all of the changes in the
legislation.
Commissioner Hoffbeck answered that current oil prices were
about $55 per barrel. They were not facing $65 per barrel
in future years. The average price for the current year was
$50 per barrel. The chart represented a spot in time. He
pointed out the yellow bar was net a $1,000 dividend.
Representative Wilson requested the actual dollar amount
for 6 percent or other. She stated it was difficult to
determine in the present graph.
Commissioner Hoffbeck replied that at $60 per barrel oil
(higher than current prices) and current spending, they
were looking at a $700 million gap, with a $1,000 dividend,
and $1.3 billion gap with a $2,000 dividend.
2:32:43 PM
Commissioner Hoffbeck mentioned that the draw limit was a
very elegant solution that was developed in the hearing
process, in Senate State Affairs committee during the
previous legislative year. He explained that the draw limit
reduced the POMV draw by a dollar-for-dollar basis, once
the UGF production taxes and royalties exceed $1.2 billion.
After that, the draw on the dividend would be reduced on a
dollar-for-dollar basis on any additional oil and gas taxes
and royalties that the state received, thereby slowly
turning off the dividend draw as those revenues increase.
2:33:48 PM
Co-Chair Seaton asked if he was including the liability the
state currently had for production tax credits.
Commissioner Hoffbeck responded in the negative.
Co-Chair Seaton clarified that the state would be limiting
its revenue although the liability for tax credits could be
increasing, depending upon expenditures decided on by third
parties.
Commissioner Hoffbeck responded that the actual liability
would come out of appropriation and would not slow when the
above-mentioned trigger occurred. The amount of $1.2
billion was actual severance tax and royalties without a
deduction for credits.
Co-Chair Seaton was concerned with the idea of credits
running the state into additional deficits. If the price of
oil increased, one would expect more liability for the
state, and it should be factored in.
2:35:59 PM
Representative Pruitt asked if credits were determined when
DOR put out the Revenue Sources Book, or were deemed a UGF
expenditure.
Commissioner Hoffbeck responded that it was portrayed in
different ways in the book. He added that credits against
liabilities were a revenue reduction and not an
expenditure, and would appear as less revenue from oil and
gas.
2:37:22 PM
Vice-Chair Gara was concerned about not being able to use
the excess state revenue. He was wondering when the state
would reach oil prices of $70 per barrel.
Commissioner Hoffbeck was unsure if the state would cross
the $70 price point in the coming years.
Vice-Chair Gara asked if it was fair to assume it would be
a least five years before the state saw $70 per barrel.
Commissioner Hoffbeck agreed.
2:39:28 PM
Commissioner Hoffbeck continued to slide 31. Under the
legislation, when the earnings reserve exceeds four times
the annual POMV draw, the extra money gets deposited back
into the corpus of the fund. The feedback loop becomes the
inflation-proofing mechanism for the corpus of the fund.
The draw would shrink as oil prices rise, the earnings
reserve would grow faster, and the feedback loop would be
reached earlier, giving more money into the corpus. As the
corpus grows, the 5.25 percent draw increases. Eventually
the fund begins to grow at a faster rate. It did restrict
revenues early on, and $1.2 billion was a compromise made
with the Legislative Finance Division. There was a limited
amount of money in the system. He agreed that the bill did
not allow for a capital program. There was not enough money
to cover it and expenditures.
2:41:22 PM
Commissioner Hoffbeck spoke to a sustainable dividend
formula on slide 32. The bill guaranteed a $1,000 dividend
for the first two years. Subsequently, it would be 20
percent of UGF royalties, plus 20 percent of the 5.25
percent POMV draw. He moved to slide 33 titled "Inflation
Proofing Transfers":
· AS 37.13.145(c) currently provides for annual
inflation proofing transfers from the ERA to corpus
· The ERA needs a sufficient balance to be able to meet
the draw each year ("ERA durability" concern)
· Bill provides that the ERA balance over 4 times the
maximum 5.25 percent draw (after current year draw) is
transferred to corpus instead
Commissioner Hoffbeck elaborated on slide 33. He referred
to a question from Vice-Chair Gara earlier related to
multiple years of bad returns. The four times draw coupled
with the three-year review period allowed the department to
take corrective action if needed before the fund was fully
depleted.
Representative Pruitt asked how long it would take to get
to the point illustrated, under the current scenario. He
asked if it could be an ongoing scenario.
Commissioner Hoffbeck replied that he would follow up.
2:44:53 PM
Commissioner Hoffbeck turned to slide 34 titled "Timing
Matters":
· Review framework in three years
· Immediate effective date (potentially in FY17)
· Timing of transfers:
o In the past, appropriations from the ERA occurred
in the FY prior to using the money, i.e., the
dividend was forward-funded. For example, money
for the October 2015 dividend (paid during FY16)
was appropriated on June 30, 2015 - the last day
of FY15.
o To accommodate the UGF use, the appropriation
from the ERA will now occur in the same FY. In
other words, instead of the FY18 ERA
appropriation being used in FY19, it will be used
for FY18.
Commissioner Hoffbeck spoke to an accounting anomaly that
had occurred in FY 16. The dividend payment for FY 16 had
been funded in the FY 15 budget. In the FY 16 budget the
legislature had stopped forward-funding the dividend; the
FY 17 dividend had been paid in FY 17. There was a hole in
FY 16, which did not show a transfer of the dividend. Some
of the slides showed a different balance related to the
dividend. The LFD and OMB followed the statutory
provisions, which is the transfer did not occur in FY 16,
but the Permanent Fund records reflect a transfer in FY 15,
resulting in a difference in numbers.
2:47:47 PM
Commissioner Hoffbeck provided a conclusion on slide 36:
· Sustainably provides billions to the general fund
(when needed)
· Preserves the dividend program
· Stabilizes the budget to give investors confidence in
our future
Commissioner Hoffbeck elaborated on the slide. As long as a
fiscal plan was not complete, there would always be
investor concern. The private sector was very clear that it
wanted to see a complete fiscal plan. Slide 37 included a
sectional analysis:
· Section 1: Review framework in 3 years
· Section 2: Royalties to the principal
· Section 3: Conforming Amendment (CA)
· Section 4: POMV and draw limit formulas
· Section 5: CA
· Section 6: Appropriations from ERA to general fund and
principal
· Section 7: Dividend appropriation (20/20 formula)
· Section 8: CA
· Section 9: CA
· Section 10: $1,000/person dividend in 2017 and 2018
· Section 11: CA
· Section 12: CA
· Section 13: CA and repeal language re. CBR investment
· Section 14: CA
· Section 15: Immediate effective date
2:50:37 PM
Co-Chair Foster pointed to slide 28 that included a POMV
calculation. He asked for an example of how all the
calculations worked and how they would be equated to how
the dividend was paid out. He was interested in the
spreadsheet that had been used to model the information.
Vice-Chair Gara referred to his earlier request related to
a 10-year projection for dividends under each of the bills
and asked for a spreadsheet.
Commissioner Hoffbeck answered in the affirmative.
Representative Ortiz asked for a quick summary on the draw
limit.
Commissioner Hoffbeck pointed to slide 30. Once
$1.2 billion is received through severance taxes, royalties
not going into the corpus, for every additional dollar
received from oil taxes and royalties, the draw from the
dividend is reduced by one dollar.
Representative Ortiz asked how tax credits related to the
formula, and how often the $1.2 billion marker was reached.
Commissioner Hoffbeck replied that he would bring modelling
in to present to the committee.
Representative Guttenberg asked about production tax and
royalties. He wondered whether modelling would show what it
would look like if it had been raised above $1.2 billion.
He asked about the extent of an artificial spending cap.
Commissioner Hoffbeck answered in the affirmative. The
answer came with a secondary calculation as in order to
allow for a larger cap, it would start at a lower point and
required less than 5.25 percent draw due to the feedback
loop.
2:54:49 PM
Representative Grenn pointed to slide 33 regarding
inflation-proofing. He asked about the decision for the
bill to provide that the ERA balance over four times the
maximum 5.25 percent draw, which would be transferred to
the corpus instead.
Commissioner Hoffbeck answered there was no downside to
having at least one extra year's revenue in the fund so the
fund would not be depleted in the three-year time period.
The department chose the time period because it wanted the
review to occur within one gubernatorial term, to avoid new
staff having to make decisions at the time of the deadline.
Representative Pruitt referred to the presentation's
mention that 5.25 percent was aggressive. He asked if the
risk in the current budget resided with oil taxes and the
volatility of oil prices.
Commissioner Hoffbeck answered in the affirmative.
Representative Pruitt asked about putting risk in the
Permanent Fund by being aggressive with the POMV number. He
asked what pressure was placed on APFC.
Commissioner Hoffbeck answered it would change the dynamic
at APFC and would add scrutiny to its annual returns. He
did not believe it was overly aggressive but simply used as
much revenue as possible under the existing process. The
corporation would feel pressure in a down year. He did not
want to be so concerned that the fund ended up being
underutilized.
2:59:19 PM
Representative Pruitt asked for verification that he would
agree with giving some of the procurement tools to the
Permanent Fund.
Commissioner Hoffbeck answered "absolutely."
Vice-Chair Gara had been surprised the four times draw was
a political calculation.
Commissioner Hoffbeck answered that the four times draw was
not political calculus, just the three-year review period.
They wanted to ensure that there was at least one review
period within every gubernatorial cycle.
3:00:23 PM
Co-Chair Seaton surmised that inflation-proofing would not
take place for a number of years. He asked for the calculus
behind the method.
Commissioner Hoffbeck answered if the Permanent Fund met
its 6.95 percent projected return, the fund would grow with
inflation, even with the draw occurring. Without the
inflation-proofing loop, putting money into the corpus,
eventually the earnings are realized and would flow out of
the fund. Even though there would not be a deposit back
into the corpus in the first few years, it is expected that
the fund would grow at a rate that would account for
inflation and for the draw. The feedback loop is needed to
take the money from where it can be spent to the corpus
where it would be locked up for perpetuity. The fund itself
would grow with inflation, but the corpus is not inflation-
proofed without that feedback loop.
Co-Chair Seaton pointed to page 2 of the legislation where
distributable income was deleted but not net income. He
asked if the POMV was just to have transfers to the
earnings reserve and the draw was not based on the item. He
was trying to determine the calculation. He pointed to page
2, Section 3, line 17.
Commissioner Hoffbeck asked for clarification.
Co-Chair Seaton referred to the calculation of net income.
He asked if the sole purpose of the net income calculation
was to determine what went into the earnings reserve.
3:04:00 PM
Commissioner Hoffbeck answered in the affirmative. He
detailed the statutory net income calculation is for how
much is moved out of the fund for appropriation. The entire
POMV process could be done without that component. They
left it in to ensure the public that they were not
jeopardizing the fund and in fact the bill would be cleaner
if it were simply 5.25 percent of the five-year average was
available for appropriation. It had been included to give
comfort that the administration was not doing something
sneaky.
Co-Chair Seaton looked at slide 29 of the presentation
related to the POMV draw and restriction. He asked if the
purpose was to limit future legislatures' ability to carry
out infrastructure and deferred maintenance so that any
other monies had to come from other revenue sources.
Commissioner Hoffbeck answered in the negative. The purpose
was to avoid hyper-inflating spending in years with high
oil prices. It flattened revenues available for government
spending. It allowed the feedback loop for inflation-
proofing. It allowed to draw more knowing that the earnings
reserve would feed back into the corpus and kept from
overheating government spending. There was only so much
available to spend in a given year.
3:07:01 PM
Representative Kawasaki mentioned capital budget years and
suggested there were also large operations budget
additions. He referred to an extra $1,200 dividend provided
by former Governor Sarah Palin [for energy costs]. He
discussed the spike in the price of energy with oil prices
at $80 to $90 per barrel.
HB 61 was HEARD and HELD in committee for further
consideration.
Co-Chair Foster addressed the schedule for the following
day.
ADJOURNMENT
3:08:40 PM
The meeting was adjourned at 3:08 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 61 NEW FN DOC HRS 1-28-17.pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |
| HB61 Sponsor Statement - Governor's Transmittal Letter.pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |
| HB61 Supporting Document - Bill Summary 1.31.17.pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |
| HB61 Supporting Document - DOR White Paper 1.30.17.pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |
| HB61 Supporting Document - Permanent Fund Protection Act Presentation (0....pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |
| HB61 Supporting Document DOR Letter .pdf |
HFIN 2/2/2017 1:30:00 PM |
HB 61 |