Legislature(2017 - 2018)SENATE FINANCE 532
03/01/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Sb 70 Overview - Randall Hoffbeck, Commissioner, Department of Revenue | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 70 | TELECONFERENCED | |
| + | 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
None
ALSO PRESENT
Randall Hoffbeck, Commissioner, Department of Revenue;
Angela Rodell, Chief Executive Officer, Alaska Permanent
Fund Corporation.
SUMMARY
SB 70 APPROP. LIMIT/BUDGET PROCESS/PERM FUND
SB 70 was HEARD and HELD in committee for further
consideration.
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
law."
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
bill.
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
Fund.
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
economies.
· 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
cycle.
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
revenue.
Commissioner Hoffbeck showed slide 12,"Part III - SB 70
MODELING."
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
assumptions
• Approved of Monte Carlo probabilistic method
• Suggested improvements, some of which the
Department of Revenue (DOR) has incorporated (for
example, probabilistic oil production,
autocorrelation)
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
billion
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
forecast
o Total return: 6.95% geometric, 12.32%
standard deviation
o Statutory return: 6.24% mean, 2.24% standard
deviation
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
ASSUMPTIONS":
· 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
MODELED":
· 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
billion.
· 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
service.
Commissioner Hoffbeck stated that the OMB numbers were
used.
Senator von Imhof did not see growth in capital other than
inflation.
Commissioner Hoffbeck answered in the affirmative.
Commissioner Hoffbeck discussed slide 18, "SB 70 SCENARIOS
MODELED":
· 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
deficit
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
percent.
Commissioner Hoffbeck showed slide 21, "THE EFFECTIVE
POMV":
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
achieve.
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
draw.
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
low.
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
investments.
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
billion.
· 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
DURABILITY."
Commissioner Hoffbeck reviewed slide 26, "DIVIDEND
FORMULA":
· $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
forecast.
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
corpus
· The ERA needs a sufficient balance to be able to
meet the draw each year ("ERA durability"
concern)
· 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
presented.
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 -
CONCLUSION."
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
numbers.
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
predict.
Commissioner Hoffbeck agreed. He stated that the graphs
were a best estimate, which he recognized was within a
range.
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
revenue.
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
70.
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
RECONVENED
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
calculated.
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
projection.
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
inflation-proofing.
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
RECONVENED
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
file).]
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
corpus.
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
consideration.
Co-Chair MacKinnon discussed the agenda for the following
day, and informed that SB 14 would be removed from the
agenda.
ADJOURNMENT
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 |