Legislature(2017 - 2018)HOUSE FINANCE 519
02/23/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Permanent Fund Forecasting Methodology, Variability and Volatility Discussion and Realized and Unrealized Earnings Presentation: Callan Associates, Inc. | |
| HB57 || HB59 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 57 | TELECONFERENCED | |
| += | HB 59 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 23, 2017
1:33 p.m.
1:33:31 PM
CALL TO ORDER
Co-Chair Seaton called the House Finance Committee meeting
to order at 1:33 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 Steve Thompson
Representative Cathy Tilton
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Steven Center, Senior Vice President, Callan Associates,
Inc.; Gregory Allen, President and Director of Research,
Callan Associates, Inc.; Angela Rodell, Executive Director,
Alaska Permanent Fund Corporation; Dan DeBartolo, Director,
Division of Administrative Services, Department of Revenue;
Jeff Jesse, Legislative Liaison, Alaska Mental Health Trust
Authority; Representative Lora Reinbold.
PRESENT VIA TELECONFERENCE
Brandon S. Spanos, Deputy Director, Tax Division,
Department of Revenue.
SUMMARY
HB 57 APPROP: OPERATING BUDGET/LOANS/FUNDS
HB 57 was HEARD and HELD in committee for further
consideration.
HB 59 APPROP: MENTAL HEALTH BUDGET
HB 59 was HEARD and HELD in committee for further
consideration.
PRESENTATION: PERMANENT FUND FORECASTING METHODOLOGY,
VARIABILITY and VOLATILITY DISCUSSION and REALIZED and
UNREALIZED EARNINGS PRESENTATION: CALLAN ASSOCIATES, INC.
Co-Chair Seaton reviewed the agenda for the day. He asked
members to hold their questions until the presentation end.
^PRESENTATION: PERMANENT FUND FORECASTING METHODOLOGY,
VARIABILITY and VOLATILITY DISCUSSION and REALIZED and
UNREALIZED EARNINGS PRESENTATION: CALLAN ASSOCIATES, INC.
1:35:12 PM
GREGORY ALLEN, PRESIDENT AND DIRECTOR OF RESEARCH, CALLAN
ASSOCIATES, INC., introduced himself and provided some
background information on Callan Associates, Inc. He had
been with the company for 28 or 29 years, since 1988. His
firm worked with large institutional investors like the
Alaska Permanent Fund Corporation (APFC). The company's
clients represented about $2 trillion in assets. The
company worked with several large public entities including
public pension funds, foundations, endowments, corporate
pension funds, and corporate defined contribution funds.
The company provided three services. It helped clients with
strategic planning which entailed deciding on a plan for an
entity's portfolio, determining which asset classes to
include, estimating the expected return over time, and
establishing how to implement the asset classes. The firm
also helped companies monitor their portfolios by
conducting performance measurements and reviewing the
investment managers who handle funding. Callan and
Associates, Inc. had a team that specialized in
understanding investment managers and investment
strategies. The company had assisted APFC for over 30
years. He had personally been involved with the Permanent
Fund (PF) for the previously 20 years. He had been involved
with doing a modeling exercise to look at the expected
returns and the interaction of the capital markets with the
earnings reserve account (ERA), the market value, and
inflation proofing. He felt he had a good handle on all the
moving pieces that went into understanding the finances of
the PF.
Co-Chair Seaton recognized Vice-Chair Gara in the room.
Mr. Allen introduced the PowerPoint Presentation: "Callan's
Return Projection Methodology for the Alaska Permanent
Fund: Capital Market Expectations, Total Return, and
Statutory Return"(copy on file). He turned to slide 2:
"Projected Returns." He reported the numbers to be nominal.
for the Alaska Permanent Fund":
Background:
· Callan has maintained a financial model of the Alaska
Permanent Fund for the past 15 years, and provides
projections to assist the Board and Staff in the
management of the Fund.
· The model employs capital market projections
maintained by Callan, Fund specific information
provided by APFC Staff, and a sophisticated and
flexible model of the accounting framework to allow us
to test various spending and asset allocation
proposals.
· The model uses Monte Carlo simulation to generate a
full range of potential outcomes from best-case to
worst-case, with associated probabilities.
· The model provides projections for many key financial
variables including
o Total Return
o Statutory Return
o Market Value
o Earnings Reserve Balance
o Distributions
· The model has been used many times over the years to
analyze various proposals related to the Permanent
Fund, including three legislative proposals in
February of 2016.
Mr. Allen explained that Callan had maintained a financial
model of the PF, the Monte Carlo simulation model, for the
prior 20 years. The model employed capital market
projections which he would be discussing. They were
Callan's expectations for return, risk, and correlation for
the various capital markets that were used in the
investment portfolio. The firm was able to generate a wide
range of outcomes from best-case to worst-case. He stressed
that typically when discussing returns, people focused on
the midpoint of the distribution of returns. However, it
was unknown what the return would be in any one year. The
Monte Carlo simulation allowed his company to look at the
full range of returns and to assign probabilities around
them. The model allowed Callan to do projections not only
for return but for statutory return (the realized return),
the market value, the ERA balance, and distributions under
various formulas. For example, the company used the model
in the previous February to evaluate three legislative
proposals that had been brought forward for different ways
to tap the PF going forward.
1:39:01 PM
Mr. Allen advanced to slide 3: "Return Projections FY
2017":
Latest Projections for Total and Statutory Return:
· Return projection period was assumed to begin July 1,
2016.
· Market values and cost-basis inputs were as of June
30, 2016.
· 1-year returns for FY 2017 do not take into account
performance in the first half of the fiscal year.
· Median 10-year total real return expectation is 4.70%,
below the 5% real return expectation that has been
employed as a target by the APFC.
· The mid-point of these distributions is just one
potential outcome. It is important to recognized that
the Fund takes on risk therefore there can be
significant variance relative to the mid-point
projections.
Mr. Allen explained that the slide showed the latest return
projections. They were calculated in the previous summer
and fall of 2016. They reflected statutory and total return
projections. The 10-year projections were reflected at the
top of the slide. He pointed to the highlighted section
which showed the midpoint. He reported that 6.95 percent
was the total return projection and 6.24 percent was the
total statutory return. He indicated that they were nominal
and that the inflation projection over the same period was
about 2.25 percent. He relayed that by subtracting 2.25
percent the result would equal the real return projections.
He re-emphasized that he was highlighting the midpoints. It
was important to note that in Callan's way of thinking
there was about a 50 percent chance that the return could
be higher than 6.95 and about a 50 percent chance that it
could be lower. He directed members not to focus too much
on the midpoint. He did not want anyone to walk away from
his presentation thinking that the PF would earn 6.95
percent every single year. There was a reasonable amount of
risk built into the PF portfolio. However, he could almost
guarantee there would not be a year in which the PF would
earn exactly 6.95 percent. Again, there was a 50 percent
chance that the return would be higher and a 50 percent
chance that it would be lower.
Co-Chair Seaton asked Mr. Allen to clarify the total return
and the statutory return and the difference between the two
columns on the slide. Mr. Allen explained that the total
return was a measure of the market value at the end of the
year relative to the market value at the beginning of the
year. It had nothing to do with whether anything had been
realized, or whether it was income or capital appreciation.
A large portion had to do with changing the prices, the
valuation. The statutory return was sort of a PF concept.
It was the realized return. A statutory return worked such
that if the corporation received a coupon or a dividend
from a bond, it would be considered income counting towards
the statutory. If the corporation sold a stock or a bond
and it realized a gain or a loss, it would count towards a
statutory return. He suggested thinking of a statutory
return as being the realized return in any given year.
Mr. Allen continued that, typically, the statutory return
was lower than the total return because the corporation did
not realize all its gains every year. The Permanent Fund
was invested in several different things such as real
estate and private equity. He suggested that even the
typical turnover (the percentage of the portfolio sold
between the beginning of the year and the end of the year)
of the stock market was about 25 percent. In any given
year, APFC would only realize about 25 percent of its total
capital appreciation. He continued that in a private equity
portfolio none might be realized. Statutory return was
important because it was what drove the size of the ERA.
The corporation had to realize a return before the money
could get moved into the earning reserve. He would provide
more detail later in his presentation in a section on
statutory return.
Mr. Allen continued to slide 4: "Capital Market
Assumptions":
Projected Return and Standard Deviation:
· Employed Callan's 2016 10-year capital market
expectations for all models.
· Expectations are developed annually and used for
strategic planning work for all client types.
· Represent long-term consensus expectations.
· Designed to work as a set-in optimization and
simulation analysis.
· Generally, these expectations evolve slowly with only
modest year-to-year changes.
Mr. Allen indicated that the table on the slide provided
Callan's outlook for the following 10 years for all the
different asset classes employed by APFC. The asset classes
included everything from equities with an arithmetic return
of 9 percent down to several other asset categories. He
commented that the APFC had a very diversified portfolio.
Callan had to come up with a projection for each category.
He relayed that he had been hired at Callan in 1988 to work
on the process, which he had been involved with every year
since then. The projection return was a long-term 10-year
outlook. He considered what was going on in the economy,
what was going on with interest rates and inflation, the
previous year projections, and what other participants in
the industry were saying. He suggested that the numbers
could be viewed as "consensus" numbers. He thought
competitors would have similar numbers.
Mr. Allen Scrolled to slide 5: "Capital Market Assumptions:
Projected Correlation Matrix." He explained that
correlations act as a measure of the way assets interact
with each other. He suggested that it was important to know
when assets had low correlation (when one item goes up, the
other item goes down at the same time). He provided the
example of an ice factory and a coal factory: coal was used
in the winter and ice was used in the summer - they had low
correlation with each other. He relayed that low
correlation was good because when putting two things
together it reduced risk. It was important to know the
correlations between asset categories to understand the
returns and the variability of returns when they were
combined.
Mr. Allen moved to slide 6: "Assumed Asset Allocation." He
suggested that the last thing he needed to know to get a
return projection and a risk projection was the asset
allocation of the PF. He pointed to the slide showing the
target asset allocation adopted by the board in 2016. The
board went through an exercise of looking at this once a
year. He noted there was a strategic asset allocation and
the assumptions. There was an expected return of 6.95
percent with a standard deviation of about 12.5 percent. It
meant that there was a two-thirds chance that the return
over 10 years would be between 6.95 percent plus 12.38
percent and 6.95 percent minus 12.38 percent.
1:45:20 PM
Co-Chair Seaton acknowledged Representative Pruitt had
joined the meeting.
Mr. Allen proceeded to slide 7: "Statutory Net Income and
Permanent Fund Mechanics":
· Understanding the mechanics of the Permanent Fund can
lend some insight into the expectations for Statutory
Net Income which determines Statutory Net Return.
· Statutory Net Return is the total of realized income
and realized capital gains in each fiscal year.
· The asset allocation determines the Fund's exposure to
a number of factors which, in turn, will influence the
Statutory Net Return over time.
· Ratio of income producing assets to capital gains
oriented assets
· Turnover
· Active versus passive management
· The use of illiquid asset classes such as real
estate, private equity, infrastructure
· We review the mechanics of the Fund, and look at the
history of a number of important variables to help put
Statutory Net Income into context.
· Fund Market Value
· Oil revenue
· Statutory Net Income (realized income)
· Earnings reserve balance
Mr. Allen wanted to delve into the topic of statutory net
income, which resulted in statutory return, and the
mechanics of the PF. He relayed that statutory return was a
measure of the return generated by realized income and
realized capital gains in each fiscal year which was the
amount that counted towards the earnings reserve and the
amount that could be spent. If gains were not realized
money could not be spent. He continued that statutory
return was more complicated than the total return because
it was dependent on some accounting variables. For example,
if returns were positive for a number of years on the fund,
the market value would rise well above the cost basis due
to prices going up. However, not all the gains would have
been realized and the cost basis would have stayed low. He
furthered that when there was a large spread between market
and cost and turnover was done it supercharged the return.
Conversely, if there were several bad years in a row, there
might be unrealized losses and when there was turnover, the
losses would be realized and reduce the size of the
earnings reserve. One of the metrics to be aware of when
thinking about statutory return was looking at the activity
for the previous 5 years. It was important to know whether
the market was an up market or a down market. A company
would generally realize about 25 percent of the capital
gains or capital losses in any given year in the normal
operation of the PF. Although his point was subtle, he
thought it was important in terms of forecasting the
statutory return.
Mr. Allen continued to review slide 7. He explained that
turnover was another factor influencing the statutory net
return. There were many things that caused turnover
including managers buying and selling stocks. Other things
also caused turnover, such as when the APFC had to raise
cash to make a distribution to the government or the
dividend. The corporation had to sell securities which
would realize gains and cause the statutory return to
change.
Mr. Allen noted that when companies rebalanced, which
entailed taking money out of equities that had gone up and
putting them into bonds that had stayed flat, they were
selling equities. He mentioned changing asset allocations.
If the board came in deciding to do something completely
different, such as having a separate asset allocation for
the earnings reserve that was all in cash, it would have to
sell a bunch of stocks and bonds and realize a bunch of
gains to get from point A to point B. Realizing a bunch of
gains would create turnover and raise the statutory return.
Mr. Allen discussed active versus passive management.
Active management had more turnover and passive management
had less turnover. He also brought up illiquid asset
classes such as real estate, private equity, and
infrastructure that had very low turnover. He concluded
that the more that APFC invested in illiquid asset classes,
the less turnover and the less gains realization as a
percent of the total. He thought the points he discussed
were important to understand because statutory return was,
in some ways, more important than total return as it
related to the Permanent Fund.
Mr. Allen continued to the chart on slide 8: "Mechanics of
the Permanent Fund." He wanted to provide a picture of the
relationship between statutory return and the PF. Slide 8
showed a historical market value of the PF over time. He
reported that at the end of FY 16 there was a balance of
about $53 billion. There had been a steady rise. There had
been a couple of dips in 2002 and 2008 periods, but a
relatively stable path that sloped upwards.
Mr. Allen reviewed slide 9: "Statutory Net Income." He
conveyed that in looking at the statutory return a much
more volatile pattern could be seen. The statutory net
income had varied much more with respect to market crisis'
than the fund itself. He highlighted that in 2009 the
statutory net income was significantly negative. He
recalled that in 2009 it was a positive return year. He
explained that the reason statutory net income was low, and
negative was because it was at a time when the fund was
realizing the losses that had been incurred in 2008. He
conveyed that the statutory return lagged total return
because things had to be realized and usually they were not
realized until the next year or the following year. He
thought it was possible that APFC could announce that the
total return for the year was 6 percent. However, the
statutory return could be -2 percent depending on the
events of the previous year. He wanted to point out the
potential disconnect between the two measures.
1:50:36 PM
Mr. Allen detailed slide 10: "Statutory Net Income
Projection: Conclusions":
· Statutory Net Income is influenced by a number of
different dynamic factors besides the total return on
the portfolio.
· The ratio of income producing investments to capital
appreciation focused investments will have a
significant impact.
· The amount of turnover in the capital appreciation
focused investments will also have an impact.
· Rebalancing frequency between asset classes will also
have a meaningful impact.
· Cash raised for distributions can accelerate the
realization of gains or losses in the portfolio and
will have an impact.
· Callan's projections for statutory net income are
probably on the high side due to the assumption of
quarterly rebalancing. APFC Investment Staff employs a
much more efficient and sensible rebalancing approach
in practice.
Mr. Allen was at the end of his presentation and believed
he had covered the points listed on the slide. He thought
Callan and Associates, Inc.'s projections and expectations
were reasonable. The company had reviewed its performance
in terms of projections. The company had never been exactly
correct, but was reasonably close in terms of a total
portfolio. He encouraged questions from members.
Co-Chair Seaton referred to slide 3 regarding statutory
returns. He pointed to the 1-year and 10-year projections.
He asked about the period. Mr. Allen responded that the
period began July 1, 2016 through June 30, 2025, a 10-year
period. Co-Chair Seaton asked if the 1-year statutory
return would extend through June 30th of the current year.
Mr. Allen responded, "correct." Co-Chair Seaton wondered if
the 50 percent probability had a statutory return of 5.43
percent total. Mr. Allen responded positively.
Co-Chair Seaton asked if 2.25 was subtracted from the
amount to determine the real return. He wanted to bring up
2 different points regarding the 1-year projection. Mr.
Allen suggested that the year was already half way over
presently. The figures were done as part of the revenue
sources projection book for the fall. Callan only had data
through June. Prior to the election the performance of the
fund was not looking good. He would have suggested that the
5.43 percent might not be reached. He furthered that since
the election, there had been a rally in equity markets and
high yield markets. Anything that had risks had performed
well, even emerging markets. He thought that presently the
state was running ahead. He opined that many things could
happen in any given year that could make the number off. He
mentioned that inflation was running a little less than
2.25 percent. He thought it would be about 1.5 percent at
the end of the fiscal year. He conveyed that 2.25 was the
long-term projection. The short-run was affected by just
the 6 months that had already occurred.
Co-Chair Seaton mentioned having talked about 90 percent
realized earnings. He wondered if it meant, compared to
total return, looking at a 90 percent asset turnover. He
thought Mr. Allen had reported the stock turnover was
generally 25 percent. Mr. Allen indicated that historically
the statutory return had averaged about 90 percent of the
total return. He had heard the number referenced before. He
added that in any given year they could vary wildly from
each other depending on what happened leading into that
year. He recommended thinking about the statutory return as
80 to 90 percent of the total return in up years - it was a
reasonable way of thinking about it. Interestingly, though,
in a really negative year, not as many losses were realized
in the statutory return in up years. However, in a negative
year the statutory return was substantially better than the
total return. They were related but were lagged relative to
one another.
1:55:01 PM
Co-Chair Seaton asked if it had something to do with having
a loss in an asset in which case a company might be
inclined to hold onto it to let it recover. Mr. Allen
responded that the fund generally held onto assets. Many of
them had paper losses, but the fund did not sell them as a
matter of course. A person could not sell their private
equity portfolio. Just because a stock portfolio went down
was not a reason to sell it. In fact, it might be a reason
to buy more of it. He continued that in the day-to-day
operation of the fund a certain amount of gains and losses
would be realized every year.
Mr. Allen informed the committee that when the fund started
it was invested entirely in bonds. He thought that was were
the statutory return concept was born. The primary source
of bonds was income. They paid a coupon. When someone
received a coupon, it counted towards statutory return.
Over the years, the fund has moved away from bonds and into
stocks, private equity, real estate, and everything else.
Income was a much smaller component of the return. Capital
appreciation had become a larger component of the return.
He reemphasized that the only way to get capital
appreciation to go into the return was by selling the stock
and realizing the gain.
Vice-Chair Gara referred to the bottom chart on slide 3. He
commented that the difference between the statutory and the
total return at the 50 percent likelihood level was pretty
close. At the 90 percent likelihood level, the 1-year total
return was 22.26 percent, but the statutory return was only
8.15 percent. He asked if the numbers reflected not cashing
in much in realized earnings, but keep the stocks.
Mr. Allen indicated Vice-Chair Gara was exactly right. The
stock market could go up 20 percent in a year. However, in
a normal year an entity would not sell its entire stock
portfolio at the end of the year. It would be more likely
to sell about 20 to 25 percent of it. He suggested that if
the return all happened at the end of the year, for
example, none of the return would be captured. It was a
matter of when a return took place and when purchases and
sales occurred. In the stock portfolio there was a natural
level of turn over which ran at about 20 percent to 25
percent per year. If a person looked at it back 10 to 15
years, it was very stable. He projected that if a company
had a 22 percent year, going into the following year there
would be a large difference between the paper value of a
portfolio and what was actually realized. He suggested that
even if the next year was negative, because the portfolio
was being turned over and realizing the embedded gains, it
would be higher. He asked if members understood what he was
trying to explain.
Vice-Chair Gara was not following Mr. Allen, but did not
need him to repeat himself. He noted that many legislators
were trying to eke out as much for dividends in the current
year and for public services. In looking at the 50 percent
level, the statutory return was predicted to be 5.43
percent. He wondered what Mr. Allen's projection was
presently, and what the projected change would mean in
terms of money in the ERA by the end of the fiscal year.
Mr. Allen speculated that if the market stayed where it was
between the present day and the end of the fiscal year, it
would not be unreasonable to expect about a 6 percent
statutory return in the current year (as opposed to 5.4
percent). He reviewed the formula. He took 6 percent and
multiplied it by about $53 billion. The total equaled
approximately $3 billion which would be added to the
earnings reserve relative to the prior year's figures.
2:00:33 PM
Vice-Chair Gara asked Mr. Allen to do the other calculation
having to do with another half of a percent. He wanted to
know the amount of additional funding into the earnings
reserve. Mr. Allen thought it would be close to $250
million.
Representative Pruitt asked for an estimate of the returns
rather than the statutory returns. Mr. Allen responded that
it depended on what happened in the remainder of the year.
He had just done the performance through December 31st. He
thought the funds went up about 8.3 percent. He thought the
amount was somewhere in the 4's. He suggested that if the
APFC went along at the exact same pace and the amount was
up 4.5 percent through December the state would be closer
to 5.5 percent. He thought it was possible that with normal
type returns he could expect the percentage to be higher
than 6.7 percent. He did not believe 6.7, 7.5, or 8 percent
was out of the question. He commented that if the markets
reacted badly, the percentage could drop by 10 percent. He
remarked that having been in the business for 28 years, the
money managers were the people who were paid a significant
amount of money. Consultants were paid much less. He
thought it was much easier to do a 10-year return rather
than a 1-year return. He remarked that 1-year returns were
crazy and were impossible to get right. He preferred doing
10-year forecasts.
Representative Wilson asked if Mr. Allen would recommend
doing a Percent of Market Value (POMV) for the state's
operating budget each year rather than putting it in
statute and binding the state.
2:04:08 PM
Mr. Allen responded that from the standpoint of the health
of the fund, Callan and Associates, Inc. favored knowing in
advance about what would come out of the fund and the time
of the withdraws. Having clarity about those items would
make it much easier to operate the fund. He thought it was
an important point for members to take away. He noted that
the POMV formulas under consideration and as he understood
them, had one very important component which was that they
were a percent of the average market value over 5 of the
prior 6 years. They excluded the most recent year. He
thought a POMV applied to 5 out of the previous 6 years
could be applied, it would be much better for the
operations of the PF. It would allow Callan and the
government to know a year in advance how much could be
pulled from the fund. His company liked the certainty
around a POMV approach rather than an ad hoc method.
Planning could be done; investment policies could be
implemented; and long-term decisions could be made. In
choosing the right percentage it could be very sustainable
over the long run and could affectively inflation proof the
corpus. He thought one of the hallmarks of the fund had
been to protect the corpus against inflation. He
highlighted the importance of inflation proofing the
corpus, otherwise, it would mean there would be less to
spend for future generations. He reiterated that with a
correct percentage, a POMV formula would naturally
inflation proof. He suggested a percentage between 4.5
percent to 5 percent was sustainable. It would
automatically inflation proof because the state would not
be spending too much. A percentage of 5.5 or 6.0 would eat
into inflation proofing making it unsustainable.
Representative Wilson was talking about a formula. She
agreed with Mr. Allen that the state should not just choose
a formula that looked good for the state. She thought
everyone recognized the need for containment. She was
concerned about putting something into law without having
any experience with it. She was wondering how to choose a
number. She thought Mr. Allen was saying that even if the
state chose a formula, it also needed to choose a number
even if it turned out to be a wrong number. Knowing the
number was better than not knowing it every year. Mr. Allen
agreed that it was important to choose a number. He
suggested that the state could always correct its course.
If the number was wrong for long there would be pressure to
change it.
2:08:05 PM
Representative Grenn thanked Mr. Allen for his explanation
and Representative Wilson for her question. He thought it
was clear the importance of the issue.
Representative Guttenberg referred to the history of the
fund and remarked that the legislature had indicated its
expectations of the fund and provided some directions. If
the state moved to a POMV or something else, he wondered
about setting up a process for shifting the state's asset
allocations and investment style to fit the direction the
state would be headed in. He wondered if the state would
increase risk or provide more stability.
Mr. Allen responded that if the right percentage was
chosen, the asset allocation would not have to be changed
at all. He elaborated that Callan worked with several large
pension funds. Pension funds 10-15 years previously the
expected returns and the actual returns ran at about 8.5
percent. In the 2000s there had been 2 large financial
crisis' and the returns were disappointing. Many of the
pensions had fallen behind in terms of the assets that they
had to cover their liabilities. There was a significant
amount of pressure on decision makers to make up the gap.
However, they did not want to go after the tax payers to
stop fixing the roads to make up the gap. A large amount of
pressure had been placed on the investment staffs to take
on more risk. Another important take-a-way was that if a
high percentage was chosen, it would put pressure on the PF
to take additional risk. He reported that when more risk
was taken there was greater volatility, for loss and for
not being able to protect persons in power of the fund. It
would introduce volatility to the payout as well. His sense
was that, from the legislature's standpoint, having some
consistency in the payout from year-to-year made budgeting
much easier. He added that by forcing the PF to take more
risk, by asking for a lot of money, it would naturally
introduce more volatility into the payment stream. He
thought it would be aggravated tremendously and advised
against it. He had not previously discussed the earnings
reserve. A three-fourths vote was required to change the
concept of the earnings reserve in the constitution. He
asked Ms. Rodell to correct him. He had always been under
the impression that the corpus was protected
constitutionally.
2:11:50 PM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, clarified that the ERA was created in statute
and not in the constitution. A majority vote of the body
was required to appropriate money. It was available for
appropriation at any time in its entirety. While all the
things Mr. Allen spoke to about percent and asset
allocation were 100 percent correct and which she agreed
with, she reminded members that because of the ability and
right to appropriate and not knowing how much might be
taken out in the first year if it was different than the
percent, it would influence how the APFC thought about it
going forward. Inflation proofing of the corpus only came
with appropriations from the earnings reserve back to the
corpus. The corpus did not grow its value inherently and
would get to keep that value. It turned all its gains to
the ERA.
Mr. Allen thanked Ms. Rodell for the correction. He thought
of the ERA as being the difference between the corpus (the
protected piece that could not be touched without a
constitutional change) and the rest of the fund. He
reported that there had been times since his involvement
that the ERA had a zero balance at the start. There was a
time where if there was a balance in the ERA after the
dividends were paid out it would be appropriated back to
the corpus to protect and grow the corpus. The danger in
doing that was that the year would begin with nothing in
the ERA. He reemphasized that if a percentage was chosen
that was too high, it would drain down the earnings reserve
over time, making it smaller and smaller relative to the
corpus. If there was a big negative year the ERA could
potentially go to zero and nothing could be spent. He was
providing the information to encourage members to be
prudent in choosing the percentage to maintain the fund's
purchasing power at a sustainable level and to maintain the
corpus. Currently, the state had a very healthy earnings
reserve. It was as large as he had ever seen it. The
state's ability to spend in the future would be inhibited
if the state were to eat through its cushion in conjunction
with experiencing a number of negative years in a row.
2:14:59 PM
Representative Ortiz asked about the variability in the 2.2
percent inflation rate. If it was highly volatile, he
wondered how it would impact the rest of the picture. Mr.
Allen thought inflation was an interesting variable.
Inflation from one year to the next did not tend to move
around very much. Inflation would not increase from 1
percent inflation to 9 percent inflation in a single year.
It had never happened before. In terms of inflation's
standard deviation volatility was low, 2.25 with a standard
deviation of about 1.5 percent. It had another feature
referred to as autocorrelation, which meant that it
trended. The episodes of trending inflation, like in the
1970s, wiped out purchasing power and wealth. The one thing
that had changed since the 1970s was the central banking
focus on keeping inflation under control. There were much
fewer checks and balances on inflation when the last large
inflation episode occurred then there were presently. There
were things happening in the economy that made it look like
inflation would start picking up. He did not want to state
that it would get out of control However, the labor markets
in the US had never been as tight for 20 years. Alaska was
a service-based economy and labor was a large part of the
inflation equation.
Mr. Allen reported that inflation had been kept
artificially low in the US because of 2 things: there was a
huge decline in energy prices and the rising dollar. There
had been a tremendous run where the dollar had increased
relative to other currencies, which had made importing
goods cheap. There had been a perfect storm to keep
inflation low. He believed some of those factors were
coming to an end. Although 2.25 percent was low relative to
what he thought he would see in the current year, it was a
reasonable estimate for the following 10 years. He
suggested that it could be higher as well. He suggested
that if inflation was 2.25 and the fund was not inflation
proofed the corpus would be 2.25 percent less than it was
before.
2:18:16 PM
Co-Chair Seaton asked about slide 10 and the statement on
the bottom having to do with quarterly rebalancing. He
wondered about the importance of the caveat Mr. Allen
included. He wondered by how much he was estimating on the
high side. Mr. Allen did not think it would be more than
three-tenths of a percent. He added that APFC was careful
in the way it managed money to reduce unnecessary turnover.
He continued that when stocks were sold commissions were
paid which costed money. One way to minimize the amount of
transaction costs over the course of a year was to reduce
turnover. In his model he had to assume that when stocks
went up and bonds went down he had to sell the stocks to
stay at the target asset allocation. In the case of the PF,
the corporation might sell its stock to pay the
distribution, rather than to buy bonds. The corporation was
crafty at how it managed the turnover issue. It ended up
being a little bit lower than what he had projected. It
meant that the realized return would be slightly lower than
what he projected.
Co-Chair Seaton provided his understanding which was that
the state had not been structuring the draw such that they
would drive his asset selling to put money in the ERA. He
offered Ms. Rodell an opportunity to clarify that point one
way or the other. He asked Ms. Rodell if she was selling
assets to put money in the ERA for allocations, or if her
investment strategy was independent of the state's
potential cash needs. Ms. Rodell confirmed that the
investments were not being driven by a particular outcome.
She spoke to Mr. Allen's point. For example, the
corporation knew what the amount of the transfer for the
dividend would be because it had the 4.5 years of
performance. The corporation made an estimate about the
final 6 months to know what the cash transfer would be. She
thought Mr. Allen was illustrating the APFC, in planning
for a cash transfer, might decide to start selling stocks
to generate the cash presently or perhaps a month from the
current day to reduce the transaction costs rather than
doing it automatically to have a forced rebalancing. His
computer model required a forced rebalancing to hit the
number. She appreciated the opportunity to clarify on the
record what the corporation did on that front.
Co-Chair Seaton asked if the corporation's basic investment
strategy would change based on the modeling with a POMV
statutory requirement going forward at a range of 4.75
percent to 5.25 percent. Ms. Rodell did not believe so
because, as Mr. Allen testified earlier, it provided the
corporation much more certainty as to what the number would
be. It meant that the corporation would be able to take
longer-term positions and to make better investment
decisions about the balance. There would not be an
expectation or an unforeseen transfer in which the
corporation would need to pull more cash than necessary due
to unpredictability.
2:22:56 PM
Co-Chair Seaton asked about the mechanism in several bills
that talked about 4 to 1 after the draw and anything above
the amount being transferred internally for inflation
proofing. He asked if it would drive or change any of the
corporation's investment strategies either way. Ms. Rodell
responded, "No, I don't believe it would change any
investment strategies."
Representative Guttenberg mentioned using the term
"investment strategies." He noted the term "Mechanics of
the Permanent Fund" used on slide 7. He asked if the terms
were interchangeable. He asked if she would describe it
differently - between what the state was currently doing
and what it would do if the state had a POMV model. Mr.
Allen replied that when he was talking about the mechanics
of the PF in this context he was talking about the current
spending policy: the interaction of the corpus and the
earnings reserve and the way the distributions were
determined. He looked at the POMV model as being a
different set of mechanics. Under the current spending rule
the corporation was not spending 5.25 percent or 4.75
percent. It had been 1.5 percent to 2.0 percent. The
largest change that was being contemplated was the amount -
as long as the rules were clear and well known in advance.
In looking at the way the current distribution was
determined, it was based on 5 years of realized earnings.
It was as if it had a 5-year average built into it already.
A five-year POMV was not a huge shift and the corpus was
protected under both paradigms. The substantive difference
was the percentage.
Representative Guttenberg asked if the rules needed to be
recalibrated. The committee had heard that when the
legislature changed something significant very strong
structural rules were needed to know the effects of the
change and whether the change was durable from one year to
the next. He asked Mr. Allen what rules needed to be
recalibrated based on his looking at what had been proposed
in the previous year and what had been proposed in the
current year.
Mr. Allen commented that there had been a spirit of
cooperation between the three bills offered in the previous
year. He noted that the legislation put forth by the
governor was the most different of the three bills. He
liked that all three pieces of legislation had an averaging
formula based on the average of the first 5 out of 6 prior
years. The Percent of Market Value was then applied to the
average. He did not believe any of the previous POMV
concepts had contained that formula. It provided 1 year
where everyone was aware of how much would come out of the
fund. Another important piece was whether the fund would be
explicitly inflation proofed. He thought the issue was
controversial. He did not want to take sides but offered
the committee some information. He indicated that if the
fund was inflation proofed it would require the legislature
to appropriate a certain percentage back to the corpus
every year. It had the benefit of ensuring that the corpus
grew with inflation which would make the earnings larger
for future generations or at least the same on an inflation
adjusted basis - a noble goal. The risk with inflation
proofing was that it reduced the size of the earnings
reserve and reducing the size of spending. He continued
that a combination of high spending, high inflation,
negative returns, and doing inflation proofing, would
reduce the size of the earnings reserve. The buffer, in
some sense, would be eroded. The nice thing would be that
the corpus would be larger and would generate future
earnings. He thought it was important to know in advance
whether inflation proofing was going to happen every year
or every so often. He suggested that an ad hoc policy
around inflation proofing would muddy up the rules and
would create greater uncertainty. Uncertainty was the worst
circumstance for investment people.
2:29:01 PM
Vice-Chair Gara mentioned that every time Ms. Rodell came
before the committee, members asked her if 5.25 percent was
okay. He was glad it was still okay because he thought that
to get out of the fiscal crisis, at least for a few years,
it would probably be what the legislature would have to do
to possibly increase the dividends and to have as much of a
government payout for services as possible. He asked about
her caveats. He wondered about the idea of revisiting
whether the market was responding as predicted. He
understood her to want a 3 or 4-year revisit.
Ms. Rodell responded that it went back to the question
about whether the corporation got the percentage correct.
It gave the corporation an opportunity to look at what was
happening to the ERA in light of the size of the draw that
occurred, what was happening in the state, and whether
there was pressure about taking additional monies out of
the ERA over and above the POMV because of revenues not
being replaced or generated. It gave everyone an
opportunity to push the reset button if the legislature
wanted to.
Vice-Chair Gara was aware Director Rodell would like to
have as much inflation proofing as possible. He thought she
had been clear about that point. He asked her opinion about
any excess over the amount of 4 times the draw going
straight into the principle. It would be a way to deal with
inflation proofing, maybe not in the current year, but a
significant amount of inflation proofing later.
Ms. Rodell thought it was good to recognize the importance
of inflation proofing. She was concerned if it was repealed
altogether that the narrative would become that inflation
proofing did not have a role or was not important to the
corpus or to future generations. She confirmed that it was
acceptable.
Vice-Chair Gara thanked Ms. Rodell. He could work around
her response.
Co-Chair Seaton drew everyone's attention to slide 6. He
noted that one of the things the committee had been looking
at was volatility. He pointed to the standard deviation of
plus or minus 12.38 percent around an expected return of
6.95 percent. He noted having requested LFD to calculate
the 9-year actuals and applying the numbers to the returns
and applying them in reverse as well. He appreciated LFD's
work. He thought the slide emphasized the importance of
thinking of a single number and a smooth curve. He thought
it was important to do what was possible to smooth out
things through mechanics. He wanted to always remember this
particular slide and the slides provided by LFD about
volatility.
Co-Chair Seaton indicated the committee would be taking up
subcommittee reports for the Office of the Governor, the
Department of Revenue (DOR), and the Department of Military
and Veterans Affairs (DMVA). He noted that all subcommittee
actions were to Section 1, the numbers section. The
reported subcommittee recommended amounts might be an
incomplete picture of a department's budget.
2:34:00 PM
AT EASE
2:35:36 PM
RECONVENED
HOUSE BILL NO. 57
"An Act making appropriations for the operating and
loan program expenses of state government and for
certain programs; capitalizing funds; amending
appropriations; repealing appropriations; making
supplemental appropriations and reappropriations, and
making appropriations under art. IX, sec. 17(c),
Constitution of the State of Alaska, from the
constitutional budget reserve fund; and providing for
an effective date."
HOUSE BILL NO. 59
"An Act making appropriations for the operating and
capital expenses of the state's integrated
comprehensive mental health program; and providing for
an effective date."
2:35:36 PM
Co-Chair Seaton noted that all subcommittee actions were to
Section 1, the numbers section of the budget. The reported
subcommittee recommended budget amounts might be an
incomplete picture of the department's budget. He relayed
that after the committee completed the subcommittee
amendment process including the language amendments that he
would propose, a new committee substitute work draft of the
bill along with the reports that would include both the
numbers and the language appropriations providing a more
complete picture of each agency's budget totals. The
subcommittee reports were distributed to members the
previous day and were posted on the Legislative Finance
Division's website. Since he was the subcommittee chair for
the Office of the Governor and the Department of Revenue he
would begin with his reports.
Co-Chair Seaton reported that the finance subcommittee for
the Office of the Governor had no amendments to consider,
nor did the governor. As the subcommittee chair he
recommended no changes to the Office of the Governor's FY
18 budget. He read the budget totals by fund source:
The budget totals:
Fund Source: (dollars are in thousands)
Unrestricted General Funds (UGF) $23,135.8
Designated General Funds (DGF) -0-
Other Funds 838.3
Federal Funds 205.0
Total $24,179.1
The Unrestricted General Fund difference from FY15
Management Plan to the FYI 18 Governor budget is a
reduction of $8.9 million, a decrease of 27.7 percent.
From FY17 Management Plan, the FYI 18 Governor budget
reflects an unrestricted general fund increase of
$279.7, an increase of 1 .2 percent.
2:38:06 PM
AT EASE
2:38:26 PM
RECONVENED
Co-Chair Foster asked Co-Chair Seaton to provide his next
subcommittee report.
Co-Chair Seaton recommended two budget amendments for
consideration by the House Finance Committee and several
recommendations to various policy committees for statutory
changes. He read from the subcommittee report:
The budget if theses amendments are adopted totals:
Fund Source: (dollars are in thousands)
Unrestricted General Funds (UGF) $25,646.4
Designated General Funds (DGF) $2,587.5
Other Funds $269,013.3
Federal Funds $78,665.5
Total $375,958.7
Positions:
Permanent Full-time 812
Permanent Part-time 33
Temporary 16
Total 861
If these amendments are adopted, the Unrestricted
General Fund difference from FY 15 Management Plan to
the FY 18 House Subcommittee Recommended Budget is a
reduction of
$8.185 million, a decrease of 24.2 percent.
The Unrestricted General Fund difference from FY 17
management plan to FY 18 House Subcommittee
Recommended Budget is a reduction of $455.2 thousand,
a decrease of 1.7%.
2:40:35 PM
AT EASE
2:40:52 PM
RECONVENED
Co-Chair Seaton read the recommendations for DOR:
The following statutory recommendations are also
submitted to the House Finance Committee
1. A recommendation to the House State Affairs
Committee: Amend AS 43.23.008 to consider repealing
allowable absences for the Permanent Fund Dividend. In
2016, 26,524 dividends were paid to people with an
allowable absence from the state. According to a
study, many of those who claim allowable absences do
not return to the state. 64% of students did not
return, and 81% of those accompanying someone else
with an allowable absence did not return to the state.
17% of all appeals through the Permanent Fund Division
relate directly to allowable absence claims. Repealing
allowable absences would increase the value of the
Permanent Fund Dividend for those residents that
remain in the state.
2. A recommendation for the House State Affairs
Committee: Consider amending AS 43.23 to include
directives or incentives to transition to a completely
paperless environment for Permanent Fund Dividend
Applications. Incentivizing paperless applications
would reduce the current printing and postage costs of
$120,705.57. It would also reduce the number of
seasonal employees necessary to process paper
applications, with a corresponding decrease in
$239,000 in seasonal personal costs.
3. A recommendation for the House Fisheries
Committee: Amend AS 43.75 to change the amount of
fisheries taxes distributed to local communities and
direct that revenue to fund direct management of
fisheries. Currently 50% of fisheries taxes collected
by the state are distributed to municipalities.
4. A recommendation for the House Fisheries
Committee: Reconsider AS 43.75.015(b)-(d) and AS
43.77.010(1) to determine if the reduced tax rate for
small fish processers and the reduced tax rate for
developing fisheries are effective or if the reduced
rates should be repealed or more narrowly defined.
These three indirect expenditures currently cost the
state an estimated $525,852 in foregone revenue.
5. A recommendation for the House Education
Committee: Amend AS 43.20.014, AS 43.55.019, AS
43.56.018, and AS 43.77.045 to remove the 100% level
of the education tax credit. Currently the first
$100,000 of an eligible contribution receives a credit
of 50%, the next $200,000 is credited at 100%, and
contributions above $300,000 is credited at 50%. This
credit can be taken across multiple tax types.
Reducing the 100% level of the credit would reduce the
more than $7.4 million in foregone revenue.
6. A recommendation for the House State Affairs
Committee: Amend AS 43.52.255 to remove the deduction
of local levies against the Commercial Passenger
Vessel Tax. This deduction results in an estimated
$13,559,5558 ($13.56 million) in forgone state
revenue.
7. A recommendation for the House Transportation
Committee: Amend AS 43.40.010(c) and AS 43.98.025(d)
to repeal or amend the motor fuel tax timely filing
discount and the tire fee timely filing credit, which
result in forgone revenue of approximately $66
thousand each. Further, reconsider the commercial
passenger vessel tax 72-hour voyage exemption under AS
43.52.295(4), which has likely modified cruise ship
voyage plans in order to avoid the tax.
8. A recommendation for the House Labor and Commerce
Committee: Amend or repeal AS 43.60.010(c), which
reduces the beer and malt beverages tax from $1.07 a
gallon to 35
beer sold in the state from a brewery who meets the
U.S. definition of a small brewery. 35% of this
reduced rate is claimed by out of state breweries. The
estimated forgone revenue is $2.6 million.
9. A recommendation for the House Resources
Committee: As 27.30.030, AS 43.20.044, and AS
43.62.010, relating to mining license tax exemptions,
credits, and deductions, should be re-examined by an
interim taskforce. Some of these deductions and
credits were established pre-statehood and may no
longer meet intent. Estimated known foregone revenue
exceeds $6 million, with more foregone revenue that is
not tracked.
10. A recommendation for the House Resources
Committee: Sunset AS 43.20.053, the in- state refinery
tax credit, on December 31, 2017. The current sunset
date is December 31, 2019. If all three in-state
refineries were to claim this credit each year it is
available, changing the sunset by two years could
result in savings of $60 million. However, because of
the number of tax payers involved it is impossible for
Revenue to report how much has been claimed under this
credit.
11. A recommendation for the House Finance Committee:
Amend or repeal various corporate income tax
exemptions found under AS 43.19 and AS 43.20, several
of which were adopted to conform with federal tax code
but are no longer necessary or no longer meet intent.
The fiscal impact of these exemptions is unknown at
this time because the potential tax revenue is not
reported.
Other Information:
The Subcommittee discussed a variety of issues during
the meetings.
Several members expressed interest in increasing state
investment officers or improving investment officer
recruitment and retention tools. More in-house
investment officers could result in a decrease in
external investment management tools. Ultimately no
amendment was put forward during subcommittee;
however, this remains a point of interest if the
Department can demonstrate a plan to recruit and
maintain these positions.
The subcommittee also discussed a requested remodel of
the Alaska Permanent Fund Corporation office building,
which is also related to investment officer retention.
This request was not offered as an amendment, as it
was more properly viewed as a capital request.
Governor's Amendments:
The Governor did not submit any amendments for this
agency.
2:48:38 PM
Co-Chair Seaton MOVED to ADOPT Amendment H DOR 1 (copy on
file):
Taxation and Treasury
Tax Division
H DOR 1 - Add Corporate Income Tax Auditors
Offered by Representative Seaton
Increase the corporate income tax auditing staff to
capture additional revenue that is currently foregone
due to lack of staff resources. Currently the tax
system is identifying audit leads that the division
lacks the staff time to investigate. Estimated
additional revenue of $500,000 per auditor.
1004 Gen Fund (UGF) 246.0
Representative Wilson OBJECTED for discussion purposes.
Co-Chair Seaton read from a prepared statement (see above).
Representative Wilson asked why the money would not be
program receipts. She suggested that the money that could
be found could be used to pay the amount. She wondered if
the state would be pursuing people that owed more corporate
tax than what they were paying now. She wondered how the
state would be losing approximately $1 million on corporate
income tax. Co-Chair Seaton relayed that the new accounting
system identified leads. There were multiple leads but no
auditors available to work on those leads. The revenues
were foregone which the department anticipated. He noted
that two other states had hired additional auditors for
corporate income taxes. Those states recovered money and
encountered increased compliance by corporations. The taxes
came in as general funds and were not program receipts. The
funds came in as general taxes from the auditing of the tax
division. It was appropriate for the monies that came in to
the unrestricted general fund to provide the monies for
auditors. He had no problem looking at it a few years down
the road to see about recovery efforts. The estimate was
that the auditors would pay for themselves in the first
year and bringing in $500,000 annually per each additional
auditor.
Co-Chair Foster let committee members know Mr. Spanos was
available for questions.
Representative Wilson indicated that even if the program
receipts were not used currently the legislature would be
adding two additional positions in anticipation that the
state would receive more money. She thought it was great if
the state received additional funds. She wanted to be able
to find out whether the auditors were able to bring in the
anticipated revenue after the first year. She wanted to
follow the money similar to the Alaska Gasline Development
Corporation (AGDC). She did not have a problem with the
amendment if it was successful in bringing in the money.
She would have a problem if she could not follow whether
the state received what the state thought it would She
asked if the committee could make its program receipts.
Vice-Chair Gara relayed that in speaking with DOR. The
department was very clear that they did not have enough
auditors. They were also clear that if they had enough
auditors they would be able to raise more money than the
auditors would cost. The question concerning whether it
would come in in the current year depended on whether the
state caught someone who was underpaid whether they would
take it to court and whether there was litigation. The
state could not be guaranteed that someone was not going to
stall on payments. He thought it had been clear from the
department that the state was very short on auditors. If it
had the auditors, the state would make more money than the
cost of the auditors.
2:53:47 PM
Co-Chair Foster also informed members that Mr. Dan
DeBartolo, Director, Division of Administrative Services,
Department of Revenue, was in the audience available for
questions.
Co-Chair Seaton mentioned the ease of requesting a report
on general tax receipts recovered through corporate income
tax. He thought it would be more difficult to set up a
different account from UGF. He suggested it would be easy
to find out whether the auditors that were hired brought in
the anticipated receipts.
DAN DEBARTOLO, DIRECTOR, DIVISION OF ADMINISTRATIVE
SERVICES, DEPARTMENT OF REVENUE, spoke to the question. He
had discussed, within the department, the issue following
the subcommittee process. It was agreed that one thing the
department should be doing right away was to create a more
robust reporting mechanism so that it could report back in
the following year during the subcommittee process what the
auditors accomplished, and the amount collected in
corporate income taxes. He anticipated having the
discussion about the effectiveness not only in the first
year but in years 2-5. To claim that the mechanism worked,
he suggested it might be worthwhile to look beyond 5 years.
He would defer further questions on the tax side to Mr.
Spanos on line.
2:56:19 PM
BRANDON S. SPANOS, DEPUTY DIRECTOR, TAX DIVISION,
DEPARTMENT OF REVENUE (via teleconference), clarified the
question.
Representative Wilson wondered, if the state were to hire
the auditors, why they could not be program receipts. She
understood that it would entail a code. It would make it
easier to find out whether the two additional hires brought
in enough to pay for their wages or more. The same idea
could be applied in other places as well. Mr. Spanos stated
that it would be very difficult to track the payments from
audits of just two auditors. He suggested it might make
more sense to put all the corporate receipts into a special
fund. It was a policy call. It would be difficult to track
payment receipts from audits done by specific auditors.
While the department's system was robust, it did not record
payments attached to audits done by individuals. The
department could do it manually. The department would be
tracking the new auditors' revenues manually and could
report that information back to the legislature. He
provided the caveat that the information could be provided
assuming it was aggregated. If one auditor did one audit
and a payment came in for that one audit it would be
questionable that the specific number could be provided. He
anticipated within one year several audits would be
completed. Assessments could be provided in a total dollar
figure. The department could also provide a report on
payments, assuming they were paid.
Representative Pruitt asked what the state was looking for.
He wondered if the state was looking for people that did
not pay their taxes or people that had errors in their
calculations. Mr. Spanos responded the tax payers were
sophisticated corporations that were doing their best to
pay Alaska as little tax as possible. The corporations
studied Alaska's statutes and interpret them in their best
interest. Often when the division looked at the
corporations it disagreed with the stance they were taking.
Many of the audits were not what would be called "slam-
dunk" audits. An audit was not an open and shut case, but a
resource intensive audit. An auditor might have to be sent
to a company's corporate headquarters to review large
amounts of paperwork or to communicate frequently back and
forth to get the needed level of substantiation to make a
determination. Some of the issues involved a unitary filing
for corporations. For example, a company doing business in
Alaska might be a member of a much larger corporation. They
might claim that they were not unitary with their parent -
the business they do in Alaska should be looked at as a
separate entity. It was hardly ever the case in the modern
world. Giant corporations controlled their subsidiaries
and, generally, the income from the parent company should
be part of the tax pie. Alaska should be receiving a slice
of the pie. If the income from the parent company was not
in that pie, the pie was much smaller as well as the
revenue Alaska received. There were several other tax
issues that the department would consider assigning to the
new auditors.
Co-Chair Foster recognized Representative Lora Reinbold.
3:01:23 PM
Representative Pruitt thought Mr. Spanos was indicating
that the entities the state was pursuing were typically
multinational or multistate entities rather than the small
business corporations within the state. They were entities
that created different limited liability corporations to
create different tax shields. He asked if his assessment
was fair. Mr. Spanos agreed.
Representative Wilson MAINTAINED her OBJECTION. She thought
the information should be tracked.
A roll call vote was taken on the motion.
IN FAVOR: Grenn, Guttenberg, Kawasaki, Ortiz, Pruitt,
Thompson, Seaton, Foster.
OPPOSED: Tilton, Wilson.
Representative Gara was absent from the vote.
The MOTION PASSED (8/2). There being NO further OBJECTION,
Amendment H DOR 1 was ADOPTED.
3:03:54 PM
AT EASE
3:04:36 PM
RECONVENED
Co-Chair Foster repeated that Amendment H DOR 1 passed on a
vote of 8/2.
Co-Chair Seaton relayed that he was in charge of the
language sections of the operating budget bills. He had two
other amendments to the Department of Revenue's budget that
were linked together.
Co-Chair Seaton MOVED to ADOPT Amendment H DOR 2 (copy on
file):
Child Support Services
Child Support Services Division
H DOR 2 - Move Cost Recovery for Paternity Testing
from Language to Section 1 (Numbers)
Offered by Representative Seaton
This amendment adds the funding from the language
section (formerly sec. 15 in HB 57, version J) to the
numbers section and increases the amount of program
receipt authority from an estimated $46.0 to $50.0.
The language section is deleted in another amendment.
H DOR 2 and H DOR 3 were being offered to clean up and
reduce the language sections of the bill where possible and
to put the information in the numbers section.
Representative Wilson OBJECTED for discussion.
Co-Chair Seaton read from a prepared statement (see above).
He noted that the item was being moved from the language
section (subcommittees could not address or act on this
section) of the bill to the numbers section. Subcommittee
members would be able to address and amend the numbers
section once the information was moved over.
Representative Wilson asked who was paying for the program.
Co-Chair Seaton responded that the money was from the
general fund and that currently the numbers were in the
language section. Items in the language section could not
be addressed or amended at the subcommittee level. The idea
was to take items out of the language sections, where
possible, and place them into the numbers section to be
available for subcommittee action in the future.
Representative Wilson understood the change Co-Chair Seaton
was suggesting. She was unclear where the full $50,000 was
coming from. Co-Chair Seaton deferred to Mr. DeBartolo.
Mr. DeBartolo did not have the amendment in front of him.
Paternity testing for Child Support Services was a budget
item that was added in every year and adjusted back out at
the end of the year. The source of the funds was a general
fund match. He apologized for not having the documentation
in front of him.
Representative Wilson referred to page 1 of the backup. It
appeared there was an increment of $50,000 and a decrement
of $46,000 that was not used, leaving a balance of $4,000.
She was trying to determine if the legislature was putting
in $50,000 from program receipts. She indicated that
typically when money came from program receipts someone was
paying for it. She assumed, because the test was paternal
in nature, it would be paid for by a man. She was trying to
understand who would be paying for the increase of $4,000.
She requested an "at ease."
3:10:01 PM
AT EASE
3:11:31 PM
RECONVENED
Mr. DeBartolo addressed Representative Wilson's question.
He explained that every year the Child Support Services
Division had to estimate what would be paid for by the
custodial fathers for paternity testing. Representative
Wilson was correct that the parent paid for the testing
rather than the state. Last year the division
underestimated the collection amount by about $4,000 which
was the reason for the change.
Representative Wilson understood the language portion being
moved. She wanted to clarify that money was not being added
to the budget. Rather, it was money the state was recouping
from users of the program. Mr. DeBartolo responded, "That
is correct."
Representative Wilson WITHDREW her OBJECTION.
There being NO further OBJECTION, Amendment H DOR 2 was
ADOPTED.
Co-Chair Seaton MOVED to ADOPT Amendment H DOR 3 (copy on
file):
Child Support Services
Child Support Services Division
H DOR 3 - Move Cost Recovery for Paternity Testing
from Language to Section 1 (Numbers)
Offered by Representative Seaton
See 30-GH1855J.7, Wallace, 1/31/17
This amendment deletes section 15 in HB 57, version J.
The funding is added to the numbers section and
increased to $50.0 in another amendment.
Representative Wilson OBJECTED for discussion.
Co-Chair Seaton explained that the amendment reflected the
other half of the change to the language section. It
removed an estimated amount in the language section to a
specific dollar amount receipt authority in the numbers
section.
Representative Wilson asked Co-Chair Seaton to restate his
position. Co-Chair Seaton repeated his explanation.
Representative Wilson WITHDREW her OBJECTION.
There being NO further OBJECTION, H DOR 3 was ADPOTED.
Co-Chair Seaton MOVED to ADOPT Amendment H DOR 4 (copy on
file):
Alaska Mental Health Trust Authority
Mental Health Trust Operations
H DOR 4 - Restore Funding Level to Trust Requested
Amount or FASD Campaign
Offered by Representative Seaton
This amendment in the amount of $150,000 is to fully
fund and maintain the capacity of the Institute for
Circumpolar Health Studies to continue to develop,
implement and evaluate Fetal Alcohol Spectrum Disorder
(FASD) prevention strategies and to continue the FASD
media campaign, which has been instrumental in the
dissemination of FASD prevention messaging. Each child
diagnosed with FASD will cost the State of Alaska
$850,000 to $4.2 million from age 0-18.
Representative Wilson OBJECTED for discussion.
Co-Chair Seaton read from a prepared statement (see above).
3:16:14 PM
Representative Wilson assumed that the state already funded
the program in the amount of $250,000. The amendment would
add $150,000 to program funding. Co-Chair Seaton responded
that the current funding level was $500,000. There was a
decrement of $150,000 in the governor's budget relating to
the media campaign which disseminated the message that no
amount of alcohol was appropriate during pregnancy. The
other portion of funding would be applied to pregnancy test
kits. He reported 2000 responses to surveys by women. The
funding would provide money for survey follow-ups regarding
those women that stopped drinking upon finding out about
their pregnancies. The purpose of the project was to lower
FASD in Alaska.
Representative Wilson argued that although the amount being
requested was minimal, she opposed providing additional
funding. She thought the tests were provided at bars to
determine whether an individual was pregnant or eligible to
drink. She was unclear where the survey data would come
from. She did not feel it was the job of state government
to provide the funding. She would be opposing the
amendment.
Representative Kawasaki agreed with some of the comments
made by Representative Wilson. He reported that the program
was being funded for the second year. Although the survey
provided some results, it was difficult to tell from the
sample whether the information that was gleaned was
voluntary. He was trying to understand the efficacy of the
specific program of putting pregnancy tests in bars. If the
program was not working the state should cease paying for
it. Conversely, if the program was working, he thought it
deserved further discussion. If there were results, he
wanted to hear about them. Co-Chair Seaton relayed that Mr.
Jesse was available for questions. He reminded members that
the amount would restore the media campaign to adults
across the state.
3:19:41 PM
JEFF JESSE, LEGISLATIVE LIAISON, ALASKA MENTAL HEALTH TRUST
AUTHORITY, introduced himself. He responded to
Representative Kawasaki that the surveys were voluntary. He
explained that there was a que code on a poster with the
pregnancy dispensers. He believed there was a small gift
certificate that was provided to women who completed the
survey. It was a remarkable return of the survey for the
type of an analysis. He emphasized that the survey was
completely voluntary.
Representative Wilson noted that the $150,000 was
designated general funds. She wondered if the amount could
be utilized in another part of the budget for another
program. She asked if she was accurate. Co-Chair Seaton
answered that the amount was for alcohol and drug treatment
prevention funds, 20 percent of which was to go towards
alcohol and prevention programs. He thought FASD was an
appropriate target for reducing the effects of alcohol on
the Alaska population. The state had a high rate of FASD.
He invited Mr. Jesse to talk about the distribution of
funds.
Mr. Jesse thought Representative Wilson was correct that
the state did not have dedicated funds. The amount was a
designated fund which meant the money could be used for any
purpose.
Representative Wilson suggested that the money could be
used for more services in behavioral health to get more
services to people with drinking problems. She pointed out
that the money could be spent towards more services rather
than a campaign. She thought the gift cards given to survey
participants were likely another cost to the state. She
thought the money should be utilized for a behavioral
service having to do with alcohol or drug addiction. She
wanted the committee members to understand that it was not
money the state would be giving up, it was money that could
go directly towards services. She did not need a response.
She knew her statement to be true.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Ortiz, Gara, Grenn, Foster, Seaton.
OPPOSED: Kawasaki, Pruitt, Thompson, Tilton, Wilson.
The MOTION PASSED (6/5). There being NO further OBJECTION,
Amendment H DOR 4 was ADOPTED.
3:23:28 PM
AT EASE
3:24:14 PM
RECONVENED
Co-Chair Seaton asked Representative Kawasaki to present
the subcommittee report for DMVA.
Representative Kawasaki read from his report:
The Chair of the House Finance Budget Subcommittee for
the Department of Military and Veterans' Affairs
recommends that the House Finance Committee accept the
Governor's FY18 Amended Budget with further
amendments:
The FY18 budget with recommended subcommittee
amendment totals:
Fund Source: (dollars are in thousands)
Unrestricted General Funds (UGF) $16,349.4
Designated General Funds (DGF) 28.4
Other Funds 10,180.6
Federal Funds 30,995.1
Total $57,553.5
Representative Kawasaki indicated that there was an
increase of roughly $100,700 from the FY 17 Management Plan
with an unrestricted general fund (UGF) of $16,248.7
representing a .6 percent increase. He continued that the
subcommittee met several times over the month and was
forwarding two budget amendments which he would speak to
shortly.
Representative Kawasaki read the statutory recommendations
by the finance subcommittee:
The following statutory recommendations are submitted
to the House Finance Committee:
1. Amend AS 26.27 to provide statutory authority to
the Alaska Aerospace Corporation to issue dividends to
the State of Alaska. This change is necessary because
the corporation stated intentions to provide dividends
to the State in the future, but does not currently
have the statutory authority to do so.
2. Move Alaska Aerospace Corporation from Title 26,
the Department of Military and Veterans' Affairs, to
Title 14, the Department of Commerce, Community and
Economic Development. This change is important because
several public corporations are housed in DCCED,
including Alaska Energy Authority, Alaska Railroad.
Alaska Gasline Development Corporation and the Alaska
Industrial Development & Export Authority, several of
which have bonding authority, issue dividends, can
purchase land and have tangible assets. AAC was
originally housed in DCCED until 2011 when moved by
Executive Order 115.
Representative Kawasaki reviewed other information from his
report:
Other Information:
1. An amendment proposal was offered that would have
reduced $388.0 UGF from personal services in the
Office of the Commissioner, an approximate 20 percent
reduction from post-vacancy amount. The sponsor
offered the proposal as flexibility to reduce UGF
spending in the Office of the Commissioner.
Subcommittee Discussion:
The Department said the $388.0 deletion would impact
46 PCNs that specialize in human
resources, budget submissions, equipment procurement,
internet technology and others that
support 270 personnel across the state, including
those who oversee the development and
submission of its operating, capital and federal
budget requests.
2. An amendment proposal was offered that would have
reduced $273.0 UGF from services in the Office of the
Commissioner, a 15 percent reduction of services from
the Governor's FY18 Amended Budget. The sponsor
offered the amendment to scale back on recent years
increases.
3:27:38 PM
Representative Kawasaki MOVED to ADOPT Amendment H MVA 1
(copy on file):
Military and Veterans' Affairs
Office of the Commissioner
H MVA 1 - Eliminate Expansion of Alaska State Defense
Force for Rural Engagement
Offered by Representative Kawasaki
Due to current budget deficit, the subcommittee does
not wish to expand or create new programs at this
time.
1004 Gen Fund (UGF) -210.9
Co-Chair Foster OBJECTED for discussion.
Representative Kawasaki read the amendment (see above). He
noted that while the committee agreed that the rural
engagement component and the Alaska State Defense Force
were very important, due to budget restraints the committee
denied the increment. He furthered that the department came
to the legislature in FY 17 for a $1.3 million UGF request
and a $1 million capital request which were denied at the
time for similar reasons.
Co-Chair Foster WITHDREW his OBJECTION.
There being NO further OBJECTION, Amendment H DMV 1 was
ADOPTED.
Representative Kawasaki MOVED to ADOPT Amendment H MVA 2
(copy on file):
Alaska Military Youth Academy
H MVA 2 - Report on Alaska Military Youth Academy UGF
Structure
Offered by Representative Kawasaki
It is the intent of the Legislature that the
Department of Military and Veteran's Affairs (DMVA)
develops a report to the Co-Chairs of the Finance
committees and Legislative Finance Division by
December 1, 2017, identifying funding
options available to the Alaska Military Youth Academy
to generate revenue. The report shall include
recommendations and limitations for tuition and fee
structures based on income levels of applicants'
households, and how to incorporate those
recommendations into Fiscal Year 2019 budget for the
Department. The report shall also include the impact
of those recommendations on federal matching dollars
and the UGF budget.
Co-Chair Foster OBJECTED for discussion.
Representative Kawasaki read the amendment (see above). He
indicated that, according to the department, any dollar
recuperated from tuition or voluntary contributions might
reduce the federal pay-in to a ratio of 75 cents per
dollar.
3:30:08 PM
Representative Wilson commented that the Military Youth
Academy had taken less money for BSA [Base Student
Allocation] than any academy. The academy set a fee
structure a few years prior. She was concerned with the
intent language and whether it would apply to Mount
Edgecombe or other public schools. She thought the academy
had made great efforts. She noted the entity had accepted
Alaska dropouts and helped them get back into school. She
did not believe there would be very few parents of the
academy that would be able to provide funding for their
children. She suggested the intent language be adjusted.
She also suggested some of the schools giving up their BSA.
She wanted additional information prior to including intent
language that could result in the loss of federal funding.
She was concerned with entities being treated equitably.
Co-Chair Seaton clarified that the DMVA budget was the only
one before the committee presently. He also noted that
during round two of the amendment process individual
finance members could offer further intent or other
amendments.
Representative Pruitt mentioned the 75/25 ratio. He
suggested that the state received $25 for every dollar the
state brought in. He wondered if it would make sense to
seek the funds from a few available people. His friends
that attended the academy would not have had the means to
pay for it on their own. He noted that in the narrative a
non-profit was mentioned. He wondered if there was an
opportunity to utilize monies from non-profits or money
from outside state government to cover the 25 cents to
avoid losing federal funding.
Representative Thompson was concerned with the amendment.
He reported that over the last 3 years the legislature had
reduced the Youth Academy funding. The entity had laid off
several people and was operating on a shoestring budget. He
thought demanding an additional report that would require
research was unreasonable because of the reduction in
personnel. He thought the committee would be asking the
academy to do more with less people. He opposed the
amendment.
Representative Kawasaki believed at the time the department
had no objection to the amendment. Subcommittee members
also had no objection. The committee did not want to deny
someone the ability to attend or to create a chilling
effect with a tuition. There were cases in which there were
kids whose families could pay that had no avenue to capture
the funds. He relayed that there was a 501(c)3 non-profit
that was being lined up, but the paperwork was in process.
The recommendation, if passed by the committee, would come
before the body again in the following year at which time
options would be presented. He reiterated that there were
no objections in the subcommittee to the amendment
proposal.
3:35:13 PM
Co-Chair Seaton asked if it meant the 501(c)3 being set up
to receive funds was providing a mechanism for receipt
authority. He wondered if the state of Alaska would be able
to accept donations from the 501(c)3 for augmentations to
the program. Representative Kawasaki responded that it was
envisioned that the 501(c)3 would allow offsetting of
general funds. Research was still needed to determine
whether the offsetting of funds would cause a problem with
federal receipts - the reason the intent language was being
offered.
Co-Chair Seaton clarified that it was intent language to
allow it. However, nothing had been done to-date.
Representative Kawasaki responded affirmatively.
Co-Chair Foster WITHDREW his OBJECTION.
Representative Wilson OBJECTED. She commented that the
military academy had done what she wished all schools did.
They dwindled their budget and only charged the state what
it needed. She wished all the districts would do the same.
The academy had a very successful program and attained
federal dollars. She thought it was terrible to tell the
academy it needed to find additional funds somewhere else
when they had been a model. She believed it would be
sending the wrong message to a successful program. She
invited members to imagine what would happen if the academy
got caught up, causing anguish and a lack of desire to
participate. The academy accepted mostly dropouts. She
concluded that instead of rewarding the academy for its
performance, the amendment sent the wrong message. She
could not support it.
Representative Kawasaki addressed one of the concerns that
was mentioned. He thought the Alaska Military Youth Academy
had done a great job. However, the academy was capacity
driven and was up such that they needed to match every
federal dollar available. If the state was able to
contribute more into the GF function, it could potentially
expand and grow with another unit. He pointed out that the
problem was that the state was looking for nickels and
dollars everywhere. If the state wanted a successful
program within the Alaska Military Youth Academy to
increase, utilizing a 501(c)3 or some sort of tuition
system provided an avenue to do so.
Representative Wilson MAINTAINED her OBJECTION.
A roll call vote was taken on the motion.
IN FAVOR: Guttenberg, Kawasaki, Ortiz, Seaton, Foster
OPPOSED: Pruitt, Thompson, Wilson, Grenn
Vice-Chair Gara and Representative Tilton were absent from
the vote.
The MOTION PASSED (5/4). There being NO further OBJECTION,
Amendment H MDV 2 was ADOPTED.
Co-Chair Seaton asked Representative Kawasaki if there were
any other amendments for DMVA. Representative Kawasaki
responded in the negative.
Representative Pruitt asked if the statutory
recommendations would be discussed further. He asked if it
was currently the time to discuss the recommendations. Co-
Chair Seaton relayed that the statutory recommendations
were developed by the subcommittees and forwarded to the
policy committee by the subcommittees. House finance was
not taking any action. Every member had the ability to
forward statutory amendments on their own. The
recommendations were for the policy committees to consider.
The legislature was not voting on the statutory
recommendations developed by the policy committee.
Representative Pruitt wondered if it was an appropriate
time to discuss the subcommittee recommendations prior to
the bill moving out of the House Finance Committee. He
restated his question about discussing the items prior to
them moving out of committee. Co-Chair Seaton explained
that one of the ideas of having the policy committees serve
as the budget subcommittees was for the recommendations to
be discussed within the subcommittee except for those from
the Department of Revenue. He explained that DOR was
considering tax items. In most cases, the subcommittees
were policy committees reviewing proposed actions. It was
not the finance committee telling the policy committee but
rather the policy committee's functioning as budget
subcommittees. The budget subcommittees were responsible
for identifying statutory actions for consideration. The
recommendations would come through the House Finance
Committee in the form of a piece of legislation because
they would most likely be related to finance. He
anticipated that the statutory recommendations based on
change in the budget would come to the committee. If
recommendations did not evolve into bills they could be
offered by any individual member of the subcommittee or
anyone in the House. The committee would not get into a
discussion about the subcommittee recommendations. They
were subcommittee recommendations to the policy committees.
3:44:14 PM
Representative Pruitt express confusion about the policy
committee versus the subcommittee. He indicated that the
subcommittees were chaired by House Finance members. He
thought there would be some statutory recommendations that
would come from the finance subcommittee that he might have
concerns with. He felt there was confusion about why
statutory recommendations would be generated from a finance
subcommittee. He thought they should have been left with
the policy committee and left out of the finance reports.
Co-Chair Seaton added that he wanted the full committee to
have the information about the findings of the
subcommittees. However, changes could not be accomplished
through the finance committee. They had to be accomplished
through statutory change.
Representative Wilson noted the Alaska Aero Space
Corporation and wondered if it would take a statute change
to move the division into commerce rather than to change it
in the budget. Co-Chair Seaton responded affirmatively.
Representative Wilson wanted clarification. She thanked Co-
Chair Seaton.
HB 57 was HEARD and HELD in committee for further
consideration.
HB 59 was HEARD and HELD in committee for further
consideration.
Co-Chair Seaton reviewed the agenda for the following day.
ADJOURNMENT
3:47:05 PM
The meeting was adjourned at 3:47 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Callan - APFC -H. Finance Committee Presentation.pdf |
HFIN 2/23/2017 1:30:00 PM |
Callan Presentation HFIN |
| Return Projection Methodology APFC HFIN 01.17.17.pdf |
HFIN 2/23/2017 1:30:00 PM |
Callan Presentation HFIN |
| DMVA-Subcommittee Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| GOV-Subcommittee PKT Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| DCCED-Subcommittee Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| DPS-Subcommittee Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| DEC-Subcommittee Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| DOR-Subcommittee Packet HFIN.pdf |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |
| Operating Budget emails 1- 2.17.17.PDF |
HFIN 2/23/2017 1:30:00 PM |
HB 57 |