Legislature(2017 - 2018)HOUSE FINANCE 519
02/06/2017 01:30 PM House FINANCE
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| Presentation: a Framework for Analyzing Fiscal Plans | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
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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.
SUMMARY
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
meeting.
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
plan.
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
future.
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
process.
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
reserves.
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
RECONVENED
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
RECONVENED
Co-Chair Seaton addressed the schedule for the following
day.
ADJOURNMENT
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 |