Legislature(2015 - 2016)BILL RAY CENTER 230
06/06/2016 03:00 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 128 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
FOURTH SPECIAL SESSION
June 6, 2016
3:04 p.m.
3:04:08 PM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 3:04 p.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Senator Cathy Giessel; Laura Cramer, Staff, Senator Anna
MacKinnon; Rob Carpenter, Analyst, Legislative Finance
Division; Alexei Painter, Analyst, Legislative Finance
Division; Randall Hoffbeck, Commissioner, Department of
Revenue; Chris Poag, General Counsel, Alaska Permanent Fund
Corporation, Juneau.
SUMMARY
SB 128 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
CSSB 128(FIN) was REPORTED out of committee with
a "do pass" recommendation.
SENATE BILL NO. 128
"An Act relating to the Alaska permanent fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska permanent fund;
relating to the earnings reserve account; relating to
the Alaska permanent fund dividend; making conforming
amendments; and providing for an effective date."
3:05:02 PM
Vice-Chair Micciche MOVED to ADOPT the committee substitute
for SB 128, Work Draft 29-GS2859\U (Wallace/Martin,
6/6/16).
Co-Chair MacKinnon OBJECTED for DISCUSSION.
3:05:20 PM
AT EASE
3:08:45 PM
RECONVENED
Co-Chair MacKinnon explained that the committee substitute
could be found online.
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, discussed the
Summary of Changes (copy on file):
Section 8: Excludes the Amerada Hess funds from the
POMV calculation
Removed inflation adjustment on the
$1,200,000,000 revenue limit
Section 9: The Amerada Hess funds which are deposited
into the capital income fund are not available for
distribution under the POMV calculation
Section 11: Added a Savings Rule:
Sec. 37.13.148 Appropriation of Revenue: Creates
a savings rule that the legislature may annually
appropriate unrestricted general fund revenue in
excess of the unrestricted general fund
appropriations. Fifty percent would be deposited
into the Permanent Fund and the remaining 50
percent would be deposited into the
constitutional budget reserve fund
Section 23: Management of the CBR is transferred to
the Permanent Fund Corporation effective July 1, 2016
Title: Added the language: relating to unrestricted
state revenues available for appropriation - this
relates to the savings rule found in Sec. 11
Section 4: Removed the repeal of the Capital Income
Fund
Co-Chair MacKinnon WITHDREW the OBJECTION. There being NO
further OBJECTION, the proposed committee substitute (CS)
was adopted.
3:11:44 PM
RECESS
3:30:18 PM
RECONVENED
Co-Chair MacKinnon discussed the budget shortfall, and
informed that funds would be drawn from the constitutional
budget reserve (CBR) to fill the gap. She relayed that the
administration had alleged that if a draw from the CBR were
to take place, it would create an opportunity cost loss of
between $50 million and $200 million. She asked for a
comment on the opportunity cost of a $3 billion draw from
the CBR.
ROB CARPENTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
replied that under the plan being proposed in the CS, the
cost was negligible due to the fact that management of the
CBR was being transferred to the Alaska Permanent Fund
Corporation.
Co-Chair MacKinnon relayed that Department of Revenue
Commissioner Randall Hoffbeck would discuss the subject.
She stated that CSSB 128(FIN) examined use of the state's
pooled assets.
Mr. Carpenter discussed the presentation, "LFD Fiscal
Model" (copy on file). He explained that slide 1, which
showed 4 graphs, was a status quo scenario.
3:33:16 PM
Co-Chair MacKinnon asked for an explanation of the four
graphs, which the committee was using as criteria through
for evaluating the success of any proposals. She explained
that one graph showed the operating budget, one pertained
to budget reserves, one showed the permanent fund dividend
(PFD), and the final graph depicted the overall health of
the permanent fund.
Mr. Carpenter indicated that the upper left graph depicted
the unrestricted general fund (UGF) budget with a bar graph
that indicated what revenue sources were being used. He
drew attention to the column for FY 17, which showed use of
the CBR for a large part of the budget. He noted the CBR
use in other years, and the projected elimination of the
funds by FY 19. The graph showed use of the earnings
reserve account (ERA) after the CBR was expended. He added
that the ERA would decline and be gone by FY 23, and the
graph showed a blank space to signify a deficit in its
place. He noted small red bars that indicated earnings in
the ERA, but pointed out there would be no ongoing balance
to fill the deficit.
Co-Chair MacKinnon wondered if the graph demonstrated the
administration's assertion that the dividend program was in
jeopardy if the ERA fell to zero.
Mr. Carpenter pointed out the graph in the upper right
entitled "Dividend Check," and noted that the graph did not
depict the PFD going to zero. Rather, the graph showed the
status quo of dividends. He directed attention to the graph
on the lower left of slide 1, called "Budget Reserves." He
noted that the graph showed the balance of the CBR gone by
FY 18, and the balance of the ERA gone by FY 21; thereby
the dividend would have to be eliminated.
3:36:23 PM
Senator Dunleavy remarked that part of the input to the
graphs on slide 1 assumed that state spending remained the
same.
Mr. Carpenter directed attention to a column in the middle
of the slide that showed some growth in the operating
budget, as well as some growth in the capital budget. He
added that there was an assumption of oil and gas tax
credits being paid at $250 million per year, given that
there was earned credits projected at approximately $2
billion over the following 8 years. He concluded that the
black line on the first graph depicting the budget was
flat.
Senator Dunleavy looked forward to hearing from the
administration regarding the aforementioned opportunity
cost and what went in to the calculation. He thought it was
certain that if spending remained the same, there was no
opportunity cost; and if spending was reduced by $100
million, it could be argued that there was opportunity
cost. He wondered about the assumptions of status quo
spending. He reminded the committee about opportunities to
reduce the size of the budget in the following years.
Co-Chair Kelly queried scenarios that showed what happened
in the FY 17 budget as a baseline. He thought the slide
assumed the spring forecast and the FY 16 management plan
for a spending baseline.
Mr. Carpenter relayed that the slide used the FY 17 budget
as it was in conference committee.
Senator Olson referred to the bottom right quadrant of
slide 1, which showed the graph "Permanent Fund - FY Ending
Balance," and asked if the depiction of the fund being flat
for the next 10 years was accurate.
Mr. Carpenter thought that given the use of the ERA, the
state would be earning money but pulling from the ERA in an
amount that would flatten out the fund. He continued that
once the ERA was exhausted in FY 21, the permanent fund was
predicted to grow again.
Senator Olson found it bothersome that there had been a
significant rise in the corpus of the fund over the past
ten years, yet the fund was predicted to lack growth in the
near future. He wondered if there was a way for the fund to
grow even if the ERA was down.
Mr. Carpenter was not sure how to answer the question, and
stated that the slide assumed a certain rate of return
based on the asset allocation of the permanent fund.
3:40:16 PM
Mr. Carpenter looked at slide 2, which showed the same 4
graphs as slide 1, reflecting the passage of CSSB 128(FIN).
He pointed out the budget graph in the upper left, with a
new bar depicting use of the Percent of Market Value (POMV)
payout to the general fund (GF). The POMV payout
significantly filled the budget deficit under the new
scenario. In the lower left quadrant, he pointed out the
graph depicting the life of the CBR extending to FY 23; and
a healthy ERA through FY 25. He drew attention to the
"Dividend Check" graph in the upper right, noting that the
bill set the PFD at $1000 for the first three years, then
falling into the formula thereafter with dividends at
roughly $1000.
Mr. Carpenter continued discussing slide 2, highlighting
the "Permanent Fund - FY Ending Balance" graph in the
bottom right corner. He pointed out that the balance of the
fund itself [under the CSSB 128 scenario] had grown to a
larger balance of over $60 billion versus the status quo
scenario on slide 1 that showed a flat balance. He noted
that for FY 17, even with a POMV payout of almost $2.4
billion, there was a remaining deficit of $1.5 billion that
could be seen on the table on the lower left of the slide.
He added that the remaining deficit amount would be filled
by the CBR in FY 17.
Co-Chair MacKinnon turned to slide 1, and drew attention to
the table at the bottom left of the slide. She looked at
the row "Years to Exhaust," and explained that the numbers
(starting with 4 in FY 17 and moving steadily down to zero
in FY 22) indicated how in many years until budget reserves
would be gone. She compared it to the same table on slide
2, which reflected what would happen under conditions of
the proposed plan. The "Years to Exhaust" row on slide 2
showed the reserves starting at 9 for FY 17, and growing
steadily because of the change in the use of the funds.
Co-Chair MacKinnon continued to compare the tables at the
bottom left of slide 1 and slide 2, and pointed out the
"Deficit" row. She noted that the status quo table on slide
1 showed approximately $3.3 billion of deficit in FY 17;
and the same figure on slide 2 [reflecting implementation
of the proposal in the CS] showed a much lower deficit of
$1.5 billion. She explained that the committee was looking
to extend the health of the state's budget reserves, as
well as keeping the corpus of the permanent fund healthy.
Senator Hoffman asked if both scenarios assumed a capital
budget of approximately $185 million from FY 19 through FY
25. He asked Mr. Carpenter to remind the committee of the
standing of the current capital budget.
Mr. Carpenter relayed that the capital budget was currently
at $96 million.
Senator Hoffman noted that the amount for FY 19 through FY
25 was double what the capital budget was currently.
Mr. Carpenter concurred.
3:44:00 PM
Senator Dunleavy discussed federal matching funds, and
wondered if the state doubled its capital budget if it
would also double the receipt of federal funds.
Co-Chair MacKinnon stated that the proposal had tried to
leverage as many dollars as possible with the money
allocated from the GF, but there was not an excess of
federal funds. Rather, there was a Department of
Transportation and Public Facilities funding match. She
thought there might be a bit more federal funds, but not a
doubling of expenditures by the state.
Mr. Carpenter confirmed that the state had leveraged every
federal dollar that was possible.
Senator Hoffman asked if doubling the capital budget over
the proposed period of time was a good start in leveraging
federal dollars.
Co-Chair MacKinnon stated that many Alaskans believed that
the capital budget, if it remained low for too long, would
mean increased costs though deferred maintenance. She
relayed that state assets were struggling with maintaining
repairs.
Senator Bishop thought the deferred maintenance problem
would only worsen if it were not addressed. He added that
it was important to consider fixing what the state already
owned rather than investing in new capital purchases.
Mr. Carpenter addressed slide 3, "20/20 Plan Cash Flow." He
drew attention to the circled area, which encompassed boxes
for the permanent fund principal, the ERA, and the CBR. He
explained that the funds were shown inside a circle to
denote an investment pool, while other cash flow sources
(royalties, production tax, and other UGF revenue) were
outside the circle with arrows toward the GF. He noted that
the royalties were split between the public school trust,
the principal of the permanent fund, and the GF; while the
other two fund sources flowed toward the GF at 100 percent.
He relayed that the graph showed the POMV payout coming
from the ERA to the GF; while a dotted line on the diagram
illustrated CBR draws (as necessary to fill deficits)
flowing to the GF. Finally, the diagram showed 20 percent
of royalties and 20 percent of the POMV paid out for PFDs.
3:47:35 PM
Co-Chair MacKinnon clarified that the slide depicted where
the money currently resided, and how the bill proposed to
manage and direct the money.
Senator Olson asked about PFDs and observed that the bill
proposed a dividend at a flat amount near $1000 over the
next 3 years. He wondered what would happen to the
dividends after FY 19.
Mr. Carpenter returned to slide 2, which showed a projected
dividend at roughly $1000 under the bill formula.
Senator Olson thought the graph illustrated that the
dividend amount was projected indefinitely at the same
amount.
Mr. Carpenter stated that the amount was projected for the
time period shown on the graph, and if production and
royalty were to decline there would be a drop in the
dividend. He added that growth of the permanent fund and
the POMV amount would offset the decline in royalty.
Co-Chair MacKinnon asked if it was accurate that there was
a variety of variables under the proposal that would affect
the dividend.
Mr. Carpenter agreed.
Co-Chair MacKinnon surmised that the permanent fund
earnings and the royalties were part of what would affect
the dividend. She thought the forecast was based on spring
projections, and asked if the spring projections were above
or below what the state was currently experiencing.
Mr. Carpenter thought the projections were below what was
expected, but growing in line with the spring projections.
Co-Chair MacKinnon thought the committee could get more
information from Commissioner Hoffbeck to enhance
understanding of the variables affecting the PFD.
Senator Olson commented on the variables and thought it
would be helpful to be able to communicate more information
to his constituents.
3:51:01 PM
Mr. Carpenter looked at slide 4, "PRPA Payout/Revenue
Limit," which showed two graphs depicting the UGF revenue
limit, which he explained was put in place against the POMV
payout. He noted that the graph to the left portrayed what
would happen without the payout limit. The bar graph showed
non-volatile revenue (such as corporate income tax), the
POMV payout, the volatile revenue (such as oil and gas),
and the deficit (which indicated CBR use). He explained
that the graph used FY 17 revenue under the spring
forecast. He pointed out the black line that depicted the
budget. He noted that the POMV payout was consistent across
the oil price scenario (the values on the bottom). As the
price of oil grew, the total volatile revenue grew as well.
He indicated that at a certain price point on the graph,
the budget line showed surplus revenue.
Mr. Carpenter continued discussing slide 4, and relayed
that there had been concern over what to do with the
forecast surplus revenue, therefore the revenue limit had
been proposed by the governor's office. When volatile
revenue reached $1.2 billion, the POMV would be reduced on
a dollar-per-dollar basis, as illustrated by the graph on
the right, "UGF Revenue with Payout Limit." He directed
attention to the point of oil revenue (at $75 to $85) where
the POMV started to decline as the volatile revenue started
to increase beyond a certain point. He added that the
payout limit proposal would mean that oil had to be $110
before there would be surplus revenue.
Co-Chair MacKinnon asked if the POMV was reduced and not
paid out, if it would sit in the ERA. Mr. Carpenter turned
to slide 5, "Savings Rule." He pointed out surplus revenue
on the graph, which showed 50 percent going to the CBR and
50 percent going to the permanent fund principal.
3:54:18 PM
AT EASE
3:55:49 PM
RECONVENED
Co-Chair MacKinnon referred to her earlier question about
POMV funds. She looked at the green bars on slide 4, which
represented the POMV with a payout limit, and understood
that the excess funds would stay in the ERA. She asked what
would happen when the funds remained in the ERA.
Mr. Carpenter detailed that as the revenue limit was put
into effect and the POMV payout was reduced; the funds
would stay in the ERA and the permanent fund, provide
additional assets for investment and grow the permanent
fund, and then cause the dividend to grow.
Co-Chair MacKinnon restated that the excess POMV funds
would be saved to help drive the dividend up.
Senator Olson asked what would happen to the dividend if
there was a financial crisis such as in 2008.
Mr. Carpenter replied that any financial crisis would
impact the dividend negatively.
Senator Olson asked if the effect would be significant.
Mr. Carpenter recounted that there had been potential for
the state to have a zero ERA with no dividend in 2008; and
thought the possibility still existed.
Co-Chair MacKinnon stated that the difference in the
dividend formula (under the proposed plan of 20 percent
market value and 20 percent royalty) diversified risk. She
thought the worst case scenario was if the price of return
on investment dropped significantly. She continued that if
oil production remained the same and the price stayed up,
then the dividend would be higher than if it were only
based on a percentage of market value from the permanent
fund earnings.
Senator Olson understood that the risk would still be
significant, but not as significant as it had been under
the existing formula.
Co-Chair MacKinnon reiterated that the PFD would be blended
from two sources, therefore the risk should be diversified.
She added that under the proposed plan, the dividend would
not swing upwards as dramatically as in the past.
Senator Hoffman asked about the dividend amount, as well as
the diminished volatility of the dividend under the
proposal in the bill compared to the current plan.
Mr. Carpenter replied that the current dividend formula was
based on 20 percent of the previous five years earnings
calculation, and recounted historic low PFD amounts as well
ask spikes due to dramatic fluctuations calculated into the
average. Under the new scenario, the amount of the dividend
would maintain, given that the formula would be a 5-year
payout of a calculation based on the entire balance of the
permanent fund.
Senator Hoffman surmised that the people of Alaska could
better predict the range of the PFD under the proposed
plan.
Mr. Carpenter replied in the affirmative.
4:00:42 PM
Co-Chair MacKinnon shared that the administration had
proposed an annuity-style draw, as a way to close part of
the fiscal gap and diversify the revenue stream. She asked
if the commissioner of the Department of Revenue had any
comments on the CS that was before the committee.
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
stated that the CS was different than the bill that was
originally proposed, but it did accomplish the purpose that
the administration had set out within the bill. He
continued that the original intent had been to have a
systematic way to use the ERA that protected both the
corpus of the permanent fund and the PFD. He affirmed that
the administration was pleased with the CS, and thought it
represented cooperation. He thanked the committee, and
particularly Co-Chair MacKinnon for the work on the bill.
He echoed the governor's comments about the bill being
subject to change.
Co-Chair MacKinnon stated that the committee had questions
about the opportunity cost of not moving forward with the
proposed plan. She recounted passing a balanced budget
including a significant draw from savings. She relayed that
there had been bipartisan support in the Senate and House
for the necessary three-quarter vote to access the CBR,
which had a lower rate of return than the ERA. She asked
the commissioner if he had the same understanding.
Commissioner Hoffbeck answered in the affirmative.
Co-Chair MacKinnon asked for explanation of how the
opportunity cost was calculated, so that the committee
members could contemplate the calculation in consideration
of the bill.
Commissioner Hoffbeck replied that there was three
components that drove the change in the equation. The
primary issues were: how much the state spent on the
budget, what other revenue sources were available, and how
much would be spent for supporting government versus the
PFD program (considering the Permanent Fund Protection Act
(PFPA)). He continued that when the administration had
considered the opportunity cost, it had looked at a $700
million difference between the dividend payout as it
currently was versus under the PFPA. Additionally, the
administration had reviewed $300 million to $400 million in
new revenues, as well as the impact of the oil and gas tax
credits.
Commissioner Hoffbeck continued, and summarized that there
was a $1 billion to $1.5 billion difference between the
status quo and the implementation of the PFPA and other
programs. He elucidated that the biggest issue with the
PFPA would be the $700 million investment return
difference; which at a 7.25 percent rate of return, would
equate to $50 million of lost revenue. He added that
considering other components, there would be $100 million
that would not be recovered for the future.
Co-Chair MacKinnon noted that the bill proposed to move $3
billion from the CBR, and asked what the opportunity cost
loss was on spending the funds.
Commissioner Hoffbeck stated that the loss was in the $50
million range, due to the fact that the bill did not have
the adjustments associated with the components that had
been proposed earlier. He clarified that the totality of
the governor's proposed finance package (including
additional revenues and credit reform) was in the $100
million range.
Senator Dunleavy mentioned an earlier reference to the
amount of $200 million, and asked for an explanation.
4:05:35 PM
AT EASE
4:07:00 PM
RECONVENED
Co-Chair MacKinnon shared that she had requested the
Legislative Finance Division (LFD) to provide additional
dialogue on the subject. She wanted to provide greater
understanding about the assertion from the administration
that there was a $200 million opportunity cost if the state
used $3 billion from the CBR.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
considered that the $200 million was the difference between
if the deficit were filled with the CBR rather than the ERA
(without a permanent fund plan). He recalled that there had
been discussion in the legislature about using the ERA
instead of the CBR. He furthered that, in the absence of
the PFPA, which allowed the CBR to be invested for a higher
return, there would be a significant difference (an
estimated $200 million) in investment revenue between using
the ERA and the CBR.
Senator Dunleavy asked if the calculation had been based on
the CBR being invested differently.
Mr. Painter replied in the affirmative.
Co-Chair MacKinnon added that the calculation also
considered the elimination of the $3 billion and the
earning potential.
Senator Dunleavy wondered if it was possible to isolate the
investment in order to get the desired return without
having to do anything with POMV.
Mr. Painter replied in the affirmative, but advised that
the scenario would require statutory change. He explained
that currently the CBR had to be invested conservatively if
it was going to be used within the following five years.
Senator Dunleavy thought some had alleged that passage of
the bill would cause the opportunity cost loss, but thought
the legislature could make the necessary changes through
legislation to change how the CBR was invested.
Mr. Painter concurred, considering the difference between
using the CBR and the ERA. He added that there was an
opportunity cost, as the commissioner had mentioned, of the
dividends and other factors.
Senator Dunleavy stated that there was also an opportunity
cost of not reducing the budget further.
Vice-Chair Micciche discussed the difference between
investing the CBR and the ERA, and asked if not passing the
bill under consideration (or another) would mean a
difference of between $800 million and $900 million.
Mr. Painter replied in the affirmative.
4:10:07 PM
Co-Chair MacKinnon acknowledged that the administration had
a different outline for opportunity cost as well as an
assertion of a $200 million difference in returns. She
reiterated that she wanted to edify the subject to aid in
considering the bill.
Co-Chair MacKinnon stated that the bill being considered
would establish a POMV, and pooled all the state's assets
to generate revenue. She furthered that the revenue would
pay the dividends at 20 percent of the POMV, plus 20
percent of royalties. Additionally, the bill would
guarantee a dividend of $1,000 for three years. The bill
would also set a revenue limit of $1.2 billion, above which
the POMV spending would be reduced by whatever amount was
earned. Funds above the revenue limit would stay in the ERA
to help drive up future dividends.
Co-Chair MacKinnon continued discussing the bill, noting
that it would create a savings rule that stipulated that in
a high-price environment, legislators may contribute 50
percent of excess funds to the permanent fund and 50
percent to the CBR to pay back the money that had been
spent. The bill transferred management of all funds to
create pooled assets under the management at the Alaska
Permanent Fund Corporation (APFC) to receive a higher rate
of return.
Vice-Chair Micciche relayed that he had asked DOR to
provide him with a scenario illustrating the difference if
the legislature had changed the CBR investment protocol 10
years previously. He recalled the difference was about $1.6
billion. He pondered how investments worked over the long
term, and thought the state should have made the change a
long time ago. He recognized the effort to keep the CBR
more liquid, but thought the practice had cost the state
considerably.
Commissioner Hoffbeck stated that the numbers were
accurate, and pointed out that the management mandate for
the CBR was different (than for the permanent fund) as the
state had to remain more liquid, particularly during years
where the state had substantial draws. He acknowledged that
the constraints had held down rates of return. He hoped
that by co-managing the funds within the permanent fund,
returns would be generated similar to those of the
permanent fund. He noted that some liquidity measures would
have to be taken in the current year to ensure that the
cash calls could be met.
Senator Olson discussed management of the permanent fund,
and wondered if the commissioner thought it was wise to
have the management of the CBR transferred to the APFC.
Commissioner Hoffbeck thought that there was an opportunity
available by transferring the CBR management to the APFC.
He thought his staff did a very good job managing the fund,
but recognized there were opportunities available through
merging the funds. He noted that he had discussed looking
at opportunities for co-management of funds with Co-Chair
MacKinnon before the matter was in the bill.
Senator Olson asked if the governor had strong feelings on
the matter.
Commissioner Hoffbeck replied in the negative.
4:15:28 PM
CHRIS POAG, GENERAL COUNSEL, ALASKA PERMANENT FUND
CORPORATION, JUNEAU, invited the committee to pose
questions about APFC as it related to the bill.
Co-Chair MacKinnon asked if Mr. Poag was up for co-managing
pooled investments for Alaskans.
Mr. Poag answered in the affirmative and expanded that the
sole responsibility of APFC was to invest and manage
assets. He explained that by making the pool larger, there
would be better investments and returns. He added that a
POMV draw was very common among endowments and
universities, and typically ranged from 4 percent to 5
percent. He noted that the proposed POMV was 5.25 percent,
and was based on five of the preceding six fiscal years, so
the effective rate was not likely to be 5.25 percent. He
informed that the trend was for markets to incline,
therefore one would artificially deflate the value.
Mr. Poag continued discussing the bill, noting that Section
1 gave the APFC comfort in that in three years the
legislature would reevaluate the use of the ERA, to
determine whether there was over-consumption or under-
consumption. He thought the reevaluations were important,
and ventured that in three years the state would be able to
determine whether 5.25 percent was the right level.
Vice-Chair Micciche asked if Mr. Poag envisioned the
reporting of the performance of the co-mingled funds to
become a sub-set of the annual report of the permanent
fund, or if it would be reported through DOR.
Mr. Poag believed the bill addressed the subject. He
referred to Section 5, line 13; which outlined a
requirement that APFC provide a report to the legislature
by March 15, communicating the balance of the fund at the
beginning and end of the fiscal year. He expanded that APFC
would communicate the nominal, real, and realized returns
of the CBR portion of the managed assets. He noted that
there was already pooling of the main permanent fund and
the ERA, as well as some portion of mental health trust
funds. If the legislation were to pass, there would be four
pools that made one large asset pool.
4:18:44 PM
Vice-Chair Micciche asked if Mr. Poag envisioned a separate
asset allocation, or similar investment of all of the funds
in the pool.
Mr. Poag stated that the APFC board had discussed holding a
special board meeting if the legislature acted to change
the way the ERA was accessed; at which it would consider
the current asset allocation and determine whether or not
to make adjustments. He discussed the necessity of
determining the rate of spend for the CBR, in order to
decide if the current asset allocation would be liquid
enough. He noted that APFC's intention was to start by
using the same asset allocation for the main fund and the
ERA. He stated that APFC was hopeful that it could manage
the cash needs that the legislature had for a fixed draw or
any CBR appropriations.
Vice-Chair Micciche asked if APFC maintained a portion of
the permanent fund corpus in liquidity.
Mr. Poag answered in the affirmative, and noted that APFC
had 6 percent of the fund in cash and interest.
Vice-Chair Micciche wondered whether the liquidity could be
transferred for a draw from one account to another without
affecting the various asset allocations.
Mr. Poag stated that the board had set up a "risk
dashboard" with allocations, which established authority to
act within the boundaries. He expanded that there were
levels which necessitated different involvement of the
chief investment officer, chief executive officer, and the
board. He explained that if the cash draw was within the
established boundaries it would not be a problem, however a
larger cash draw would possibly necessitate accommodations
by realizing an investment. Alternatively, it was possible
to utilize a line or letter of credit to solve a short-term
cash need while allowing less liquid assets to maintain in
the current profile.
Co-Chair MacKinnon understood from past meetings that the
bill would allow DOR to work cooperatively with APFC to
establish a smooth transition of the management.
Mr. Poag concurred.
Senator Dunleavy asked if APFC had any concerns about the
bill.
Mr. Poag expressed that the decision to access the ERA was
a policy decision that was outside the purview of APFC. He
noted that the board had a meeting in January at which it
evaluated the legislation and had given input. He thought
APFC had been afforded a great opportunity to advise the
state on how to make an informed decision on how to spend
funds at a sustainable level. He communicated that APFC was
in support of the proposal, and looked forward to
reevaluating the success of the asset pool in three years'
time.
4:22:43 PM
Co-Chair MacKinnon stated that the new fiscal notes would
not be adopted, but she wanted to discuss them with the
committee. She shared that because of the sequence of
events, the committee could not incorporate new fiscal
notes in to the budget. She informed that the notes would
be advisory only, and would have to come back in the form
of a supplemental request to the legislature. She wanted to
highlight the difference in approach that the fiscal notes
represented.
Vice-Chair Micciche explained that both fiscal notes were
related to the projected change (increase and decrease) in
management fees due to the modifications in investment
proposed in the bill. He explained that the first fiscal
note was for DOR, with an appropriation for APFC, APFC
Operations. The note proposed operating expenditures of
$14,800,000 from the 1105 permanent fund gross fund for FY
17 through FY 22. The funds were for a projected increase
in management fees due to a change in how the fund would be
managed.
Vice-Chair Micciche discussed the second fiscal note for
DOR Taxation and Treasury, for the Treasury Division. The
note proposed a decrement of $130,000 in external
management fees for managing the CBR from FY 17 through FY
22. He detailed that the decrement had been included in the
governor's FY 17 request. The fiscal note analysis detailed
that the total cost of managing the CBR was approximately
$1.4 billion, and with the exception of the $130,000
decrement, the costs would be allocated to other funds in
the Treasury.
Co-Chair MacKinnon relayed that the committee would be
looking for actual costs for managements, and if the
department was managing quite a bit of the work internally,
she would expect to see a downturn in staffing positions at
DOR.
4:25:30 PM
Senator Dunleavy remarked that there were different ways of
looking at opportunity costs, which he thought had been
demonstrated during the meeting. He thought many committee
members shared the concern that there were opportunity
costs to realize through continued reduction of the budget.
He thought there would be less pressure to reduce the
budget if new revenue streams were found. He thought some
believed the Senate had cut too much from the budget, and
others thought not enough had been cut.
Senator Dunleavy continued discussing the bill. He
personally believed there was much to be done in cutting
the budget. He noted that with the passage of the bill, the
state would still have $1 billion gap between revenues and
expenditures. He questioned how the gap would be filled,
and expressed concern about keeping the growth of
government in check. He questioned taking funds out of the
economy (with capping of the dividend) and thought it
presented an opportunity cost as well. He thought state
government would keep growing at the expense of the private
sector. He was concerned that the plan would take pressure
off the legislature in tackling budget issues the following
year.
Senator Hoffman stressed that the current issue was the
budget deficit. He felt that without the legislation the
state would be in a worse financial situation. He recalled
the last time he saw a piece of legislation of the same
magnitude was when the legislature passed the bill
establishing the CBR account. He discussed the importance
of the legislation and noted that without putting the
settlement funds into a fund, the dollars would have been
spent instead of utilized to meet the state's needs.
Senator Hoffman continued to discuss the bill, and
commented that the restructuring of the permanent fund did
several things: it protected and stabilized the permanent
fund, and it gave the state long-term cash flow to meet its
needs. He emphasized the need for action on the fiscal gap,
but acknowledged that the plan would not fill the complete
gap. He thought the vast majority of Alaskans were looking
to the legislature to come up with a fiscal plan.
4:30:25 PM
Vice-Chair Micciche shared that he had listened to
transcripts of the meetings from when the permanent fund
was created. He had gleaned that the fund was designed to
help support government when times were difficult. He
acknowledged the bill did not fill the fiscal gap, and
thought it was imperative to continue to cut the budget and
make government more efficient. He emphasized that he did
not feel reduced pressure to cut the budget. He thought
that without taking action, the PFD would likely go away in
about five years; whereas with passage of the bill it could
be maintained in perpetuity.
Vice-Chair Micciche discussed opportunity cost and the vast
earnings differential if the allocation of the funds were
changed. He mentioned oil and gas tax credit legislation.
He thought there were more cuts to make on the budget. He
though the key to surviving a fiscal downturn was to use
all the tools available. He thought the investment of the
last forty years was being used to continue to manage down
the size of government. He was not enthusiastic about
passing the bill but saw the necessity of passing it.
Vice-Chair Micciche MOVED to report CSSB 128(FIN) out of
Committee with individual recommendations. There being NO
OBJECTION, it was so ordered.
4:34:33 PM
AT EASE
4:37:22 PM
RECONVENED
Co-Chair MacKinnon thanked the Legislative Finance Division
team, her own staff, and the Legislative Legal department.
She thanked the Department of Revenue, Commissioner
Hoffbeck, Mr. Alper, and associated staff. She thanked
Attorney General Richards, and expressed appreciation for
Governor Walker and Senator Lesil McGuire.
CSSB 128(FIN) was REPORTED out of committee with a "do
pass" recommendation.
ADJOURNMENT
4:39:48 PM
The meeting was adjourned at 4:39 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 128 CSSB 128 work draft version U.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 - Summary of Changes Version S to U.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 - Highlights Version U.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 - Sectional Analysis Version U.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 20-20 plan cashflow_w Surplus Split.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 Public Testimony Packet 2 060616.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |
| SB 128 Public Testimony Packet 060616.pdf |
SFIN 6/6/2016 3:00:00 PM |
SB 128 |