Legislature(2015 - 2016)SENATE FINANCE 532
04/25/2015 01:30 PM Senate FINANCE
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| Presentation: Alaska's Fiscal Crisis - Department of Revenue Fiscal Report | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
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SENATE FINANCE COMMITTEE
April 25, 2015
1:38 p.m.
1:38:07 PM
CALL TO ORDER
Co-Chair MacKinnon called the Senate Finance Committee
meeting to order at 1:38 p.m.
MEMBERS PRESENT
Senator Anna MacKinnon, Co-Chair
Senator Pete Kelly, Co-Chair
Senator Peter Micciche, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Jerry Burnett, Deputy Commissioner, Treasury Division,
Department of Revenue; Representative Cathy Giessel;
Senator Gary Stevens; Pat Pitney, Director, Office of
Management and Budget, Office of the Governor.
SUMMARY
PRESENTATION: ALASKA'S FISCAL CRISIS - DEPARTMENT OF
REVENUE - FISCAL REPORT
Co-Chair MacKinnon discussed the agenda for the day and
went over the handouts. She remarked that the state was
facing a $3.9 billion deficit for FY 15, which signified a
draw on reserves. She furthered that there was a
prospective $3.5 billion to $4 billion deficit for FY 16,
contingent upon oil production and price. She reported that
the Senate had cut $374,971,000 from the operating budget.
Based on the previous year, and considering the $3 billion
Teacher's Retirement System and Public Employees Retirement
System (TRS/PERS) investment, the number could be
calculated with an additional $500 million. She added that
$487 million of capital expenditures had been reduced from
the previous year. She indicated that the Senate was doing
everything it could to set the state's operating budget to
the right size while investing in items that benefitted
Alaskans.
^PRESENTATION: ALASKA'S FISCAL CRISIS - DEPARTMENT OF
REVENUE FISCAL REPORT
1:41:04 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE (DOR), introduced the PowerPoint
presentation "Department of Revenue - Fiscal Report" (copy
on file), stating that the presentation would look at
expectations from the FY 15 revenue forecast while
examining projected deficits for subsequent years.
Mr. Burnett began with slide 2: "Department Of Revenue
Fiscal Summary":
•Spring 2015 Revenue Forecast
•Reserve Outlook
•Cash Flow & Burn Rate
•Division of Finance -Management of Cash
•Reserves as of March 31, 2015
•Other Fund Balances
Mr. Burnett stated that some of the numbers presented would
be different than what the committee had, as the department
was unaware of the final budget numbers for the year. He
clarified that the forecast numbers were for the future. He
intended to discuss cash flow, immediate reserves, and some
other fund balances.
1:42:31 PM
Mr. Burnett turned to slide 3: "Spring 2015 Revenue
Forecast FY 15-FY 24," sourced from the DOR Revenue Sources
Book Spring 2015. He shared that the expenditures were from
an internal fiscal model, and were reflective of a budget
estimate based on a budget presented by the governor. He
drew attention to the deficit of $3.932 billion
unrestricted general fund (UGF) revenues from 2015, and
compared it to the $1.9 billion deficit for FY 14. He
remarked on the significant change in expected revenues,
based on previous forecasts using oil priced at $100-plus
per barrel (bbl). He noted that year to date, actual Alaska
North Slope West Coast (ANS WC) oil prices were above the
$67.49 bbl indicated on the slide, but the revenues would
be close to what was reflected on the slide for 2015.
1:44:39 PM
Co-Chair MacKinnon asked about the $67.49 ANS WC oil price
for 2015, and wondered if Mr. Burnett could share an
updated figure. Mr. Burnett responded that the ANS WC price
was over $70 bbl as of the current week. He discussed
changing prices and explained that there would be a high-
lagged average price until the end of the fiscal year.
Co-Chair MacKinnon asked about the average daily price of
$70 for three-quarters of the year, and wanted to assess
the certainty of the $67 figure considering the drag. Mr.
Burnett stated he thought it would be close to $67.
Co-Chair MacKinnon asked to what degree of certainty Mr.
Burnett believed the ANS WC price of $67 bbl would be set.
Mr. Burnett believed with a fairly high degree of certainty
that the price would be $67 or higher for the FY 15
average. He did not think it likely to be lower due to
almost 10 months of prices that were much higher.
Co-Chair MacKinnon asked if the price fluctuated from the
second quarter to the third quarter, or if Mr. Burnett
could speak to the degree of change between quarters. Mr.
Burnett reported the ANS WC price in much of the first
quarter was much higher (almost $111 bbl) and then it had
dropped dramatically to prices in the $50 bbl range. The
price had moved up to the $60 bbl range currently, but was
very volatile in a narrow range.
Co-Chair MacKinnon asked if Mr. Burnett could supply the
committee with accurate second quarter data. Mr. Burnett
stated that he would get the figures to the committee.
1:48:12 PM
Mr. Burnett discussed the 2016 forecasted ANS WC oil price
of $66.03, looking at other markets in comparison. He
commented that there was a lot of volatility and prices
changed very rapidly. The state had two years (2013 and
2014) of the exact same average price, with every other
year seeing significant changes up and down.
Vice-Chair Micciche thought it would have been helpful to
observe unrestricted revenues for one of the years
represented. He discussed oil taxes, royalties, and
corporate taxes; and wondered if they would remain fairly
consistent in a set price range until ANS WC came up to
about $80 bbl. He wondered if Mr. Burnett had a breakdown
for FY 15.
Mr. Burnett referred to the FY 15 spring forecast, and
reported that the petroleum property tax was stable at
about $128 million. He furthered that the petroleum
corporate income tax was about $204 million, oil and gas
production tax was at $362 million, and royalties were at
$947 million. The royalties for FY 16 went up to $1.22
billion, the production tax was lower at $320 million, and
the corporate income tax was lower at $148 million. He
added that the petroleum property tax for FY 16 was stable
at $125 million.
Vice-Chair Micciche asked if the vast majority of the
income was still from oil. Mr. Burnett clarified that the
biggest part of the revenues for 2015 and 2016 was
royalties, at nearly half of the total of UGF revenues.
Vice-Chair Micciche asked if there was a net-to-the-good on
production taxes for FY 15 and FY 16. Mr. Burnett stated
that the state had a net-to-the-good on production taxes
every year in the forecast.
1:51:28 PM
Co-Chair MacKinnon asked about the deductible lease
expenditures and referred to proprietary information. She
suggested that the Point Thomson project was a large asset
to come online, and wondered if there was a way to give an
indication of what portion of the lease expenditures was
coming from Point Thomson and "riding on the back of oil."
Mr. Burnett shared that he could not provide the
information if he had it (for proprietary reasons), and
specified that expenditures were nearly all to one company.
He stated that Co-Chair MacKinnon was correct in that there
was a very large expenditure which was deductible from the
state's tax base, which accrued through the companies
involved at Pt. Thomson and reduced the companies'
petroleum production tax. He surmised that some of the
expenditures would be going down in the forthcoming years
as the project was developed.
Co-Chair MacKinnon discussed the Pt. Thomson project
timeline and thought the general public may not be able to
see the investment as no revenues had been generated yet.
1:53:07 PM
Senator Hoffman referred to the original forecast in the
DOR Revenue Source Book, and the revenues expected for FY
17 based on ANS WC at $110 bbl, compared to the $86.66 bbl
listed in the presentation. He asked for confirmation of
the total drop in revenue between the two figures and
wondered if it was $400 million. Mr. Burnett did not have
the number at hand but estimated the total drop to be
larger than $400 million.
Senator Hoffman asked about the ANS WC price of $130 bbl
forecast in the DOR Revenue Source Book for FY 21, which
was listed as $112 in the presentation. He asked Mr.
Burnett to provide the dollar drop for the comparison,
along with the FY 17 comparison, to illustrate the
volatility of oil prices over a short time period.
1:54:39 PM
AT EASE
1:55:56 PM
RECONVENED
Mr. Burnett estimated that the difference in the forecasted
prices was a very large number close to $1 billion, and
stated that there was a lot of sensitivity to price above
the $80 bbl range.
Senator Hoffman thought the number was substantial as well.
Vice-Chair Micciche commented that if total ANS production
through 2024 stayed at 535 thousand barrels per day
(THSbbls/day), which he considered a fairly conservative
number, the difference would be that the state would
starting "going to the good" in 2019. Under that scenario,
the state would expect future revenues to be: minus $295
million in 2018, plus $167 million by 2019, plus $725
million by 2020, plus $811 million in 2021, plus $795
million in 2022, plus $969 in 2023, and plus $1.1 billion
in 2024. He calculated the difference of production staying
flat at 535 THSbbls/day to be $12.5 billion.
Mr. Burnett could not verify the numbers calculated by
Vice-Chair Micciche but thought that despite other factors
in the production tax calculation, the difference was
probably in the neighborhood of $12.5 billion. He asked the
committee to bear in mind that the forecasts were risk-
based and therefore showed production decreasing. He
thought production was likely to be higher than what was
reflected in the presentation, but not as high as what
Vice-Chair Micciche was suggesting.
1:58:34 PM
Vice-Chair Micciche discussed the difference in the
production tax values in FY 15 and FY 16, and Alaska's
Clear and Equitable Share Act (ACES); and asserted that if
the production tax worked on additional projects and oil
production flattened out, there would be a substantial
difference in income. He qualified that he was thankful for
the conservative forecast by DOR.
Co-Chair MacKinnon referred to SB 21 and thought there had
been a flattening and a slight increase in production which
she believed to be about 1 percent. Mr. Burnett concurred
that there had been a flattening and slight increase in
production.
Co-Chair MacKinnon thought it appeared as though there was
a greater confidence level in production in the years 2015
through 2017, and less confident as the dates moved farther
out. Mr. Burnett concurred.
Senator Hoffman hoped that the oil production was flat or
moving in a positive direction, and pointed out that the
bottom of the slide reflected the reverse scenario, with
budget deficits totaling $17 billion plus. He remarked that
the state did not have that in reserves, which necessitated
further reductions to the budget, and he hoped the state
would eventually have a $1 billion cushion in the
constitutional budget reserve (CBR).
Co-Chair MacKinnon thought that that what Senator Hoffman
stated was fair. Production and prices were variable, and
the state's expenses were somewhat within its control. She
suggested the state could not control the world oil market,
but could control its spending and incentivize to affect
for greater production. She stated that the senate had made
a first step in trying to right-size the budget and take a
"bite" out of the budget.
2:01:27 PM
Mr. Burnett turned to slide 4: "Reserve Outlook - Spring
2015 Forecast." He highlighted the $12,780 million CBR
balance at the end of FY 14. He continued that the state
would have $8,875 million in the CBR and $0 in the
statutory budget reserve (SBR) at the end of FY 15,
assuming the balance of the deficit was taken out of the
CBR.
Co-Chair MacKinnon recalled that as of March 2015 the CBR
had approximately $10,130 million, and the SBR had
approximately $1,660 million. She shared that she had
received the numbers from the Treasury Division and asked
if her figures were correct.
Mr. Burnett stated that there was a cash balance in the SBR
was approximately $1.6 billion as of the end of April 2015,
and did not think any transfers had been made from the fund
since. He explained that the funds were obligated to be
spent in FY 15, in addition to another $1.2 billion beyond
that amount.
Co-Chair MacKinnon commented that it would be interesting
to see what it would mean to the administration if a three-
quarters vote [necessary to access CBR funds] was not
achieved. Mr. Burnett agreed.
Mr. Burnett pointed out that under the spring forecast
numbers, as of 2020 the state would have no reserves and a
bit of a deficit beyond that point.
Co-Chair MacKinnon asked how the figures were different
from those of the Legislative Finance Division (LFD). She
recalled that previous figures indicated the state would
have exhausted reserves by 2018.
Mr. Burnett believed that the difference was due to setting
oil prices or state expenditures at a different level when
completing calculations. He clarified that it would not
take much sensitivity between the two variables to exhaust
the reserves by 2018. He considered the DOR forecast to be
reasonable and thought that another forecast that was also
considered reasonable could produce a different result.
Co-Chair MacKinnon remarked that there was a great deal of
public interest in the deficit and drawing on savings. She
thought that Mr. Burnett was projecting the use of reserves
somewhat more optimistically than the committee had heard
earlier in the week.
Mr. Burnett stated that both sets of numbers were
reasonable. He did not think it would take much difference
[from the other forecast] in revenues to come up with a
diminished reserve in 2018. He did not see a scenario in
which the state would run out of reserves before the end of
2017; however he did not know of scenarios in which the
state did not run out of funds in the early part of 2020.
Co-Chair MacKinnon clarified that the committee understood
the variables being used in the forecasts, however the
public may not. She pointed out that FY 17 actually started
in the year 2016.
Mr. Burnett concurred, and furthered that FY 18 started in
the year 2017. He stated that in LFD's revenue forecast
model, reserve funds would run out in July of 2017, with a
significant deficit that was uncovered in 2019.
Co-Chair MacKinnon clarified for the public that fiscal and
calendar years used different dates. When discussing FY 17,
the committee was in reality discussing a beginning date of
July 1, 2016. She explained that FY 17 projected out
further in some people's minds, when in reality budget
change required action in the current or subsequent year.
Mr. Burnett agreed and stated he would be careful to use
both types of date reference.
2:07:45 PM
Vice-Chair Micciche elucidated that FY 16 would start in
two months and FY 17 would start in 14 months.
Mr. Burnett referred back to slide 4 and pointed out that
from 2021 to 2025 there were deficits reflected with no
reserves to cover them. He pointed out that significantly
lowered spending or an additional revenue source was needed
to cover the budget. He commented that prices fluctuated,
but the legislature should plan to have something in place.
Co-Chair MacKinnon asked if Mr. Burnett had a plan to share
with the committee. Mr. Burnett responded in the negative.
2:08:55 PM
Mr. Burnett advanced to slide 5: "Spring 2015 Revenue
Forecast Discussion":
•If only the CBRF is tapped each Fiscal Year to
Balance the State's Budget, current anticipated run-
out date occurs in June of FY 2020
•CBRF Subaccount transfer into the Main account
incorporated into Spring projections
•SBRF is anticipated to be fully expended during FY
2015
•After SBRF is fully expended, approximately $1.2
billion is needed to balance anticipated General Fund
spending for FY 2015
Mr. Burnett pointed out that much of 2015 had passed, and
many of the state spending obligations had already
occurred.
Co-Chair MacKinnon asked Mr. Burnett to comment on the
Senate's budget proposal to expend the school fund in order
to close the budget gap for FY 15. She clarified the
proposal was due to not being able to get a three-quarters
vote from the Minority necessary to access the CBR.
Mr. Burnett stated that the proposal would create cash flow
differences for FY 16. He did not have a comment on the
spending, but remarked that the proposal was legal and do-
able.
Co-Chair MacKinnon was unaware of another alternative to
fund FY 15, and wondered whether Mr. Burnett was aware of
another fund that could serve the same purpose. Mr. Burnett
stated that other funds with available cash were the Power
Cost Equalization (PCE) Fund and Higher Education
(governor's scholarship) Fund.
Co-Chair MacKinnon reiterated that the committee was
looking for a three-quarter vote.
2:11:26 PM
Mr. Burnett referred to slide 6: "CBRF STATISTICS AS OF
MARCH 31, 2015". He stated that it showed the investments,
the total asset value, and how much the fund had earned for
the year. He pointed out that the state had earned a bit
more in the subaccount than the spring forecast had
projected prior to the transfer from the subaccount to the
main account. He stated that in the month of February there
had been earnings of about $200 million in the subaccount,
with negative earnings for most of the rest of the year,
for a total of $179 million in investment income prior to
being moved over to the main account.
Co-Chair MacKinnon expressed that she had concerns with the
current management of funds. She had no challenge with the
authority of the commissioner of DOR to move funds how he
deemed appropriate to benefit the state, and thought that
everything had been done legally and under the right
conditions. She felt that there was lost opportunity when
the earnings from the subaccount were placed in the main
account, which drew substantially less interest.
Mr. Burnett reported that in 2008 he was the deputy
commissioner of DOR. At that time there was a transfer of
$4.1 billion to the subaccount from the main account of the
CBR; in September of the same year the balance in the
subaccount was $5 billion. He continued that in February of
2009, there was $3.1 billion in the subaccount. He
explained that when the spending horizon was shorter, the
opportunity to lose money was a greater risk than the
possible gain of earnings. He referred to the 5-year
horizon in statute as an example of using the same logic.
He stated that there had been a lot of discussion at the
time, and the decision to have the funds in the subaccount
was correct in the long run, as the money was not used and
became close to $7 billion over a period of the next a few
years. He stated that Alaska had an unprecedented 6-year
run-up in the equity markets, with a maximum correction of
20 percent in a day.
Mr. Burnett continued that there had been a 40-plus percent
correction in a period of a year, and the state could not
recover from that in a 5-year time horizon. He explained
that the decision to move the funds was based on protection
from loss rather than seeking earnings. He emphasized that
he did not make the choice; rather, he was explaining what
the basis for the choice was. He referred to committee
members that were in office at the time of the earlier
funding scenario, and suggested that some had been
"somewhat upset" with the commissioner of DOR.
2:15:50 PM
Co-Chair MacKinnon stated that her concern had to do with
forgoing a $100 million opportunity, and thought that Mr.
Burnett had been absolutely right (from a conservative
perspective) that the state could stand to lose the money
in the case of a negative market. She asserted that the
state would not know for a year if the decision was right
or if there was an opportunity lost. She thought that in
its current location, the money would be lucky to earn 2
percent interest.
Mr. Burnett stated that the ten-year expected capital
market averaged somewhere in the two percent range, which
was not a high number but was unlikely to lose a large
amount. He clarified that the funds were in fairly short-
duration investments.
Co-Chair MacKinnon wondered if the reasoning behind the
choice (of moving the funds from the subaccount) had to do
with liquidity because the assets could be called upon for
use within the next five years. Mr. Burnett responded in
the affirmative.
Co-Chair MacKinnon asked about the investment strategy on
the main account, and wondered if there was any way to
safely increase the return to greater than 2 percent rather
than holding the funds in treasuries. She wondered if there
were long-term equity mutual funds or other options that
might draw more income for the state.
Mr. Burnett indicated that the DOR commissioner and the
investment staff in the Treasury Division were looking at
the asset allocation of the fund, and all other funds. He
explained that the fund evaluation was an annual process
after which the funds were reset in July. He stated that he
would not be surprised if there were changes made to the
asset allocation of the fund, he had participated in
discussions about it, and it was ultimately the
commissioner's decision.
2:18:31 PM
Co-Chair MacKinnon asked if the committee members were
interested in receiving an update from the department on
subsequent changes or distinctions in the allocation of the
fund. She indicated that members nodded in agreement. She
asked Mr. Burnett to keep the committee updated on any
decisions with regard to the asset allocation. Mr. Burnett
agreed.
Senator Olson asked about the aforementioned subaccount
earnings from 2008, and wondered if there were indications
there at the time that may have suggested it was fine to
leave the funds rather than move them to a safer location.
He referenced a recent $4 billion transfer, and wondered if
there had been indicators that suggested the state would be
losing a large amount of money if it was not moved.
Mr. Burnett reported that the equity markets had one of the
longest term run-ups that they had ever had. There had
never been a longer time period in which there had been no
major market correction, and that was considered an
indicator. He recounted that the biggest change was when
the spring forecast came out and there was a less than
five-year time horizon; that was the statutory trigger, and
was what the commissioner had recognized as a condition for
the funds not to be in the subaccount. He stated that DOR
was in the process of addressing whether the funds should
be in a different asset allocation in the main account than
it currently was.
2:21:04 PM
Senator Olson wondered if there should be something put
into statute to protect state funds from current market
volatility. Mr. Burnett did not think any changes to
statutes were necessary, and furthered that the
commissioner invested under "the prudent investor rule"
with a look at the life of the asset and when it would be
needed. He furthered that the approach was consistent for
the various funds the state had, and asset allocations were
used to protect the state from volatility.
Senator Bishop asked if there was a difference in penalties
between draws from the main account and draws from the
subaccount.
Mr. Burnett responded in the negative, and explained that
the subaccount was set up around 2000 to gain additional
earnings because there were more funds in the CBR than were
originally predicted to be spent. He furthered that the
subaccount started with a deposit of $400 million, an
amount specifically chosen in order to be a match and a
"natural arbitrage" between financing that was being
contemplated in the CBR earnings for capital projects.
Co-Chair MacKinnon asked Mr. Burnett if the state had been
willing to take a little more risk because it felt the
money would be held for a longer period of time, thereby
diminishing the risk; whereas the recent transfer to the
main account was to guard the funds a little closer. Mr.
Burnett concurred and added that prior to 2015, the state
had not planned to spend the funds for a long period of
time.
2:23:33 PM
Mr. Burnett turned to slide 7: "APFC Fund Financial History
and Projections As Of February 28, 2015." He explained that
the slide showed permanent fund projections on earnings,
and the fiscal year end assigned balance, which constituted
the earnings reserve account. He furthered that the account
would theoretically have funds available for appropriation.
Co-Chair MacKinnon referred to the slide and wondered if
the fund should be rebalancing to a more conservative
nature after hitting the longest run of good return. She
asked if there would be conversations with the managers of
the fund accounts regarding switching to more conservative
areas.
Mr. Burnett believed that the fund managers had rebalanced
to be more conservative, and specified that the fund's
projected earnings (after fees) was around 6 percent. He
added that there were liquid assets and private equity
within the fund, which had higher returns over the long
period. He reminded the committee that the principal of the
permanent fund could not be spent, only a portion of the
realized earnings.
Co-Chair MacKinnon asked about the projected rate of return
for the CBR account. She observed that in past years, at
times the CBR had managed a higher rate of return than the
permanent fund, and other times the opposite was true. She
asked Mr. Burnett to reflect on the previous year, and
compare DOR's management and returns to those of the
permanent fund. She wondered how the returns would be
forecast for the future considering the decisions of the
administration.
Mr. Burnett did not have the actual numbers with him, but
shared that the PCE Fund, the retirement funds, and the
subaccount of the permanent fund earned a higher rate in FY
14 than the permanent fund. He was unable to recall the
earnings of the current year.
Co-Chair MacKinnon asked for Mr. Burnett's perspective as
well as to provide anticipated amounts for earned income
for the year. Mr. Burnett was unable to provide the exact
number for the main account of the CBR, but shared that it
was low. He commented that the information was available on
the department website.
2:26:50 PM
Senator Hoffman commented that the permanent fund earnings
reserve account continued to grow, and opined that the
legislature should be examining related policy questions
and where the money should be spent. He asked about the
current balance of the earnings reserve account. Mr.
Burnett responded that the account was projected to be over
$6 billion dollars at the end of FY 15.
Senator Hoffman observed that it would grow to $12 billion
by 2025. He asked if Mr. Burnett included the earnings when
he had mentioned "available funds." Mr. Burnett responded
in the affirmative; stating that the earnings of the
permanent fund were deposited in the general fund as
provided by law, and the legislature could appropriate them
for any purpose.
2:28:02 PM
Mr. Burnett advanced to Slide 8: "GeFONSI Market Value
$5.07 billion at 3/31/2015." He explained that the slide
was an illustration of the market value of the general fund
and other non-segregated investments (GeFONSI). He pointed
out that the account grew very rapidly up to 2013; and
explained that from 2008 to 2013, the total had included
the SBR. He recounted that in 2013, the SBR (which
contained about $4.7 billion) had been moved into a
separate fund for investment purposes, which explained the
significant drop from 2013 to 2014. He continued that the
fund had a variety of monies from over 100 different funds
and accounts in it, including UGF, the education forward-
funding account, and money that the legislature had
appropriated to the Alaska Housing Finance Corporation
(AHFC). He specified that the fund had just over $5
billion, and of that, less than $1 billion was currently
UGF. He discussed short-term fixed-income returns, and
commented that they had been very low for the last several
years.
2:30:29 PM
Vice-Chair Micciche asked if there were any results from
the returns trend for FY 15. Mr. Burnett responded that the
returns were very low, and were under one percent.
Vice-Chair Micciche asked if the department had a
spreadsheet available listing the various funds. Mr.
Burnett responded that the department had the information,
and on the DOR website there was a list of the funds that
received their own interest. He remarked that the
department had monies that may not belong to the state,
such as student loan corporation monies or reserves of
AHFC, which were invested in GeFONSI to garner higher
returns than they might gain otherwise.
Co-Chair MacKinnon noted that after Mr. Burnett's slide
presentation, the committee would start a conversation
about the cash deficiency plan, and available sources of
funds without the three-quarter vote needed to access the
CBR.
2:32:27 PM
Mr. Burnett pointed to Slide 9: "Other Fund Balances As Of
March 31, 2015":
•Alaska Higher Education Investment Fund
-$459.9 million, total investment income $14.7
million
•Public School Trust Fund (P&I Account)
-$601.2 million, total investment income $19.2
million
•Power Cost Equalization
-$980.1 million, total investment income $33.5
million
Mr. Burnett noted that the Public School Trust Fund was not
available. It was a constitutionally-dedicated fund whose
income could only be spent on schools, and the investment
income was portioned into the foundation formula every
year. He discussed the PCE Fund, noting that the previous
year it had earned an approximately 20 percent return, and
the current year it was earning somewhat less.
Co-Chair MacKinnon mentioned that the governor had proposed
different management of the PCE Fund, and wondered about
the status of the related legislation. Mr. Burnett
specified that the legislation (SB 34), had passed the
Senate as amended in the Senate Finance Committee, and had
passed the House. He continued that now the fund had a 4
percent investment policy floor, which may or may not
change how it was invested, but the department would not be
seeking the higher-risk targets.
2:34:05 PM
Mr. Burnett clarified that the funds listed on slide 9 were
invested outside of the GeFONSI pool. He thought the Public
School Trust Fund had a very interesting investment policy
which might be a topic for further discussion for the
committee.
Co-Chair MacKinnon asked if Mr. Burnett wanted to go into
detail about the public school trust fund investment
policy. Mr. Burnett shared that the earnings of the fund
were limited to the realized earnings and did not include
capital gains. He found that investing the earnings in the
modern world was interesting because the gains on equities
were not included in the income, so fixed income and
dividend-paying stocks were used to provide income.
Equities were used to increase the value of the fund, but
capital gains were not spendable. He reiterated that the
policy was something the committee might want to examine.
Co-Chair MacKinnon clarified that the fund was
constitutionally dedicated, but there were statutory ways
for the fund to grow over time. She thought Mr. Burnett was
inferring that the state was not optimizing the growth and
able to provide it for school education due to statutory
restrictions. Mr. Burnett believed it was likely the case,
and thought it was something to look at.
Co-Chair MacKinnon avowed to make a note of the policy in
order to bring it to the Senate's attention, possibly
during the upcoming interim, to see if the legislature
could work with the administration to better utilize the
revenue stream for public education.
Co-Chair Kelly wanted to be caught up on the conversation.
He was wondered if GeFONSI was the account in which the CBR
was managed. Mr. Burnett relayed that GeFONSI was a pool of
funds including the GF, the forward funding of education
monies, the funds put aside for the natural gas pipeline,
AHFC funds, the rail belt energy fund money, and other
similar types of funds. He stated that it was an investment
pool and each of the funds owned a portion.
Co-Chair Kelly asked if the fund was fairly liquid. Mr.
Burnett stated that it was fairly liquid and spendable, and
many of the funds were spent on a regular basis. He added
that the CBR and SBR were managed separately, as well as
the higher education fund.
Co-Chair MacKinnon mentioned funds that were not accessible
by the legislature, such as funds from AHFC or the Alaska
Commission on Postsecondary Education (ACPE). Mr. Burnett
noted that there was a portion of the fund made of monies
that had been appropriated for a purpose and had not yet
been spent.
2:38:10 PM
Senator Dunleavy mentioned the AHFC and student loan
corporation and thought that both had dividends that went
to the state. Mr. Burnett clarified that both were set up
to spin off a dividend, and assuming that they earned
income, would pay a dividend. He added that the ACPE board
determined whether a dividend was paid every year.
Senator Dunleavy asked if Co-Chair MacKinnon had been
referring to something beyond dividends.
Co-Chair MacKinnon responded in the affirmative, and
reiterated that the board of directors made the dividend
policy decision on behalf of the state, and used AHFC as an
example of investing dividends based on board's mission.
She thought the committee might want to examine the
corporation's mission in the state statutes if they
expected the corporation to pay dividends to the state. She
reiterated that the board was determining investment of the
dividends, and thought that most of the dividends were
spent on clientele and other housing opportunities. She
thought the state had not received a dividend from ACPE for
the past several years; they had reinvested the dividends
in additional loan programs or discounts to current
students in repayment. She considered that the board had
looked at the postsecondary debt load and repositioned the
dividends.
Mr. Burnett responded that Co-Chair MacKinnon was correct.
He referenced three corporations: the Alaska Industrial
Development and Export Authority (AIDEA), AHFC, and ACPE.
As with ACPE and AHFC, AIDEA dividends were at the
discretion of the board to make recommendations as to how
they would be spent.
2:40:41 PM
Senator Dunleavy asked if it was safe to say that any
dividends would be a fraction of the money the state had
invested for the principal.
Co-Chair MacKinnon responded that she thought it was fair
to say.
Senator Dunleavy asked about an item requested by ACPE and
taken out of the current year's budget; funding for an
Alaska Navigator: Statewide Workforce and Education-Related
Statistics (ANSWERS) grant longitudinal study. He wondered
if the item could then in turn be funded through the
process of declaration-of-dividend by the board.
Co-Chair MacKinnon stated that ACPE would be required to
come back to the legislature to request the appropriation
for the direct line of funding. She related that the
commission had made the recommendation, which the
legislature had turned down. Mr. Burnett did not have any
further information, and related that he sat as a member of
the board of directors of all three corporations.
Co-Chair MacKinnon related that the board had very
passionately requested the appropriation, and that the
administration had followed up with herself and Co-Chair
Kelly in its request to fund the particular study. It was
her belief that the corporation did not have the authority
to fund the study without the language in the budget.
2:42:12 PM
Vice-Chair Micciche asked for a quick review of the cash
deficiency contingency plan.
Co-Chair MacKinnon asked Mr. Burnett to address the
department's cash deficiency plan. She reiterated that the
legislature had not completed a three-quarter vote to
access the CBR, and wondered how the department would go
through its cash deficiency operation plan and pay for
state government.
2:43:07 PM
Vice-Chair Micciche expected that the current
administration was working on a comprehensive and fully
executable cash deficiency plan. He wondered if such a plan
was underway considering present conditions.
Mr. Burnett stated that the plan was reviewed and updated
each year, and the current plan had been executed by the
previous administration. He told the committee that it
could expect a new plan that would be changed somewhat, and
it would be a collaborative project with the Department of
Law (DOL), the Department of Administration (DOA), the
Office of Management and Budget (OMB), and DOR.
Co-Chair MacKinnon recognized that it was a collaborative
effort and thought it was a framework in which to start
policy discussions internally with the administration. She
furthered that the Senate Finance Committee would like to
know how the department would start implementing the cash
deficiency plan, because that appeared to the direction in
which the state was going. Mr. Burnett stated that at the
current time the SBR had $1.6 billion, and the GF still
contained cash; and from a cash stand point the State of
Alaska could continue to operate and pay its bills. He
pointed out that at the end of the fiscal year, the state
would have a deficit and would be unable to close out the
fiscal year. The state could continue to operate, as long
as it believed the deficit would be funded in some manner.
2:44:54 PM
Co-Chair MacKinnon asked if the state had the reserves in a
variety of accounts to keep the state cash flow current and
keep paying bills. She asserted that it was a policy
decision as to where the state accessed the funds, and
wondered how DOR would pay the state's bills without the
three-quarters vote needed to access the CBR. She asked
about Mr. Burnett's mention of "closeout" and wondered
whether he was referring to an accounting closeout, where
the state would be unable to meet the single audit
requirements to close out the year.
Mr. Burnett explained that the state had sufficient cash to
pay its bills; it had an appropriation from the current
year's revenues and the SBR. The state would not have
exhausted the cash prior to after the end of the fiscal
year. He emphasized that from a cash basis, the state could
continue to operate; qualifying that with the shortage, the
state would not have the authorization to spend beyond
that. Thereby the state would have an unfunded budget,
would not be able to close out the fiscal year, would not
be able to meet the single audit requirements, and would
have gone in to deficit spending. He stated that he was not
the attorney that would be advising the state on the
matter, so he was unable to tell the committee how to
proceed.
2:46:50 PM
Co-Chair MacKinnon shared that the Senate had proposed an
idea to fund the deficit, had passed the motion with a
three-quarter vote, and was not the legislative body that
was creating the cash deficiency conversation. She relayed
a hypothetical situation that the Senate passed a budget,
enabling the department to do the single audit and close
out FY 15 by utilizing non-forward funding (because of
being unable to get the three-quarters vote from specific
members of the other body). She anticipated revenue of $2.2
billion to start FY 16, and wondered how the state would
fund FY 16 without the three-quarter vote.
Mr. Burnett stated that at the beginning of FY 16, assuming
the budget passed and use of the CBR was not authorized,
under the cash deficiency plan the state would have the
ability to inter-fund borrow or borrow externally within
the fiscal year. He furthered that if the legislature
reasonably believed that there would be some way to close
the gap later on, it could borrow against expected tax
revenues. He believed the state would bring $100 million
per month in production tax and royalties. He thought that
dependent upon cash flow, the money could be borrowed early
in the year and pay the state's bills until it was no
longer possible. He added that it was not a long-term
solution.
2:49:13 PM
Co-Chair Kelly asked how much of the funds being discussed
were automatically available to the administration. He
wondered if legislative approval (other than the CBR vote)
was required for the department to employ the cash
deficiency plan. Mr. Burnett responded that with the
memorandum of understanding between DOL, DOA and OMB; the
state could utilize inter-fund borrowing without additional
legislative approval if it was expecting the revenue later
in the year.
Co-Chair Kelly asked for clarification that inter-fund
borrowing was exclusive of the CBR. Mr. Burnett answered in
the affirmative, and relayed that the state had previously
borrowed against the CBR and paid it back. Additionally,
the state could borrow in the market against future
revenues. He summarized that there was potential to move
cash flow from one end of the year to the earlier part of
the year to pay bills.
Co-Chair Kelly asked how the state could adequately
demonstrate the ability to pay back the funds if there was
not a vote to authorize use of the CBR.
Mr. Burnett stated that there must be knowledge of funds
forthcoming in the future in order to borrow against it. He
qualified that the state could only borrow in the same
fiscal year as the funds for repayment were expected.
Co-Chair Kelly wondered if the collateral for borrowing
also had to be within the same fiscal year. Mr. Burnett
said not necessarily.
2:51:51 PM
Senator Hoffman read aloud section 10, "Interim Borrowing"
in Article IX of the Constitution of the State of Alaska.
§ 10. Interim Borrowing
The State and its political subdivisions may borrow
money to meet appropriations for any fiscal year in
anticipation of the collection of the revenues for
that year, but all debt so contracted shall be paid
before the end of the next fiscal year.
Senator Dunleavy referred to the scenario of the
legislature sending the department a spending plan and
funding plan, and wondered if Mr. Burnett was describing a
scenario in which that the state would be writing an IOU on
behalf of the legislature. Mr. Burnett did not believe that
the department had the authorization to borrow funds. He
reminded the committee that he was not the attorney tasked
with analyzing the legality. He believed that if the
legislature were not to have provided any type of funding
for state government, there would be a problem moving
forward. He reiterated that it was possible to borrow
against anticipated revenues within the fiscal year to move
cash flow to the beginning of the fiscal year.
2:53:41 PM
Senator Dunleavy asked for clarification as to whom Mr.
Burnett was referring to when he used the word "we." Mr.
Burnett clarified that he was referring to the
administration.
Senator Dunleavy referred to the word "state" in the
aforementioned section in Article IX of the constitution,
and wondered if it was referring to the legislature, or the
administration. He thought it was an important distinction,
and wondered if the administration could act on behalf of
the state in the context of the passage.
Co-Chair MacKinnon suggested that the DOL would be a
resource for interpretation of the constitution rather than
Mr. Burnett.
Co-Chair MacKinnon referred back to Section 10 of Article
IX of the constitution.
2:55:03 PM
Vice-Chair Micciche referred to the "Cash Deficiency
Contingency Plan" (copy on file), and the $400 million
minimum balance which appeared to be a trigger for many of
the procedures listed in the plan. He wanted to better
understand the logic for doubling the required minimum
balance of the GF. Mr. Burnett stated that there had been
times in which the state had paid out $200 million in one
day, due to fund transfers and other items, so the minimum
was then set at a high enough level to ensure there was
sufficient cash to meet an obligation. He stated that he
was not involved in the creation of the document.
Vice-Chair Micciche thought that the number could be lower,
and expected that the department would be looking at the
minimum level in the future.
Co-Chair MacKinnon stated that the plan was an internal
document where the involved departments had made their best
policy judgements, and restated that it was the work of the
past administration. She commented that the legislature was
interested in what the current administration would do for
cash deficiencies, and wondered when it could expect a new
cash deficiency operation plan.
Mr. Burnett responded that he was not aware of a date for a
new plan, but the department would be discussing it soon.
Co-Chair MacKinnon asserted that the committee would like a
copy of the new plan as soon as possible, and requested
that Mr. Burnett ask the commissioner for a timeline as to
when the plan might be developed. She thought that
considering the current fiscal situation, the plan may be a
priority.
Mr. Burnett thought that regardless of the votes on the
budget, it was likely that the state would be utilizing a
cash deficiency plan as a result of not having a monthly
cash flow large enough to cover bills in some months. The
plan was something that would be utilized under any
circumstances when the state was spending down reserves.
2:57:36 PM
Senator Bishop was curious about the aforementioned
constitutional question of the word "state" in Section 10
in Article IX.
Co-Chair MacKinnon stated that she had been in contact with
DOA Commissioner Sheldon Fischer to examine some of the
administration's actions in managing government. She noted
that Commissioner Fisher and Commissioner Hoffbeck would
both be available the following Tuesday for consultation.
Co-Chair MacKinnon pointed out that the PCE Fund and the
higher education fund were not listed in the cash
deficiency plan, and wondered if the administration
believed they could access the funds to help with deficit
spending when it did not have authorization.
Mr. Burnett stated that the department had not given the
idea full consideration yet, and a plan from the previous
year had been looking at a much different level of cash
deficiency needs and timing. He stated that the issue of
using the PCE or higher education funds was that they were
both invested long-term, and thereby any draws would
provide risk to the funds' long-term viability and result
in greater debt.
Senator Dunleavy wondered if Legislative Legal Services
could shed some light on the question of the definition of
"state" in Article IV.
Co-Chair MacKinnon thought that if the legislature was
still in session the following week, the question might
bring Department of Law to committee to discuss its
constitutional responsibilities in the case of not being
able to obtain the three-quarters vote to access the CBR.
Co-Chair MacKinnon commented that in the earlier cash flow
conversation she had understood that the state made
different amounts of payments at different times of the
year. She discussed a cash-flow model and wondered if
education was funded on a six-month cycle or monthly. She
asked how the money was distributed to local school
districts. Mr. Burnett thought that the Department of
Education and Early Development could provide a better
answer, but stated that the funding for education was not
done all at once. Rather, the funding was done over time,
with a larger draw at the beginning of the year and smaller
draws throughout the remaining time. He added that local
governments were funded similarly; except for shared taxes,
which were paid after they were collected.
Co-Chair MacKinnon pointed out that most school districts
did not have taxing authority, and thought that districts
understood the fiscal situation. She asked that if the
larger draw in the beginning of the year that meant that
the FY 15 draw would help the districts go past July 1st
and start the next fiscal year, or would there be another
draw later in the summer.
Mr. Burnett stated that for the past several years the
draws had come from the education forward-funding account,
so it was not a GF draw. He looked at the funding
differently than the cash plan for the GF; and so long as
education was forward-funded, it was not included in the
cash deficiency model. He stated that certainly it was
necessary to fund early in the year, and also through the
year. He had looked at the historic balances through the
year but did not recall exact numbers.
Co-Chair MacKinnon asked if Mr. Burnett could provide the
committee with information on the second draw from the
education fund. She discussed the timing of the school year
and the fiscal year, and recognized that there were
operating expenses before the beginning of the school year.
She wondered when the next large payment would go to school
districts in Alaska. Mr. Burnett agreed to provide the
information.
Co-Chair MacKinnon expressed appreciation for Mr. Burnett
testifying on a Saturday. She related that the committee
was trying to understand what the administration was facing
in regards to the budget. She was concerned about what the
administration might do if the three-quarters vote was
hampered by a small group of people. She did not support a
draw from the PCE account, and considered that it would be
detrimental to the account. She thought that selling
conservatively-invested assets would cause an even greater
need for cash in the future. She relayed that there were
several committee members who concurred with the sentiment.
Mr. Burnett mentioned Alaska's credit rating, and wondered
if the committee wanted to discuss it.
Co-Chair MacKinnon expressed that the current
administration did a good job and went to the markets to
make a case for the state as to why it should maintain a
strong credit rating. She mentioned the sizable reserves
and the contentious relations over how they would be
accessed. She asserted that the state was currently cash
rich, and acknowledged that accessibility and the projected
use of the savings would be a cause for pause to credit
agencies. She asked Mr. Burnett to do a high-level overview
of key factors included in the state's credit rating, so
the committee could understand what was being examined on a
national level.
3:06:45 PM
Mr. Burnett discussed key rating considerations of the
state including its large undedicated and unrestricted
reserves, and possession of a volatile single-resource
income stream. He described that the state had conservative
financial planning over the years, which was positive and
attributable to the legislative body. He discussed the CBR
and the SBR, and past stability of the budget. He reminded
the committee that Alaska's economy was very dependent upon
natural resources, and a manageable liability position with
little debt relative to income. He discussed the state debt
level remaining stable over time and specified that it was
currently about 8 percent (including school debt
reimbursement). He thought that credit agencies were
sensitive to a long-term downward trend with no plan to
access reserves in a systematic way. He thought most of the
rating analysts he had spoken with over preceding years did
not believe the legislature would ever spend permanent fund
earnings on government. Rating agencies would consider
whether the state would access other sources of revenues;
they were used to other states employing broad-based taxes.
The agencies were very conservative and viewed Alaska as
being different than other states.
Mr. Burnett remarked that the credit agencies would be
looking at how the state handled the current fiscal
situation. He discussed reducing expenses over time and
having a systematic plan for using the reserves so they did
not run out.
3:10:01 PM
Co-Chair MacKinnon remarked that the state had a plan with
engaging a natural gas pipeline. She said the state had
laid the framework, and though it might not be apparent to
the general public, policy makers had been advancing a
plan.
Mr. Burnett stated that the rating agencies were well aware
of the natural gas pipeline plan, and they were rating
twenty-year debt. The agencies were expecting additional
revenue sources in the future, which would include a gas
pipeline within that period.
Co-Chair MacKinnon commented that DOR's projected revenue
streams reflected the gas pipeline, as far as expending to
meet the goal.
Senator Dunleavy felt as if the Senate was on its own,
separate from the House of Representatives in trying to
navigate the fiscal situation. He stated that he was very
interested in hearing from the administration about its
plan to get through the subsequent two to three years. He
remarked that the state was the size of a subcontinent,
with 700,000 people, and was not the same as a city or
county down south.
Vice-Chair Micciche thought that the state should have a
fiscal plan independent of the natural gas pipeline, and
suggested that the success of the project would benefit how
the state's finances were viewed in the future. He thought
the state should manage spending and revenue independent
from the project.
3:13:01 PM
Senator Dunleavy indicated that there were plans being put
forward, and mentioned a plan put forth by retired UAA
economist Dr. Scott Goldsmith that he considered of merit.
He restated his interest in hearing a plan from the
administration. He agreed with Vice-Chair Micciche on using
caution when considering a future gas pipeline as a large
revenue component of a fiscal plan.
Co-Chair MacKinnon discussed the schedule.
ADJOURNMENT
3:14:52 PM
The meeting was adjourned at 3:14 p.m.