Legislature(2017 - 2018)SENATE FINANCE 532

03/01/2017 09:00 AM FINANCE

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09:01:41 AM Start
09:02:16 AM Presentation: Sb 70 Overview - Randall Hoffbeck, Commissioner, Department of Revenue
10:39:22 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 SENATE FINANCE COMMITTEE                                                                                       
                       March 1, 2017                                                                                            
                         9:01 a.m.                                                                                              
9:01:41 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair MacKinnon called the Senate Finance Committee                                                                          
meeting to order at 9:01 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Click Bishop, Vice-Chair                                                                                                
Senator Mike Dunleavy                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Natasha von Imhof                                                                                                       
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
Randall Hoffbeck, Commissioner, Department of Revenue;                                                                          
Angela Rodell, Chief Executive Officer, Alaska Permanent                                                                        
Fund Corporation.                                                                                                               
SB 70     APPROP. LIMIT/BUDGET PROCESS/PERM FUND                                                                                
          SB 70 was HEARD and HELD in committee for further                                                                     
PRESENTATION:   SB   70   OVERVIEW   -   RANDALL   HOFFBECK,                                                                    
COMMISSIONER, DEPARTMENT OF REVENUE                                                                                             
SENATE BILL NO. 70                                                                                                            
     "An Act  relating to  an appropriation  limit; relating                                                                    
     to  the   budget  responsibilities  of   the  governor;                                                                    
     relating to the Alaska  permanent fund, the earnings of                                                                    
     the  Alaska permanent  fund, and  the earnings  reserve                                                                    
     account;  relating to  the  mental  health trust  fund;                                                                    
     relating to  deposits into the dividend  fund; relating                                                                    
     to  the  calculation  and  payment  of  permanent  fund                                                                    
     dividends; and providing for an effective date."                                                                           
^PRESENTATION:   SB   70   OVERVIEW  -   RANDALL   HOFFBECK,                                                                  
COMMISSIONER, DEPARTMENT OF REVENUE                                                                                           
9:02:16 AM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
discussed the  presentation, "SB 70 REVIEW"  (copy on file).                                                                    
He  informed  that  the presentation  was  the  department's                                                                    
review of  the bill  in relationship  to what  it considered                                                                    
critical components that needed to  be in any Permanent Fund                                                                    
restructure bill.                                                                                                               
Commissioner  Hoffbeck  showed  slide   2,  "Part  I  -  THE                                                                    
PERMANENT FUND'S ROLE IN A SOLUTION."                                                                                           
Commissioner Hoffbeck  turned to slide 3,  "USE OF PERMANENT                                                                    
FUND EARNINGS":                                                                                                                 
     "This   proposal,   if   approved,  would   amend   the                                                                    
     Constitution   of   the   State    of   Alaska   by   …                                                                    
     establish[ing]  a  constitutional permanent  fund  into                                                                    
     which at  least 25  percent of all  [mineral royalties]                                                                    
     received by the  State would be paid.  The principal of                                                                    
     the  fund  would  be  used  only  for  income-producing                                                                    
     investments permitted  by law  and the income  from the                                                                  
     fund  would be  deposited in  the general  fund of  the                                                                  
     State  and   be  available   to  be   appropriated  for                                                                  
     expenditure by  the State unless otherwise  provided by                                                                  
     Ballot Proposition No. 2                                                                                                   
    Permanent Fund from Non-Renewable Resource Revenue                                                                          
     Constitutional Amendment                                                                                                   
Commissioner   Hoffbeck   thought   there  had   been   some                                                                    
disagreement as  to what the  Permanent Fund  was originally                                                                    
established  for. As  evidenced  by  the ballot  proposition                                                                    
language on the slide, the  commissioner thought that it was                                                                    
the original intent of the  fund to have the money available                                                                    
for appropriation for state expenditures.                                                                                       
Commissioner Hoffbeck displayed slide  4, "WHY USE PERMANENT                                                                    
FUND EARNINGS":                                                                                                                 
     FY18 Budget $4.3 billion                                                                                                   
     FY18 Budget Gap $2.8 billion                                                                                               
     Potential Tools to Close the Gap                                                                                           
          Motor Fuels Tax Increase $0.1                                                                                         
          Broad Based Tax $0.6                                                                                                  
          Oil Tax Credit Reform $0.1                                                                                            
          Max. Cuts Proposed (over 3 years) $0.75                                                                               
          SB70 (net dividend) $1.9                                                                                              
Commissioner Hoffbeck remarked on  the governor's budget and                                                                    
the tools  that had been  proposed to close the  fiscal gap.                                                                    
He highlighted the  last two items on the  slide, which were                                                                    
focused on in the bill.                                                                                                         
Commissioner Hoffbeck showed slide 5,  " Part II - STRUCTURE                                                                    
FOR  USING THE  PERMANENT  FUND." He  thought the  Permanent                                                                    
Fund  was  a   multi-billion-dollar  solution,  where  other                                                                    
potential solutions were $100  million solutions. He thought                                                                    
that  it  was  not  possible to  solve  the  state's  fiscal                                                                    
problem  without using  the  Permanent Fund  as  one of  the                                                                    
major components of any plan.                                                                                                   
Senator Micciche referred to  the Senate Majority's proposal                                                                    
of $750  million in  cuts over three  years. He  thought the                                                                    
commissioner had discussed the proposal  as an aspect of the                                                                    
Commissioner  Hoffbeck  clarified  that  he  had  mistakenly                                                                    
spoke of the cuts as if  they were contained in the bill. He                                                                    
continued that  the cuts had  been discussed as  a companion                                                                    
to achieve the Senate's goal.                                                                                                   
Commissioner  Hoffbeck  discussed  slide 6,  "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     1. Rule-Based Framework (Saving, Spending, Dividend)                                                                       
     2. Stabilize the Budget                                                                                                    
     3. Protect the Dividend                                                                                                    
     4. Protect the Permanent Fund                                                                                              
     5. Maximize the use of the Earnings Reserve                                                                                
Commissioner  Hoffbeck stated  that  over  the previous  two                                                                    
years,  there were  over 63  hearings  on various  Permanent                                                                    
Fund  restructuring   bills.  The  governor,   himself,  and                                                                    
Office of  Management and Budget  (OMB) Director  Pat Pitney                                                                    
had done over  500 meetings and presentations  in the state,                                                                    
discussing  fiscal plans  and fiscal  issues. He  explicated                                                                    
that the administration had come  up with five components of                                                                    
what was  necessary for any  restructuring of  the Permanent                                                                    
9:07:12 AM                                                                                                                    
Commissioner  Hoffbeck turned  to  slide  7, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should be …                                                                                         
     1. Rule-Based (Saving, Spending, Dividend)                                                                                 
        · Greatest threat to long term fund durability is                                                                       
          unplanned withdrawals                                                                                                 
        · Withdrawals need to occur under a set of                                                                              
          statutory rules                                                                                                       
             ƒDesigned to protect the fund and guard                                                                           
               against unsustainable uses                                                                                       
             ƒEnsure the ERA holds enough to bridge years                                                                      
               of low earnings ("ERA durability")                                                                               
Commissioner Hoffbeck  commented that the proposed  bill was                                                                    
not seen  as a  short-term fix, but  rather was  a long-term                                                                    
structural change in how the state would fund government.                                                                       
Commissioner  Hoffbeck  reviewed  slide  8,  "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should be …                                                                                         
     2. Stabilizing:                                                                                                            
        · Over the long term, economies that experience                                                                         
          repeated ups and downs grow slower than stable                                                                        
        · Because commodity prices are volatile, economies                                                                      
          dominated by a single commodity industry, like                                                                        
          the petroleum industry, experience more (and more                                                                     
          pronounced) cycles.                                                                                                   
        · Permanent Fund Earnings can play a central role                                                                       
          in reducing four decades of boom and bust                                                                             
          budgeting cycles                                                                                                      
Commissioner  Hoffbeck  expressed  that the  Permanent  Fund                                                                    
could be  used as a  tool for stabilizing revenues,  as well                                                                    
as a  tool for stabilizing  the size of government;  so that                                                                    
the state could  come out of the of boom  and bust budgeting                                                                    
Commissioner Hoffbeck  showed slide 9, "STRUCTURE  FOR USING                                                                    
THE PERMANENT FUND":                                                                                                            
     A plan to use the fund should…                                                                                             
     3. Protect the Dividend                                                                                                    
        · Reflects   the   current   and   future   economic                                                                    
          realities of shrinking oil and gas tax revenue.                                                                       
        · Recognizes that too large a dividend limits                                                                           
          available options for full fiscal solutions.                                                                          
        · Provides for a sustainable dividend for all                                                                           
          generations of Alaskans.                                                                                              
Commissioner  Hoffbeck  had  recognized  how  important  the                                                                    
dividend was as  part of the economic base of  the state. He                                                                    
thought  the size  of  the dividend  needed  to reflect  the                                                                    
economic realities  of the state  budget. He  explained that                                                                    
the larger the dividend, the  more the deficit would have to                                                                    
be filled with other sources.                                                                                                   
Commissioner  Hoffbeck displayed  slide  10, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should…                                                                                             
     4. Protect the Permanent Fund                                                                                              
        · Meant to provide for funding state expenditures                                                                       
          for all generations of Alaskans.                                                                                      
        · Maintain or grow the real (inflation-adjusted)                                                                        
          value of the permanent fund.                                                                                          
        · Withdrawing too much is unsustainable and risks                                                                       
          damaging the fund.                                                                                                    
Commissioner  Hoffbeck reiterated  that  the Permanent  Fund                                                                    
was meant to be multi-generational,  and needed to grow with                                                                    
inflation. Drawing too  much from the fund  was unstable and                                                                    
risked damaging the corpus of the fund.                                                                                         
9:11:00 AM                                                                                                                    
Commissioner  Hoffbeck spoke  to  slide  11, "STRUCTURE  FOR                                                                    
USING THE PERMANENT FUND":                                                                                                      
     A plan to use the fund should …                                                                                            
    5. Maximize the use of the Permanent Fund Earnings:                                                                         
        · As North Slope production declines, the fund's                                                                        
          earnings will be increasingly important in                                                                            
          eliminating the fiscal imbalance in order to                                                                          
          sustain public services.                                                                                              
             o Similar to petroleum revenue, investment                                                                         
               earnings can be highly variable.                                                                                 
             o Unlike petroleum, our financial reserves are                                                                     
               a renewable resource.                                                                                            
        · Withdrawing too little limits future options for                                                                      
          full fiscal solutions.                                                                                                
        · Other proposed new revenues and cuts could reduce                                                                     
          the deficit by millions, the fund can sustainably                                                                     
          contribute billions.                                                                                                  
Commissioner   Hoffbeck  noted   that  there   were  several                                                                    
versions of bills that included  some form of Permanent Fund                                                                    
restructuring. He emphasized the  importantance of using the                                                                    
tool  of the  Permanent Fund  to its  fullest potential.  He                                                                    
pointed out  that the state  made substantially more  on the                                                                    
earnings of the  Permanent Fund than it made on  oil and tax                                                                    
Commissioner  Hoffbeck showed  slide  12,"Part III  - SB  70                                                                    
Commissioner   Hoffbeck   turned   to   slide   13,   "MODEL                                                                    
SOPHISTICATION AND VETTING":                                                                                                    
     · Key aspects of the model                                                                                                 
        • Probabilistic treatment of oil prices, oil                                                                            
        production, investment returns                                                                                          
        • Focus on detail of how money flows between                                                                            
        permanent fund, general fund, and dividends                                                                             
        • Assumptions from objective sources                                                                                    
        • Monte Carlo simulations                                                                                               
     · Vetted by McKinsey last year                                                                                             
        • Found no major mechanical errors, reasonable                                                                          
      • Approved of Monte Carlo probabilistic method                                                                            
        •  Suggested   improvements,  some   of  which   the                                                                    
        Department of  Revenue (DOR)  has incorporated  (for                                                                    
        example,     probabilistic      oil      production,                                                                    
Commissioner Hoffbeck reviewed slide 14, "METHOD, INPUTS,                                                                       
AND ASSUMPTIONS":                                                                                                               
        · Permanent Fund Starting Value: $54.9 billion                                                                          
             o Realized portion of corpus: $37.9 billion                                                                        
             o Realized portion of earnings reserve account                                                                     
               (ERA): $9.7 billion                                                                                              
             o Unrealized earnings held by the fund: $6.3                                                                       
             o Starting value based on                                                                                          
                  ƒAPFC forecast for end of fiscal year                                                                        
                    2017 (FY17), without inflation proofing                                                                     
                    transfer for FY17                                                                                           
                  ƒBecause APFC accounts for October 2017                                                                      
                    dividends  in  FY17, scenarios  starting                                                                    
                    with $1,000  per person  dividends begin                                                                    
                    with  a higher  realized ERA  balance of                                                                    
                    $10.6 billion  and a total  fund balance                                                                    
                    of $55.8 billion                                                                                            
        · Investment Return: Callan Associates' 10-year                                                                         
             o Total   return:   6.95%   geometric,   12.32%                                                                    
               standard deviation                                                                                               
             o Statutory return: 6.24% mean, 2.24% standard                                                                     
             o Inflation rate: 2.25%                                                                                            
Commissioner Hoffbeck emphasized  that the investment return                                                                    
numbers  used on  the  slide were  from  the Permanent  Fund                                                                    
Corporation.  He assured  that the  department attempted  to                                                                    
use objective numbers wherever possible.                                                                                        
Commissioner Hoffbeck showed slide 15, "METHOD, INPUTS, AND                                                                     
   · Petroleum Revenues:                                                                                                        
        o Oil price: Probabilistic analysis of ANS oil                                                                          
          prices using a PERT distribution from the fall                                                                        
          2016 price forecasting session                                                                                        
        o Production: Probabilistic analysis of ANS oil                                                                         
          prices using a PERT distribution from the DNR                                                                         
          provided Fall 2016 RSB                                                                                                
   · CBR: $4.4 billion beginning of year 2018 balance & a                                                                       
     2.25% rate of return                                                                                                       
Commissioner   Hoffbeck   displayed    slide   16,   "BUDGET                                                                    
ASSUMPTIONS,"  which showed  a line  graph. The  dotted line                                                                    
showed  the baseline  UGF revenues.  The yellow  line showed                                                                    
the effect  of SB  70 with  $750 million  in cuts.  The blue                                                                    
dashed line portrayed  SB 70, plus capital  and debt service                                                                    
(the  bill's   appropriation  cap  plus  capital   and  debt                                                                    
service). The green dashed line  showed the extended 10-year                                                                    
OMB fiscal plan. He thought it  was possible to see that the                                                                    
SB 70  appropriation cap  was very similar  to what  OMB had                                                                    
forecasted for  forward-looking budgets. He pointed  out the                                                                    
delta that occurred with the $750 million in cuts.                                                                              
9:15:13 AM                                                                                                                    
Commissioner Hoffbeck  spoke to  slide 17, "SB  70 SCENARIOS                                                                    
        · Deposits: 25% of royalties deposited into the                                                                         
          permanent fund                                                                                                        
        · Draw Calculation                                                                                                      
             o Maximum POMV:                                                                                                    
                  ƒFor first 4 years, 5.25% of the average                                                                     
                    value of the fund in the first 5 of the                                                                     
                    last 6 years.                                                                                               
                  ƒBeginning in FY22, 5% of the average                                                                        
                    value of the fund in the first 5 of the                                                                     
                    last 6 years.                                                                                               
             o Draw Limit: The maximum POMV amount is                                                                           
               reduced by $1 for every $1 that UGF                                                                              
               royalties and production taxes exceed $1.2                                                                       
        · Dividend Calculation:                                                                                                 
             o 25% of the maximum POMV calculation (before                                                                      
               applying the draw limit).                                                                                        
             o Overwriting the above calculation, the                                                                           
               dividends for CY2017, CY2018 and CY2019 are                                                                      
               $1,000 per person (the fund starting value                                                                       
               accounts for the CY17 dividend).                                                                                 
        · Inflation Proofing: Any ERA balance over 4 times                                                                      
          the full POMV calculation (after the current year                                                                     
          draw) is transferred to the corpus.                                                                                   
Commissioner Hoffbeck  clarified that  if the amount  of the                                                                    
draw  was reduced  based on  the  draw limit,  it would  not                                                                    
reduce the size of the dividend.                                                                                                
Senator von  Imhof referred to  slide 16, and the  blue line                                                                    
that represented  SB 70 plus  capital and debt  service. She                                                                    
asked  what  assumptions  were used  for  capital  and  debt                                                                    
Commissioner  Hoffbeck  stated  that the  OMB  numbers  were                                                                    
Senator von Imhof  did not see growth in  capital other than                                                                    
Commissioner Hoffbeck answered in the affirmative.                                                                              
Commissioner Hoffbeck  discussed slide 18, "SB  70 SCENARIOS                                                                    
             · SB70 with Full Fiscal Plan (full deficit                                                                         
               closure, no additional draws)                                                                                    
                  o The model assumes that the permanent                                                                        
                    fund  framework  is  immune to  any  UGF                                                                    
                  o This means that there are no unplanned                                                                      
                    withdrawals from the ERA                                                                                    
             · SB70 with no other Measures (structural                                                                          
               deficit remains requiring additional draws):                                                                     
                  o The model uses the $4.1 billion                                                                             
                    appropriation limit in  SB 70 plus OMB's                                                                    
                    capital   budget    and   debt   service                                                                    
                    payments as the budget assumption                                                                           
                  o Any deficit remaining after the planned                                                                     
                    withdrawal from the  ERA is filled first                                                                    
                    from   the  CBR;   after   the  CBR   is                                                                    
                    depleted, budget deficits  are filled by                                                                    
                    unplanned withdrawals from the ERA                                                                          
             · SB70 with 3 year $750 million in cuts ($300,                                                                     
               $250, $200 million)                                                                                              
                  o The model uses the $4.1 billion                                                                             
                    appropriation limit in  SB 70 plus OMB's                                                                    
                    capital   budget    and   debt   service                                                                    
                    payments as the budget assumption                                                                           
                  o Deficits are reduced by incremental                                                                         
                    spending reductions of  $300, $250, $200                                                                    
                    million.  Any  deficit  remaining  after                                                                    
                    the planned  withdrawal from the  ERA is                                                                    
                    filled  first from  the  CBR; after  the                                                                    
                    CBR  is  depleted, budget  deficits  are                                                                    
                    filled  by  unplanned  withdrawals  from                                                                    
                    the ERA                                                                                                     
Commissioner Hoffbeck  turned to slide  19, "Part IV  - DRAW                                                                    
DURABILITY." He noted  that there had been  discussion as to                                                                    
whether the 5.25  percent draw was too large.  He thought it                                                                    
was  important to  look at  the impact  of 5  of the  last 6                                                                    
years of the draw calculation.                                                                                                  
Commissioner Hoffbeck discussed slide 20, "POMV DRAW":                                                                          
        · 5.25% of the average fund value in the first 5 of                                                                     
          the last 6 years                                                                                                      
        · Example: draw calculation for fiscal year 2018                                                                        
          End of FY                                                                                                             
             o Average fund value in the first 5 of the                                                                         
               last 6 years = $48.1 billion                                                                                     
             o 5.25% of $48.1 = $2.5 billion                                                                                    
             o Effective POMV: = 4.7% of 2017 value                                                                             
        · Aggressive, but sustainable … if the draw limit                                                                       
          is applied                                                                                                            
Commissioner  Hoffbeck directed  attention to  the table  on                                                                    
the slide  that showed the  average fund value from  2012 to                                                                    
2018.  He  pondered  that  while a  5.25  percent  draw  was                                                                    
aggressive,  it was  sustainable based  on what  experts had                                                                    
said.  He thought  that some  people  were more  comfortable                                                                    
with  a 4.25  percent draw.  He noted  that the  actual real                                                                    
draw against  the current  value of the  fund was  about 4.7                                                                    
Commissioner  Hoffbeck  showed   slide  21,  "THE  EFFECTIVE                                                                    
     Based on  historic fund  values, these  "snapshot" POMV                                                                    
     calculations  demonstrate  that,  5.25 percent  of  the                                                                    
     fund's  average market  value  in the  first  5 of  the                                                                    
     preceding 6  years is generally less  than 5.25 percent                                                                    
     of the fund's current value.                                                                                               
The slide also showed a  bar graph that considered five-year                                                                    
increments   of  the   effective  POMV.   He  reviewed   the                                                                    
hypothetical effective POMV in past years.                                                                                      
9:19:42 AM                                                                                                                    
Senator  Micciche  asked  how the  commissioner  would  feel                                                                    
about  a  5.25  percent  draw  for the  first  five  of  the                                                                    
preceding 6  years, with a  5.25 percent cap. The  cap would                                                                    
keep  the  draw from  rising  above  5.25 percent  in  heavy                                                                    
earning years of the fund.                                                                                                      
Commissioner Hoffbeck stated that  there were years in which                                                                    
the draw would  be high, as well as years  in which the draw                                                                    
would  be  substantially lower.  He  thought  if a  cap  was                                                                    
applied,  it  may  artificially constrain  the  amount  that                                                                    
could be  drawn in  a given year;  not recognizing  the fact                                                                    
that there would  be years that the 5.25  percent draw would                                                                    
be  substantially lower  than what  the fund  could actually                                                                    
Senator Micciche  asked, using  the commissioner's  logic to                                                                    
look at a 20-year horizon, if  the draw averaged out and did                                                                    
not jeopardize the fund (even without a 5.25 percent cap).                                                                      
Commissioner  Hoffbeck  answered  in  the  affirmative,  and                                                                    
stated that  the department would  show some  modelling that                                                                    
considered a  24-year time  span, that  would show  the draw                                                                    
was durable and sustainable at 5.25 percent.                                                                                    
Senator Micciche wondered if a  5.25 percent draw on a well-                                                                    
managed,  well-diversified fund  would  remain  safe over  a                                                                    
long  span of  time that  included historic  lows and  other                                                                    
such  impacts that  had  been  seen in  the  history of  the                                                                    
Permanent Fund.                                                                                                                 
Commissioner Hoffbeck  believed that the Permanent  Fund was                                                                    
well-diversified, and  had a projected 6.95  percent rate of                                                                    
return. He thought a 5.25 percent draw was achievable.                                                                          
Co-Chair MacKinnon  referred to Senator  Micciche's comments                                                                    
and referenced  a language  change in the  bill from  a flat                                                                    
5.25 percent draw to an "up to 5.25 percent" draw.                                                                              
Co-Chair    MacKinnon   spoke    to   the    importance   of                                                                    
intelligibility.  She   wanted  to  clarify  that   she  was                                                                    
referring to  a possible language change  regarding the POMV                                                                    
9:24:01 AM                                                                                                                    
Senator von Imhof  liked the "up to" rails  around the draw.                                                                    
She thought  if there were 2  or 3 or 4  years of decreasing                                                                    
market  values,  then the  draw  would  look different.  She                                                                    
noted that the numbers in the  bill worked when the fund was                                                                    
rising  at a  relatively  stable and  predictable rate  each                                                                    
year. She thought  the math could become  problematic if the                                                                    
fund had any kind of losses.                                                                                                    
Commissioner Hoffbeck  referred to  Section 10 of  the bill,                                                                    
and thought there was already "up to" language.                                                                                 
Co-Chair MacKinnon  remarked that  the language in  the bill                                                                    
made the 5.25 percent a maximum draw.                                                                                           
Senator von  Imhof thought that  if a little less  was drawn                                                                    
on an  annual basis,  there would  be a  little more  in the                                                                    
ERA, and there  would be a cushion  in the case of  a two or                                                                    
more year  of loss in the  fund. She thought a  quarter of a                                                                    
percent could make a difference  in years that earnings were                                                                    
Commissioner Hoffbeck  stated that "up to"  language did not                                                                    
do any damage  to the bill, as long as  the maximum draw was                                                                    
left at 5.25 percent.                                                                                                           
Vice-Chair Bishop thought the draw  limit was helpful, as in                                                                    
high years of earnings the corpus of the ERA was increased.                                                                     
Commissioner Hoffbeck  stated that  the draw limit  was more                                                                    
tied  to  increasing  oil prices  than  increasing  returns,                                                                    
since  the trigger  was when  oil prices  reached a  certain                                                                    
level. Increased earnings would increase the draw.                                                                              
Senator Micciche  thought that the  draw limit served  as an                                                                    
averaging mechanism. He  thought the value of  the limit was                                                                    
when oil prices  were higher, it would diversify  use of the                                                                    
Commissioner Hoffbeck agreed.                                                                                                   
Commissioner  Hoffbeck  displayed  slide 22,  "DRAW  LIMIT":                                                                    
        · Reduces the POMV draw by $1 for every $1 that UGF                                                                     
          production taxes and royalties exceed $1.2                                                                            
        · Does not apply to the portion of the POMV going                                                                       
          to dividends.                                                                                                         
Commissioner Hoffbeck  spoke to slide 23,  "UGF REVENUE WITH                                                                    
POMV  &  DRAW  LIMIT,"  which showed  a  graph  titled  "UGF                                                                    
Revenue and Oil Price." He  thought the graph showed how the                                                                    
draw from  the ERA started  to shut itself off  as royalties                                                                    
and  production taxes  increased.  Starting  around $75  per                                                                    
barrel  (bbl)  to  $80/bbl  oil   price,  one  could  see  a                                                                    
reduction in the  draw from the ERA, and at  an oil price of                                                                    
about $110/bbl the draw was  completely shut off. Without an                                                                    
ERA draw there would be  uncapped revenues. He mentioned the                                                                    
appropriation cap in the bill.                                                                                                  
9:29:30 AM                                                                                                                    
Commissioner  Hoffbeck  discussed   slide  24,  "SB70,  FULL                                                                    
FISCAL PLAN," which showed a  bar graph entitled 'Median UGF                                                                    
Revenue  and Budget."  He  pointed out  the  blue bar  which                                                                    
represented  status quo  revenue  (from  existing taxes  and                                                                    
fees  and oil),  while the  yellow showed  planned Permanent                                                                    
Fund withdrawals,  and the green bars  showed the difference                                                                    
between the OMB  budget and the revenues from  the other two                                                                    
sources. He  stated that  gap would need  to be  filled from                                                                    
other sources, even after the Permanent Fund was in play.                                                                       
Co-Chair  MacKinnon  asked   if  Commissioner  Hoffbeck  was                                                                    
referring to other sources to  deal with the deficit such as                                                                    
cuts, or other revenues beyond the Permanent Fund.                                                                              
Commissioner Hoffbeck answered in the affirmative.                                                                              
Senator Micciche  asked about  slide 23,  and asked  at what                                                                    
oil price point did the draw from the ERA begin to decline.                                                                     
Commissioner  Hoffbeck  estimated  that the  draw  began  to                                                                    
decline  around  the  $80/bbl price  point.  He  offered  to                                                                    
provide the actual number at a later time.                                                                                      
Senator  Micciche referred  to slide  24, and  asked if  the                                                                    
curve  on the  graph represented  the actual  Consumer Price                                                                    
Index (CPI) trend.                                                                                                              
Commissioner  Hoffbeck explained  that for  the OMB  budget,                                                                    
the curve was  the CPI for agency-type  operations, and then                                                                    
actual  increases   that  were   forecast  for   the  Public                                                                    
Employees'   Retirement   System   (PERS),   the   Teachers'                                                                    
Retirement System (TRS), and the state on-behalf payments.                                                                      
Commissioner Hoffbeck  showed slide  25, "Part V  - DIVIDEND                                                                    
Commissioner   Hoffbeck   reviewed   slide   26,   "DIVIDEND                                                                    
        · $1,000 per person for the first 3 years, then                                                                         
        · 25% of the POMV draw (expected to be about $1,000                                                                     
          per person into the future)                                                                                           
Commissioner Hoffbeck  showed slide  27, "SB70,  FULL FISCAL                                                                    
PLAN," which showed  a graph. He drew attention  to the line                                                                    
between  the yellow  and blue  portions of  the bars,  which                                                                    
showed  the   distribution  of  the  various   results  that                                                                    
occurred  in the  probabilistic modelling.  The lines  above                                                                    
and below  the blue and  yellow bars represented  the extent                                                                    
of other results  that occurred within thousands  of runs of                                                                    
the modelling.  He noted  that the  line between  the colors                                                                    
showed a $1000 Permanent Fund  Dividend (PFD), which grew to                                                                    
$1600 in 2041  under the bill plan. The buying  power of the                                                                    
dividend  would  remain  through  the life  of  the  24-year                                                                    
Commissioner  Hoffbeck  displayed  slide   28,  "Part  VI  -                                                                    
INFLATION PROOFING / FUND DURABILITY."                                                                                          
Commissioner   Hoffbeck  spoke   to  slide   29,  "INFLATION                                                                    
PROOFING TRANSFERS                                                                                                              
        · AS 37.13.145(c) currently provides for annual                                                                         
          inflation proofing transfers from the ERA to                                                                          
        · The ERA needs a sufficient balance to be able to                                                                      
          meet the draw each year ("ERA durability"                                                                             
        · Bill provides that the ERA balance over 4 times                                                                       
          the maximum draw (after current year draw) is                                                                         
          transferred to corpus instead                                                                                         
        · This "4 times" rule is designed to grow the                                                                           
          corpus in pace with inflation over time                                                                               
Commissioner Hoffbeck noted  that he had modelled  to see if                                                                    
the transfers worked  over the life of the fund  to build up                                                                    
the corpus and meet the inflation-proofing requirement.                                                                         
9:34:16 AM                                                                                                                    
Commissioner  Hoffbeck  discussed   slide  30,  "SB70,  FULL                                                                    
FISCAL PLAN,"  which showed a  graph that depicted  the life                                                                    
of  the  fund  over  the  span  of  the  forecast.  He  drew                                                                    
attention  to the  line between  the yellow  and blue  bars,                                                                    
which indicated  what the total  fund value was  through the                                                                    
life of the  forecast. He noted that the FY  41 median value                                                                    
was $112 billion,  which was $66 billion  real dollars after                                                                    
accounting  for inflation.  He observed  that the  fund grew                                                                    
greater than  the rate of  inflation over the period  of the                                                                    
forecast. He noted that there was no risk of ERA failure.                                                                       
Senator Micciche asked to go back  to slide 24, and asked if                                                                    
SB 70 provided for inflation and escalation.                                                                                    
Commissioner Hoffbeck  stated that  the plan  itself allowed                                                                    
for the  fund to grow  with inflation, and also  allowed for                                                                    
budget growth with inflation. It  also allowed for inflation                                                                    
under the appropriations cap.                                                                                                   
Senator Micciche  referred to an article  that had suggested                                                                    
the bill  was a  flat-funded plan.  He wanted  it understood                                                                    
that the numbers  showed the rise in the value  of the fund,                                                                    
and the  value of the POMV  with a balanced budget  by 2024.                                                                    
He  wanted to  see the  assumptions that  created the  green                                                                    
bars. He  admitted that  if there was  a long-term  trend of                                                                    
low oil  prices, the state  would likely have  to supplement                                                                    
with other revenue. He wanted  to understand the assumptions                                                                    
that had been used in the presentation.                                                                                         
Commissioner Hoffbeck  agreed to  work with  the Legislative                                                                    
Legal Department. He  thought it was how  that inflation was                                                                    
dealt with in the budget  component of the bill that created                                                                    
a difference.                                                                                                                   
Co-Chair  Hoffman referred  to  slide 30,  and thought  many                                                                    
people were concerned  about the health of  the fund itself.                                                                    
He asked  if under  SB 70, under  the median  case scenario,                                                                    
the fund would reach approximately $100 billion by 2037.                                                                        
Commissioner Hoffbeck answered in the affirmative.                                                                              
Commissioner  Hoffbeck  showed to  slide  31,  "Part VIII  -                                                                    
FISCAL PLAN IMPACT."                                                                                                            
Commissioner  Hoffbeck reviewed  slide 32,  "SB 70  MODELING                                                                    
COMPARISON:  FUND  SIZE,"  which showed  a  graph  entitled,                                                                    
'Nominal Fund  Value.' The graph  looked at SB 70  with $750                                                                    
million in  cuts, and  at SB  70 with  a revenue  package to                                                                    
fill  the  gap.  The  comparison  would  show  the  relative                                                                    
difference and  why it  was important to  do more  than just                                                                    
pass a  Permanent Fund bill  to solve the  fiscal situation.                                                                    
The  dotted line  showed the  revenues  available under  the                                                                    
status quo,  and the blue dashed  line was SB 70  by itself.                                                                    
He  thought the  bill by  itself would  result in  unplanned                                                                    
cuts once  the CBR was  depleted. He suggested that  with SB                                                                    
70  alone and  no  other  fiscal measures,  there  was a  45                                                                    
percent  failure  rate. Considering  SB  70  with a  revenue                                                                    
package would ensure a durable  and lasting fund. He thought                                                                    
there was  still work to  do even after passing  a Permanent                                                                    
Fund bill.                                                                                                                      
9:39:54 AM                                                                                                                    
Senator  Micciche  assumed  that Commissioner  Hoffbeck  had                                                                    
gone with the  past curve of production decline  in order to                                                                    
get to the  point on the graphs. He agreed  that the further                                                                    
out the projections went, the more difficult it was.                                                                            
Commissioner Hoffbeck stated that  the presentation used the                                                                    
fall forecast  from the Department  of Revenue.  He referred                                                                    
to a presentation by Dan  Stickel, Chief Economist, Economic                                                                    
Research  Group, Tax  Division, Department  of Revenue.  The                                                                    
department did not  look at new fields more  than five years                                                                    
out.  He stated  that there  were several  fields that  were                                                                    
likely  to  occur,  that were  just  outside  the  five-year                                                                    
window and were  not included in the  forecast numbers being                                                                    
Commissioner  Hoffbeck  showed  slide 33,  "SB  70  MODELING                                                                    
COMPARISON:  DIVIDEND,"   which  a  graph   titled  "Nominal                                                                    
Dividend Per Person (Median)." The  graph showed the PFD per                                                                    
person  under  status  quo  and   under  SB  70  in  various                                                                    
combinations. Although  the status quo  maintained dividends                                                                    
at  a higher  rate for  a period  of time,  by 2024  or 2025                                                                    
there was a  precipitous drop off and no  dividends once the                                                                    
ERA was  depleted. Under  the other plans,  there was  not a                                                                    
substantial difference in the size  of the PFD until 2027 or                                                                    
2028, when additional  draws would be made  against the ERA.                                                                    
Cuts   or   revenues   as   a   solution   were   relatively                                                                    
inconsequential for the size of future dividends.                                                                               
Commissioner Hoffbeck  displayed slide  34, "SB  70 MODELING                                                                    
COMPARISON:  UGF REVENUE,"  which  showed  a graph  entitled                                                                    
"Funds  Available for  Services."  He noted  that the  graph                                                                    
showed the  status quo line that  represented using whatever                                                                    
monies  were  available,  and  the  ERA  once  the  CBR  was                                                                    
depleted. The other three lines  started to diverge in about                                                                    
2027, when there were additional draws against the ERA.                                                                         
9:42:56 AM                                                                                                                    
Commissioner   Hoffbeck  read   slide  35,   "Part  VIII   -                                                                    
Commissioner  Hoffbeck  discussed  slide  36,  "CONCLUSION,"                                                                    
which  showed a  table considering  the five  rules measured                                                                    
against  the bill  and  other measures.  He  noted that  the                                                                    
status quo  largely did not  meet any of the  criteria being                                                                    
examined. He noted that SB  70 alone would meet criteria for                                                                    
a period of  time, until the ERA was depleted,  and the plan                                                                    
had some  of the  same issues  the Status  Quo plan  had. He                                                                    
continued that  SB 70  with a revenue  plan under  a revenue                                                                    
plan   would  meet   all  the   criteria,   get  a   partial                                                                    
stabilization    of   the    income.   He    discussed   the                                                                    
appropriations  limit   after  $750  million  in   cuts.  He                                                                    
commented that  there would  still be  some pressure  to try                                                                    
and fill the void under the cap.                                                                                                
Senator  Micciche  thought to  maximize  ERA  use, that  the                                                                    
scenario  on the  table under  SB  70 was  missing text.  He                                                                    
thought an  overlay chart  that showed  oil prices  would be                                                                    
helpful. He  recognized that the  assumptions were  based on                                                                    
the  fall forecast,  which was  necessary. He  mused that  a                                                                    
substantive increase in  oil price ($5 or $6)  would paint a                                                                    
different  picture. Conversely  a long-term  decline in  the                                                                    
same amount  would paint a  very negative picture.  He asked                                                                    
if the commissioner could provide  a range on the chart, and                                                                    
reiterated that  line 5  under the "SB  70 Alone"  column on                                                                    
the chart  was overstated.  He explained that  the committee                                                                    
was  trying  to make  the  best  decision that  covered  the                                                                    
fiscal gap.  He suggested  that different verbiage  could be                                                                    
used  with  the  understanding the  oil  price  fluctuations                                                                    
would dramatically impact fiscal outcomes.                                                                                      
Commissioner Hoffbeck  thought Senator  Micciche had  made a                                                                    
fair criticism, and thought there  could be more explanation                                                                    
on the slide.  He referred back to slide 30,  where it could                                                                    
be observed that  there was a broad range of  the total fund                                                                    
value, which  took into  account probabilistic  modelling on                                                                    
oil  production as  well  as price.  He  offered to  provide                                                                    
numbers associated with the chart.                                                                                              
9:47:49 AM                                                                                                                    
Co-Chair  Hoffman referred  to  line 3  on  slide 36,  which                                                                    
addressed  protection of  the PFD.  The  chart alleged  that                                                                    
that  the dividend  was at  risk when  the ERA  was depleted                                                                    
under  the status  quo scenario.  He asked  to look  back to                                                                    
slide 27,  which showed the  dividend rising to  above $1500                                                                    
in about  21 years.  He asked how  the slide  rectified with                                                                    
the comments on slide 36.                                                                                                       
Commissioner Hoffbeck explained that  slide 27 assumed there                                                                    
was some  package that filled  the void and that  there were                                                                    
no draws against  the ERA. He had slides  that modelled what                                                                    
would happen to  the dividend without filling  the void, and                                                                    
the slides showed a declining dividend.                                                                                         
Co-Chair Hoffman asked what year the decline occurred.                                                                          
Commissioner Hoffbeck specified that  the decline started in                                                                    
2027 or 2028, when the ERA was tapped.                                                                                          
Co-Chair Hoffman asked  for a dollar amount of  how much the                                                                    
dividend would decline.                                                                                                         
Commissioner Hoffbeck offered to  provide the information at                                                                    
a later date.                                                                                                                   
Co-Chair  Hoffman thought  the  margin of  error of  decline                                                                    
could be questionable. He thought  people would be concerned                                                                    
with slide  33, which showed  that in there was  no dividend                                                                    
in other  years. He  thought the Senate  was trying  to show                                                                    
that  it was  trying to  protect the  dividend. He  asserted                                                                    
that SB  70 captured the  dividend at the $1000  amount, and                                                                    
protected  the  dividend  into the  foreseeable  future.  He                                                                    
referenced slide 33,  and emphasized that if  action was not                                                                    
taken the dividend would be eliminated.                                                                                         
Co-Chair  Hoffman  thought  the  general  public  needed  to                                                                    
understand that the dividend was  very important. There were                                                                    
many variations of plans, but  SB 70 protected the dividend.                                                                    
He  referred to  an LFD  model that  showed the  fund itself                                                                    
increased every  year. He thought  that although  there were                                                                    
many variables, LFD estimated that  the plan that the Senate                                                                    
proposed  protected  the fund  itself  and  extended it  250                                                                    
years. It also protected the dividend.                                                                                          
9:53:04 AM                                                                                                                    
Commissioner  Hoffbeck wanted  to get  together with  LFD in                                                                    
order to  mitigate confusion  with the  way the  numbers had                                                                    
been modelled.  He thought  that there  was a  difference in                                                                    
the way  inflation had been  treated in the  various models.                                                                    
Under the model  on slide 33, in 2041 the  real value of the                                                                    
dividend would be  about $1200. He reiterated  that he would                                                                    
reconcile  numbers with  LFD to  work with  only one  set of                                                                    
Co-Chair  Hoffman stated  he was  trying to  make the  point                                                                    
that if  nothing was done,  there was a $3  billion deficit.                                                                    
He  questioned   the  remaining  options  if   the  CBR  was                                                                    
depleted.  He thought  the  state  had the  luxury  of a  $4                                                                    
billion buffer,  but recognized that four  years previously,                                                                    
there had been a $17 billion buffer.                                                                                            
Senator Micciche  referred to slide  33, and  cautioned that                                                                    
the graph modelled  an assumption of decline,  and looked at                                                                    
oil  prices 12  years in  the future.  He acknowledged  that                                                                    
there  would be  changes in  the future  that would  require                                                                    
adjustments. He discussed the  possibility for a broad-based                                                                    
revenue solution to adjust to  possible deficits. He thought                                                                    
if there was  a 10 percent increase in the  price of oil the                                                                    
modelling  would  look  much  better.  He  pointed  out  the                                                                    
difference between  SB 70  alone and  SB 70  with cuts  or a                                                                    
full  fiscal  plan  were  things   that  were  difficult  to                                                                    
Commissioner  Hoffbeck agreed.  He  stated  that the  graphs                                                                    
were  a best  estimate,  which he  recognized  was within  a                                                                    
9:57:21 AM                                                                                                                    
Senator Dunleavy referred  to slide 33, and  the dotted line                                                                    
that showed  the dividend decreasing and  then disappearing.                                                                    
He asked  if the  calculation was a  mathematical assumption                                                                    
that the  legislature would  be driven to  take more  out of                                                                    
the ERA.                                                                                                                        
Commissioner  Hoffbeck stated  that the  graph was  based on                                                                    
the  assumption that  once the  CBR was  depleted, the  next                                                                    
step would be to start  using the monies that were available                                                                    
for appropriation in the ERA.                                                                                                   
Senator Dunleavy  stated that he  had received calls  on the                                                                    
matter, and  thought it  was important to  note that  it was                                                                    
assumed that the legislature would  go into the fund to draw                                                                    
more to cover the deficits.                                                                                                     
Senator  von Imhof  thought that  slide 33  showed that  the                                                                    
status quo of spending remained.  She thought it was obvious                                                                    
that if  people would rather  have a dividend,  the tradeoff                                                                    
was less money in government services.                                                                                          
Commissioner Hoffbeck agreed.                                                                                                   
Co-Chair MacKinnon  thought the  challenge, from  the Senate                                                                    
perspective,  was advancing  cuts to  the budget  that would                                                                    
pass both bodies.                                                                                                               
Vice-Chair Bishop referred to  the production curve starting                                                                    
in the  1980s. He emphasized  that it was necessary  to deal                                                                    
in absolutes  as much as  possible. He  thought SB 70  was a                                                                    
good  plan  to put  the  state  on sustainable  footing.  He                                                                    
referred to the  state's dependence upon oil.  He thought it                                                                    
was  important to  insulate the  state with  other forms  of                                                                    
10:01:28 AM                                                                                                                   
Commissioner  Hoffbeck  turned  to slide  37,  "CONCLUSION,"                                                                    
which addressed  how much SB  70 resolved the  fiscal issue.                                                                    
The status quo and SB 70  scenarios both started with a $4.3                                                                    
billion  proposed governor's  budget. Under  the status  quo                                                                    
there would be about $1.6  billion in revenues, and under SB                                                                    
70 there  would be  about $1.7  billion in  revenues because                                                                    
some  royalties were  moved into  revenues for  new oil.  He                                                                    
looked at  differences in  the planned  ERA draws  under the                                                                    
two plans.  He compared the  $2.8 billion deficit  under the                                                                    
status quo to  a $700 million deficit under SB  70. He noted                                                                    
the substantial closure  of the fiscal gap through  SB 70 as                                                                    
reflected on the table.                                                                                                         
Commissioner Hoffbeck reviewed slide 38, "SB 70":                                                                               
        · Provides a Rule-Based Framework for use of the                                                                        
          Permanent Fund earnings Reserve                                                                                       
        · Stabilizes the budget related to Oil and Gas                                                                          
          Revenues and Permanent Fund Earnings and limits                                                                       
          spending on all revenues                                                                                              
        · Protects the Dividend                                                                                                 
        · Protects the inflation adjusted value of the                                                                          
          Permanent Fund                                                                                                        
        · Maximizes the use of the earnings reserve                                                                             
Co-Chair MacKinnon asked if  the administration supported SB                                                                    
Commissioner   Hoffbeck  stated   that  the   administration                                                                    
supported the bill.                                                                                                             
Co-Chair  MacKinnon informed  that  the  committee would  be                                                                    
happy  to  consider  any  specific  feedback  on  inflation-                                                                    
proofing that he might have.                                                                                                    
10:04:07 AM                                                                                                                   
AT EASE                                                                                                                         
10:10:53 AM                                                                                                                   
Co-Chair MacKinnon noted that  the executive director of the                                                                    
Permanent   Fund  Corporation   was   available  to   answer                                                                    
questions and discuss the effects of the bill on the fund.                                                                      
ANGELA  RODELL, CHIEF  EXECUTIVE  OFFICER, ALASKA  PERMANENT                                                                    
FUND CORPORATION, introduced herself.                                                                                           
Co-Chair MacKinnon  asked if Ms.  Rodell had a  statement of                                                                    
review for SB 70 for the committee's consideration.                                                                             
Ms. Rodell wanted to make  a couple of observations based on                                                                    
the  previous testimony.  She thought  it  was important  to                                                                    
point out that the bill had  the intent to review the effect                                                                    
of the 5.25  percent draw on the ERA after  three years. The                                                                    
review would  coincide with  the stepping  down of  the draw                                                                    
rate  to 5  percent. She  thought it  would be  important to                                                                    
review the  effects at  the three-year  mark and  reflect on                                                                    
how the mechanics of the bill were working.                                                                                     
Ms. Rodell  continued her remarks,  and considered  that the                                                                    
bill  recognized the  importance  of inflation-proofing  the                                                                    
corpus  of the  fund  to grow  for  future generations.  She                                                                    
observed  that there  was not  a reconciliation  to whatever                                                                    
actual  inflation  might  be. There  was  a  provision  that                                                                    
anything  in   excess  of  four   times  the  draw   may  be                                                                    
appropriated into  the corpus.  She thought  inflation could                                                                    
actually  be   very  different   than  what   the  provision                                                                    
10:13:23 AM                                                                                                                   
Co-Chair  Hoffman relayed  that  there  had been  discussion                                                                    
about the  5.25 percent  payout. The dialogue  had concerned                                                                    
whether  the amount  protected the  corpus of  the fund.  He                                                                    
wondered  if the  corporation had  concerns  about the  draw                                                                    
level at 5.25 percent or the rolling average.                                                                                   
Ms.   Rodell  relayed   that  the   Alaska  Permanent   Fund                                                                    
Corporation  (APFC) did  not have  concerns  about the  5.25                                                                    
percent  draw and  the  step-down to  5  percent, which  she                                                                    
thought were reasonable numbers.  She thought the average of                                                                    
looking at 5 out of the  last 6 years provided certainty for                                                                    
managing the  investment portfolio, and  was a key  piece of                                                                    
the provision.                                                                                                                  
Senator  von  Imhof referred  to  Ms.  Rodell's comments  on                                                                    
inflation-proofing. She recognized  inflation-proofing as an                                                                    
important mechanism to include in  a plan, but thought there                                                                    
were many  ways to  accomplish the  task. She  proposed that                                                                    
the calculation  that existed in  statute was good,  but was                                                                    
not  the only  option. She  thought the  current calculation                                                                    
was  arguably more  appropriate to  use while  the fund  was                                                                    
growing and while it was in  its early years. She thought at                                                                    
the fund's current size, there  were other ways to inflation                                                                    
proof; including through the  earnings mix, investments, and                                                                    
how the draw was done.                                                                                                          
Ms. Rodell  agreed with  Senator von  Imhof, and  thought if                                                                    
there was only  one fund, inflation-proofing would  be a lot                                                                    
easier. She  discussed the  challenge of  the fact  that the                                                                    
fund was made up of two  very different accounts:  a savings                                                                    
account (the corpus), and a  checking account (the ERA). She                                                                    
specified that  the ERA had  about $10.5 billion of  the $57                                                                    
billion fund  total. She  emphasized that  there was  a very                                                                    
real legal distinction between the  savings (which could not                                                                    
be  spent),  and maintaining  the  investment  power of  the                                                                    
fund; and  the ERA.  She reminded  that the  legal structure                                                                    
around the ERA had always  given the legislature the ability                                                                    
to appropriate the  balance in the ERA in  its entirety with                                                                    
a simple  majority vote. She  thought that the ERA  had been                                                                    
treated as a sacred cow that was not to be touched.                                                                             
Ms. Rodell  suggested that as  the legislature  was planning                                                                    
to use the ERA  in a different way than it  had in the past,                                                                    
it  was important  to recognize  that it  had the  right and                                                                    
authority  to spend  it all  in entirety  if necessary.  She                                                                    
stated that inflation-proofing was  important because it was                                                                    
the  method through  which funds  went to  the non-spendable                                                                    
part  of the  Permanent  Fund. Inflation-proofing  protected                                                                    
investments in  the corpus of  the fund, and  maintained the                                                                    
investment power of the corpus.                                                                                                 
10:18:52 AM                                                                                                                   
Co-Chair MacKinnon  referenced Senator von  Imhof's comments                                                                    
about the fund changing over  time. In the funds infancy, it                                                                    
had  been   heavily  invested  in  stocks   and  bonds;  and                                                                    
currently there were unrealized  gains sitting in the corpus                                                                    
of the  fund, and in real  estate. She asked if  Senator von                                                                    
Imhof had  been referring  to other  inflation-proofing that                                                                    
had been happening with fixed assets.                                                                                           
Ms.  Rodell answered  in  the affirmative,  as  long as  the                                                                    
gains remained  unrealized. She  thought it  was challenging                                                                    
to realize the  gains. She used the example  of selling real                                                                    
estate  assets to  illustrate a  lack of  inflation proofing                                                                    
when  the original  asset went  back in  the corpus  and any                                                                    
earnings went to the ERA.                                                                                                       
Co-Chair MacKinnon  asked if there was  something that could                                                                    
be  inserted into  a  bill that  would  provide fixed  asset                                                                    
compensation to  retain additional funds in  the corpus. She                                                                    
did not  want the  APFC to  hold its  assets and  not create                                                                    
interest  earnings for  dividends. She  asked if  Ms. Rodell                                                                    
could  identify language  that  would  help with  inflation-                                                                    
proofing for fixed assets.                                                                                                      
10:21:35 AM                                                                                                                   
Ms.  Rodell appreciated  the discussion.  She reminded  that                                                                    
the  constitution was  very clear  in dictating  that income                                                                    
went to  the General  Fund (GF), and  the ERA  was available                                                                    
for  appropriation.  She thought  the  cleanest  way was  to                                                                    
appropriate back to the corpus,  as the legislature had done                                                                    
since 1982.  She recognized that  there was a  mechanism for                                                                    
appropriating money back in to the  corpus in SB 70 that was                                                                    
based  on a  different formula  than  had been  used in  the                                                                    
past. She wanted to observe  that the formula being proposed                                                                    
did not  recognized inflation itself, but  rather recognized                                                                    
that at some  point there could be excess funds  to put back                                                                    
in the corpus and  help recover inflation differentials that                                                                    
happened over the years.                                                                                                        
Co-Chair MacKinnon asked if there  was a formal process that                                                                    
could be  inserted into the  bill, or was there  language in                                                                    
existence to provide the corporation  and board of directors                                                                    
comfort.  She discussed  a possible  minimum balance  to set                                                                    
for the ERA  to ensure that the account  remained healthy at                                                                    
all times.                                                                                                                      
Ms.  Rodell  answered  affirmatively, and  stated  that  she                                                                    
could look  at what  might constitute  a healthy  balance in                                                                    
the  ERA,  so  that  if   there  was  language  added  about                                                                    
inflation proofing,  the ERA  would not  be drawn  below the                                                                    
desired level.                                                                                                                  
10:24:43 AM                                                                                                                   
Senator von Imhof  stated that traditionally a  fund did not                                                                    
usually  have  an  earnings  reserve   fund  and  a  corpus.                                                                    
Normally managers managed  the investment mix of  a fund and                                                                    
made  sure  there was  liquidity  available  for the  annual                                                                    
draw. She asked if a  more traditional model made sense, and                                                                    
if Ms. Rodell envisioned moving the fund in that direction.                                                                     
Ms. Rodell informed that the  APFC Board of Trustees had put                                                                    
forward  a  resolution   in  2004,  and  it   had  not  been                                                                    
rescinded.    The   resolution    had   advocated    for   a                                                                    
constitutional amendment  which would change  the investment                                                                    
language. The resolution would roll  the ERA into the corpus                                                                    
of  the fund,  leaving  one  fund of  which  an annual  draw                                                                    
amount would  come off on a  POMV to the GF.  The resolution                                                                    
pertained  to changing  the draw  calculation, and  was done                                                                    
before Generally  Accepted Accounting Principles  changed in                                                                    
1997 with regard  to income. In 2005, the  board removed the                                                                    
legislative list of  investments, and was allowed  to have a                                                                    
broad diversification  of the  investments. She  stated that                                                                    
it would be  great to move towards a  more traditional fund,                                                                    
and it was supported by the Board of Trustees.                                                                                  
Senator von  Imhof thought that the  change would accomplish                                                                    
two  functions  and  allow  inflation-proofing  to  be  more                                                                    
robust,  and  capture  more than  the  current  calculation.                                                                    
Additionally,  the  resolution  would  give  the  APFC  more                                                                    
flexibility to  manage the  assets in  the highest  and best                                                                    
use  of  asset   mix  with  the  market.   She  thought  the                                                                    
traditional method was more lucrative.                                                                                          
10:27:27 AM                                                                                                                   
Co-Chair  Hoffman   discussed  the  four-time   rule,  which                                                                    
already  addressed the  fact  that the  corpus  of the  fund                                                                    
could  grow by  inflation. He  referred to  slide 30,  which                                                                    
showed that the  corpus of the Permanent Fund  would grow in                                                                    
value  over the  course of  20 years  to a  balance of  $100                                                                    
billion.  He   wondered  if  Ms.  Rodell   agreed  with  the                                                                    
Ms.  Rodell thought  it  was possible,  but  thought it  was                                                                    
important  to note  that  the projection  was  based on  the                                                                    
assumption of a full fiscal plan  so the fund was allowed to                                                                    
grow because the ERA was not being drawn upon.                                                                                  
Senator   Micciche  thought   all  would   agree  that   the                                                                    
legislature had  not always been disciplined  on spending in                                                                    
high  revenue years.  He thought  the  legislature had  been                                                                    
disciplined  on protecting  the  Permanent  Fund corpus.  He                                                                    
asked for information on how  much was re-deposited over the                                                                    
statutory  and constitutional  requirements since  the birth                                                                    
of the  fund. He thought that  when the state got  back into                                                                    
high revenue  years, he  would support  into over-inflation-                                                                    
proofing. He  thought the plan  was far above  the statutory                                                                    
Ms. Rodell offered to provide  the information on the excess                                                                    
royalty that was done by statute.                                                                                               
10:30:28 AM                                                                                                                   
AT EASE                                                                                                                         
10:31:34 AM                                                                                                                   
Co-Chair MacKinnon  conveyed that the APFC  had presented to                                                                    
the   committee  previously,   and   the  presentation   was                                                                    
available  for reference.  ["Alaska Permanent  Fund -  2017"                                                                    
presented to  the Senate Finance Committee  2/21/17 (copy on                                                                    
Ms. Rodell looked at slide  15 of the previous presentation,                                                                    
"Statutory Net Income," and observed  that $29.1 billion had                                                                    
been saved in addition to  regular royalties, in the form of                                                                    
excess appropriations  when the  legislature chose  to sweep                                                                    
the balance of the ERA  into the corpus. Additionally, there                                                                    
had  been  times  when the  legislature  considered  it  was                                                                    
prudent to  appropriate additional  monies into  the corpus.                                                                    
She calculated  that there was  $16 billion was  roughly the                                                                    
inflation calculation,  and there had  been in excess  of $3                                                                    
billion  over that  amount. She  agreed  to provide  Senator                                                                    
Micciche more detailed information about his question.                                                                          
Senator Micciche  recognized that  the legislature  had been                                                                    
on a savings  spree in the past, in there  had discipline in                                                                    
protecting  the fund  and over-inflation-proofing  the fund.                                                                    
He envisioned  a fully sustainable  draw from  the Permanent                                                                    
Fund that would eliminate the  need in perpetuity for broad-                                                                    
based  taxes. He  thought the  bill protected  the fund.  He                                                                    
hoped  to  return to  the  days  where  it was  possible  to                                                                    
deposit more than was required into the fund.                                                                                   
10:34:37 AM                                                                                                                   
Senator Olson discussed a significant  loss to the Permanent                                                                    
Fund 10 to  12 years previously because of a  lack of timing                                                                    
of  a  fund  transfer.  He  asked if  SB  70  or  any  other                                                                    
legislation would protect the  fund from another significant                                                                    
loss because of an untimely transfer.                                                                                           
Ms.  Rodell  thought  Senator  Olson   was  referring  to  a                                                                    
transfer made  during the creation  of a sub-account  in the                                                                    
CBR   when  monies   were  transferred   in.  Unfortunately,                                                                    
equities had been  purchased at a high price  point and took                                                                    
time  to  recover, but  there  was  an immediate  loss.  She                                                                    
recognized  the Permanent  Fund and  the investments  of the                                                                    
CBR  required   a  balance  of  short-term   needs  and  the                                                                    
recognition  of one-year  inside market  volatility and  the                                                                    
expectation for using the money.  Limiting the amount of the                                                                    
draw  would  provide some  protection,  but  there could  be                                                                    
events  that  could  not  be foreseen.  The  APFC  tried  to                                                                    
minimize such events by creating  a diversified portfolio so                                                                    
as to not get overexposed;  which resulted in not getting as                                                                    
much when  markets were  high, but not  losing as  much when                                                                    
markets dropped.                                                                                                                
Ms.  Rodell  continued her  remarks,  pointing  out that  in                                                                    
current  statute, APFC  was asked  to  invest the  ERA in  a                                                                    
similar manner  to the corpus  of the fund. The  statute had                                                                    
been  interpreted over  the years  that APFC  would pro-rate                                                                    
each investment. Every security and  asset owned by the fund                                                                    
was owned partially  by the ERA and partially  by the corpus                                                                    
of the account. She explained  that when it changed was when                                                                    
the  fund  started  to  realize   gains  and  reinvest.  She                                                                    
reiterated  the importance  of the  three-year look-back  in                                                                    
the bill,  because if  things were  happening in  the market                                                                    
where the  fund was unable  to grow as expected,  draws were                                                                    
larger, and  the ERA was shrinking  faster than anticipated;                                                                    
it might  necessitate a different asset  allocation than the                                                                    
Senator Olson asked  if APFC had the  statutory authority to                                                                    
do what Ms. Rodell described.                                                                                                   
Ms. Rodell answered in the affirmative.                                                                                         
SB  70  was   HEARD  and  HELD  in   committee  for  further                                                                    
Co-Chair MacKinnon  discussed the  agenda for  the following                                                                    
day,  and informed  that SB  14  would be  removed from  the                                                                    
10:39:22 AM                                                                                                                   
The meeting was adjourned at 10:39 a.m.                                                                                         

Document Name Date/Time Subjects
SB 70 - DOR Senate Finance Presentation - 3.1.17.pdf SFIN 3/1/2017 9:00:00 AM
SB 70