04/18/2007 07:33 AM House W&M
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| Start | |
| HJR1 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 18, 2007
7:33 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Chair
Representative Anna Fairclough, Vice Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Sharon Cissna
Representative Max Gruenberg
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Kelly
COMMITTEE CALENDAR
HOUSE JOINT RESOLUTION NO. 1
Proposing amendments to the Constitution of the State of Alaska
creating and relating to the gas revenue endowment fund,
relating to deposits to the fund, limiting appropriations from
the fund based on an averaged percent of the fund market value,
relating to deposits to the permanent fund, and relating to
deposits to the budget reserve fund.
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HJR 1
SHORT TITLE: CONST. AM: GAS REVENUE ENDOWMENT FUND
SPONSOR(s): REPRESENTATIVE(s) HAWKER
01/16/07 (H) PREFILE RELEASED 1/5/07
01/16/07 (H) READ THE FIRST TIME - REFERRALS
01/16/07 (H) W&M, JUD, FIN
03/21/07 (H) W&M AT 7:30 AM HOUSE FINANCE 519
03/21/07 (H) <Bill Hearing Canceled>
04/18/07 (H) W&M AT 7:30 AM HOUSE FINANCE 519
WITNESS REGISTER
No witnesses to record
ACTION NARRATIVE
CHAIR MIKE HAWKER called the House Special Committee on Ways and
Means meeting to order at 7:33:48 AM. Present at the call to
order were Representatives Hawker, Roses, Fairclough, Seaton,
Gruenberg, and Wilson. Representative Cissna arrived as the
meeting was in progress.
7:34:59 AM
HJR 1-CONST. AM: GAS REVENUE ENDOWMENT FUND
[Contains some discussion of HOUSE JOINT RESOLUTION NO. 5,
Proposing amendments to the Constitution of the State of Alaska
limiting appropriations from certain mineral revenue, relating
to the balanced budget account, and relating to an appropriation
limit.]
CHAIR HAWKER announced that the only order of business would be
HOUSE JOINT RESOLUTION NO. 1, Proposing amendments to the
Constitution of the State of Alaska creating and relating to the
gas revenue endowment fund, relating to deposits to the fund,
limiting appropriations from the fund based on an averaged
percent of the fund market value, relating to deposits to the
permanent fund, and relating to deposits to the budget reserve
fund.
CHAIR HAWKER, sponsor of HJR 1 suggested that a constitutional
approach may be most appropriate for long-term budget planning
and fiscal policy. This resolution proposes that the state
place 100 percent of its revenues from gas production into an
account very like the permanent fund, called the Gas Revenue
Endowment Fund ("GREF"). The fund's earnings would be managed
using a percent of market value (POMV) management approach and
could be used for any public purpose, except for payment of
individual dividends. This fund is intended to support the
state and to capture the benefits of severing the state's gas
resources. He introduced a spreadsheet based on the Department
of Revenue's Fall 2003 Revenue Source Book. This chart shows
the possible revenues available for the GREF. He noted that
this document was prepared without reference to a potential gas
pipeline and explained that although the actual numbers would be
different if the chart was prepared today, the mechanism and
predictions are still relevant. The chart estimates the
aggregate proceeds from gas production from 2007 to 2033 based
on Chicago gas prices of $4, $5, and $6 per mmBtu [British
thermal unit]. He explained by the year 2030, the annual five
percent draw down under POMV would be the same as the amounts
going into the fund due to the effect of compounded earnings,
mitigated by a five percent draw. He explained that,
eventually, the five percent annual draw would be greater than
the amount of gas revenues received by the state. He opined
that if the state did save and invest its gas revenues, it would
provide the state a true long-term endowment fund whereby our
natural resources will have been converted into an ever-growing
monetary resource.
7:45:33 AM
REPRESENTATIVE ROSES asked whether HJR 1 was possibly in
conflict with HJR 5 since HJR 5 proposes to place all mineral
revenues in a restricted savings account. He relayed his
understanding that HJR 5 proposes to set up a spending account
based on the five year average of mineral revenues. He
expressed concern that the only revenues available to be
considered as part of the five-year average would be the "five
percent POMV." Therefore, if the proposals in HJR 1 and HJR 5
were both in place, all mineral revenues, minus those from gas,
would go into the Balanced Budget Account proposed in HJR 5. He
suggested that only five percent of the gas revenues would be
available to determine the five year average if both proposals
were adopted. He suggested that the committee carefully
consider these two proposals to determine whether they should be
combined in some way, or considered separately.
7:47:50 AM
CHAIR HAWKER noted that HJR 5 was designed to mitigate spending
in a time of high oil prices. He opined that approach has a
great deal of merit, and that the public and some members of the
legislature desire some type of spending limits. He opined that
when a non-renewable resource is severed, it is gone forever
absent efforts to preserve its monetary benefits for future use.
REPRESENTATIVE ROSES said that HJR 5 proposes a forced savings
account with significant spending restrictions. He expressed
his approval that HJR 1 does not propose to place funds in the
Constitutional Budget Reserve (CBRF) or into the permanent fund
dividend account. As oil prices continue to decline, at what
point does the declination of oil revenues equal or exceed five
percent of the market value, he queried. At that point, money
would still be coming in, but at a lesser rate, he predicted.
If the decrease in oil revenues exceeds the increase in gas
revenues, the state would have even less revenue available, he
suggested. He noted that it will turn around "when it gets to
the huge numbers," but up to that point there is a fairly level
funding stream.
CHAIR HAWKER suggested that the state currently does not have a
plan to get it through the "bridge period" between now and a gas
pipeline. He explained that HJR 1 is intended to provide a
mechanism to use revenues received from "natural gas produced on
the North Slope," to establish an endowment fund. He
volunteered that there will be some gas liquids in any gas
stream and said he has an amendment that will propose to exclude
revenues from gas liquids that are intended for pump station
utility use, or are incident to oil transported in the Trans-
Alaska Pipeline System (TAPS). The aforementioned liquids are
"de minims," however, the GREF proposed by HJR 1 would include
gas liquids that may be part of the planned gas pipeline.
REPRESENTATIVE SEATON clarified that the GREF would include gas
liquids delivered via gas pipeline, but not gas liquids
delivered through TAPS. He asked about the inclusion of
production from Point Thompson.
CHAIR HAWKER indicated that Point Thompson production would be
included as one of the carbon molecules classified as C-1
through 8.
7:58:31 AM
CHAIR HAWKER explained that HJR 1 is drafted so as to intercept
all revenues related to gas for placement in the GREF instead of
into the permanent fund. He explained that HJR 1 creates a
stand alone account that does not affect the CBRF at all.
REPRESENTATIVE CISSNA opined that long term investments tend to
offer more rewards, and asked if the mechanism in HJR 1 supports
stable investment returns.
8:02:26 AM
CHAIR HAWKER agreed that capital markets support a higher rate
of return for long term investments than for short term
investments. He noted that the permanent fund manages for the
long term, but must also take into account the need to build up
cash to pay dividends and yearly management expenses.
REPRESENTATIVE WILSON asked about the operating expenses for the
GREF.
CHAIR HAWKER reminded the committee the state will not receive
any gas pipeline revenues for quite some time, if ever, but that
there still needs to be a way to meet the state's future
financial needs. Under the approach of HJR 1, there would be a
slow ramp up of the account as it would appropriate only 5
percent of its revenues annually. Under this approach, it would
take almost 18 years before the outgoing five percent would
exceed the amount going into the fund, he said.
REPRESENTATIVE WILSON asked whether there needs to be some
method to bridge the revenue gap between now and a gas pipeline.
CHAIR HAWKER agreed that figuring out how to fund the state's
needs in times of low revenues will be difficult, and may
eventually require use of the permanent fund earnings.
8:08:54 AM
REPRESENTATIVE FAIRCLOUGH set forth that setting up a new
account may not be supported by the public due to perceptions
that "it looks like a grab" of future funds. She offered that
the permanent fund should be set up to use the POMV approach as
that is good business practice and will provide "the bridge" for
future revenue deficits. She noted that HJR 5 offers a spending
cap, which she opined would find more public support. She
suggested re-visiting the POMV approach to managing the
permanent fund as a way to accomplish the goal of amending the
constitution to afford a long-term revenue solution for the
state.
CHAIR HAWKER asked for clarification as to how placement of
funds into a state account can "be a grab."
REPRESENTATIVE FAIRCLOUGH responded that the public may feel
like the state is trying to take all the resource revenues,
instead of sharing it as it does under the permanent fund
structure. She said that the public receives a direct benefit
from growth of the permanent fund. She opined that the public
may see it "as a limiting structure" on the growth of the annual
permanent fund dividend. She acknowledged that the state does
face a fiscal crisis, and must either manage its resources
differently or look to additional revenue sources. However, she
opined that the public may not "believe we are at that point
yet," and therefore may not support a separate fund that they
perceive will reduce growth of the permanent fund dividend.
CHAIR HAWKER advocated that the public in general has a good
grasp of fiscal issues.
8:15:08 AM
REPRESENTATIVE ROSES reminded the committee that future oil
production is estimated to decline anywhere from 9 to 12 percent
annually. He expressed concern about retaining some fund
liquidity so as to have adequate revenues available to fund
state needs in light of a possible significant decline in oil
revenues.
8:18:24 AM
REPRESENTATIVE SEATON opined that HJR 5 does not impose a
spending cap but a method to level revenue. He reminded the
committee that the House previously voted two-thirds in favor of
a POMV approach for management of the permanent fund and opined
that there was no adverse political fallout from that decision.
He predicted that the permanent fund will have to go to POMV for
sustainability and it may be more logical to have one fund.
8:21:58 AM
CHAIR HAWKER reminded the committee that the legislature can
spend 100 percent of the permanent fund earnings at present
because those funds are unrestricted. He emphasized that the
point of endowment accounting is to not over-spend earnings, but
to make certain they are re-capitalized at a sustainable growth
rate.
REPRESENTATIVE FAIRCLOUGH pointed out that she recognizes the
need for a discussion regarding the permanent fund and the
possibility of adjustments as to how the permanent fund is
managed.
REPRESENTATIVE WILSON explained her education efforts with
regard to the POMV approach and opined that the citizens are
willing to take steps to solve fiscal problems once they realize
the extent of the fiscal issues facing the state.
REPRESENTATIVE ROSES asked for more information as to how this
approach, which would divert revenue into the GREF, will not
also result in spending cuts.
CHAIR HAWKER characterized the approach as offering a "supply
side spending limit."
REPRESENTATIVE SEATON offered his belief that this approach is
to establish that a particular source of revenue is not
available for spending, which he opined is not the same as a
spending cap. He offered that it does not restrict the ability
of the state to increase revenues through taxes or bonds,
therefore it is not a spending cap.
REPRESENTATIVE ROSES defined it as a spending cap based on
current method of revenue but not a spending cap if the state is
willing to consider new revenue sources.
REPRESENTATIVE GRUENBERG reminded the committee of past efforts
to develop solutions to the fiscal issues facing the state. He
expressed support for a meaningful integrated approach to the
issue of long-range planning as it is the most important issue
facing the state.
8:34:40 AM
CHAIR HAWKER noted that there are significant differences of
opinion on the specific approaches put forth to solve fiscal
issues, which can make it difficult to agree on only one
approach. He reminded the committee that resolutions cannot be
vetoed by the governor and emphasized that efforts need to be
made to "agree where we can agree" so as to establish
philosophical objectives.
8:37:48 AM
REPRESENTATIVE GRUENBERG volunteered that the approach proposed
in HJR 1 could help to alleviate a number of problems. He
suggested that there are many approaches to consider when
designing a long-term approach to fiscal issues.
REPRESENTATIVE SEATON mentioned that further consideration of
HJR 1 could be in conjunction with the fiscal plan proposed by
HB 125.
REPRESENTATIVE FAIRCLOUGH referred to the successful investment
approach of Rasmuson Foundation and the Foraker Group and
suggested that these groups could provide some guidance to the
state.
REPRESENTATIVE WILSON pointed out that there can be a great deal
of emotion surrounding any discussion of the permanent fund.
8:48:24 AM
CHAIR HAWKER suggested that public interest in fiscal issues
varies depending on the extent of the state's financial problems
and opined that these discussions have matured over the years to
allow for a fuller discussion of options.
REPRESENTATIVE ROSES reminded the committee that there is
significant experience and success in account management
strategies by economists in DOR and the permanent fund.
REPRESENTATIVE SEATON referred to past decisions in retirement
issues which resulted in the under funding of the retirement
plans. He addressed the need to directly address any proposed
spending cap so that money is not restricted in one area that
has a negative long-term effect on another area.
[HJR 1 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
8:54:41 AM.
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