Legislature(2017 - 2018)SENATE FINANCE 532
03/06/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 21 | TELECONFERENCED | |
| *+ | SB 26 | TELECONFERENCED | |
| += | SB 70 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
March 6, 2017
9:01 a.m.
9:01:56 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; Emma
Pokon, Attorney, Department of Law; Senator Bert Stedman,
Sponsor; Alexei Painter, Analyst, Legislative Finance
Division.
SUMMARY
SB 21 PERMANENT FUND: INCOME; POMV; DIVIDENDS
SB 21 was HEARD and HELD in committee for further
consideration.
SB 26 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
SB 26 was HEARD and HELD in committee for further
consideration.
SB 70 APPROP. LIMIT/BUDGET PROCESS/PERM FUND
SB 70 was SCHEDULED but not HEARD.
SENATE BILL NO. 26
"An Act relating to the Alaska Permanent Fund
Corporation, 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 of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
9:02:47 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
wanted to walk through SB 26, and noted that many of the
slides were very similar to what was discussed the previous
week when the committee considered SB 70. He informed that
he would highlight the differences between the two
presentations in slides 1 through 25.
Co-Chair MacKinnon asked if Commissioner Hoffbeck could
review the document for the benefit of the public.
Commissioner Hoffbeck discussed the presentation "Permanent
Fund Protection Act," (copy on file). He turned to slide 2,
"BASIC ELEMENTS OF SB 26":
The Permanent Fund Protection Act proposes:
1. A framework for sustainable withdrawals from the
earnings reserve account (ERA) and
2. A sustainable dividend formula.
Commissioner Hoffbeck noted that there were several
companion documents [a 5 critical tests document, a one-
page overview of the Alaska Permanent Fund Protection Act,
a 12-page narrative white paper, and a sectional analysis].
He considered that the two points on the slide were
critical for the durability of any plan.
Commissioner Hoffbeck looked at slide 3, "PRESENTATION
OVERVIEW":
Part I: The Permanent Fund's Role in a Solution
Part II: Structure for Using the Permanent Fund
Part III: Modeling Background
Part IV: Draw Durability
Part V: Dividend Durability
Part VI: Fund Durability & Inflation Proofing
Part VII: Fiscal Plan Impact
Commissioner Hoffbeck informed that there was seven parts
to the presentation.
9:04:59 AM
Commissioner Hoffbeck read slide 4, "Part I - THE PERMANENT
FUND'S ROLE IN A SOLUTION."
Commissioner Hoffbeck spoke to slide 5, "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 highlighted the last line of the
slide. He thought there had always been intent within the
structuring of the Permanent Fund that it would eventually
be used for state expenditures.
Commissioner Hoffbeck discussed slide 6, "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
SB26 (net dividend) $2.0
Commissioner Hoffbeck expanded that SB 70 had generated
about $1.9 billion; the difference between it and SB 26 was
how royalties were treated between the dividend and the
income. He stated that the governor had expressed a
preference for a revenue solution, but was open to a broad
discussion on revenues versus expenditure reductions. The
governor had expressed in an op-ed piece that he would
accept whatever the legislature agreed upon within terms of
a revenue solution.
9:06:52 AM
Commissioner Hoffbeck turned to slide 8, "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 relayed that the slide listed the
five tests the administration used for reviewing any plans
being presented that involved changing the Permanent Fund.
The various plans had a robust hearing history. He thought
SB 26 was very similar to SB 128 [legislation from 2016
dealing with the Alaska Permanent Fund Corporation], and he
would discuss the differences in a later slide. There had
been many hearings, community meetings, and a review of
global best practices as to how a sovereign wealth fund
should be used.
Commissioner Hoffbeck looked at slide 9, "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
o Designed to protect the fund and guard
against unsustainable uses
o Ensure the ERA holds enough to bridge years
of low earnings ("ERA durability")
Commissioner Hoffbeck stated that it was critical to know
how much could be spent in order to still maintain a
sufficient balance in the Permanent Fund and the Earnings
Reserve Account (ERA). He stated that a great deal of time
had been spent modelling various bills to ensure that plans
were durable and would last over time.
Commissioner Hoffbeck reviewed slide 10, "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 noted that stability was associated
with economic growth. He mentioned the "resource curse,"
which described a funding source that was primarily based
on a volatile and singular revenue stream, which tended to
slow economic growth over time. He thought it was critical
to stabilize the government component of the economy to the
extent it was possible. He thought it was possible to
structure income from investments and oil together in such
a way to reduce volatility out of the budgeting process for
state expenditures.
9:09:33 AM
Commissioner Hoffbeck looked at slide 11, "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 discussed the one-page document
"Permanent Fund Protection Act," dated February 6, 2017
(copy on file).
Commissioner Hoffbeck noted that protecting the Permanent
Fund Dividend (PFD) became a critical issue after speaking
around the state and talking with constituents. He had
found relative consensus regarding use of the Permanent
Fund, but people considered that the dividend was part and
parcel of the economics of the state and should be
preserved at some level.
Commissioner Hoffbeck reviewed slide 12, "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 discussed slide 13, "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 stated that in order to maintain the
durability of the Permanent Fund, there needed to be
situation where there was less chance of an unplanned
unstructured draw. In order to do so, it was necessary to
put as money as possible in the structured portion of the
fund in order to close the fiscal gap to the greatest
extent possible.
Commissioner Hoffbeck looked at slide 15, "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 Hoffman relayed that there had been robust
probabilistic modelling of production and price.
9:13:02 AM
Commissioner Hoffbeck reviewed slide 16, "METHOD, INPUTS,
ANDASSUMPTIONS":
· Permanent Fund Starting Value: $54.9 billion
•Realized portion of corpus: $37.9 billion
•Realized portion of earnings reserve account (ERA):
$9.7 billion
•Unrealized earnings held by the fund: $6.3 billion
•Starting value based on
•APFC forecast for end of fiscal year 2017
(FY17), without inflation proofing transfer for
FY17
•Because 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
•Total return: 6.95% geometric, 12.32% standard
deviation
•Statutory return: 6.24% mean, 2.24% standard
deviation
•Inflation rate: 2.25%
Commissioner Hoffman stated that the base assumptions
discussed in the slide were consistent with all the
Permanent Fund bills that the department considered. The
assumptions were based on the Permanent Fund's forecast for
the end of the year FY 17. He stated that the numbers on
the slide were lower than what actually resided in the
fund, due to an unexpectedly higher year of returns; which
resulted in another level of conservatism in the
projections. The department had used Callan and Associates'
ten-year forecast for total returns, statutory returns, and
an inflation rate.
Commissioner Hoffbeck discussed slide 17, "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
forecast in Fall 2016 RSB
· CBR: $4.4 billion beginning of year 2018 balance & a
2.25% rate of return.
Commissioner Hoffman noted that the probabilistically
modelled oil price and production and were noted in the
Fall Revenue Forecast.
Commissioner Hoffbeck displayed slide 18, "BUDGET
ASSUMPTIONS," which showed a graph depicting the baseline
for UGF revenues for all revenues except unrestricted
royalties and production taxes, which were modelled
separately. The blue line was the ten-year Office of
Management and Budget (OMB) forecast, which was extended
with inflation after ten years.
Senator Micciche asked to go back to slide 18, and inquired
if the assumption for inflation was 2.25 percent.
Commissioner Hoffbeck answered in the affirmative.
Senator Micciche asked if the first four years were flat
because of assumed reductions.
Commissioner Hoffbeck needed to look at the details as to
why the years were flat, and conveyed that the first three
years assumed some budgetary restraint.
Senator Micciche asked if the commissioner would agree that
the most challenging part of the model was assuming what
the future would be, and which plan covered the largest
portion of the gap. He thought the OMB ten-year plan did
not account for revenues, and was just a comparison based
on what was known of the past for growth.
Commissioner Hoffbeck stated that there was a challenge
both in forecasting and the reality of some of the formula
programs that were currently in statute, and that tended to
grow over time. He recounted that there had been $240
million to $260 million in the current budget between one-
time expenditures and formula growth that needed to be
stripped from the budget to get to a zero budget. He
thought there were a lot of issues to consider when holding
the line on expenditures, and even more issues when
reductions were considered. He also thought there were many
issues to consider when pondering new revenues.
9:17:00 AM
Commissioner Hoffbeck looked at slide 19, "LAST SESSION'S
WORK":
Last year, the 29th Legislature held 39 hearings on
the Permanent Fund Protection Act (SB128, HB245, and
SB5001):
· SSTA: 10 hearings, including 2 days of public
testimony
· SFIN: 10 hearings, including 1 days of public
testimony
· HFIN: 19 hearings, including 4 days of public
testimony
Other bills addressing the use of permanent fund
earnings were also considered:
· SB114: 7 hearings in SSTA, 9 hearings in SFIN
· HB303: 4 hearings in HFIN
· HB224: 4 hearings in HFIN
SB26 is a slimmed down version of the Permanent Fund
Protection Act passed by the Senate last year. It is
the same as the CS for SB128, but without provisions
re.:
· CBR management
· APFC procurement
· Spending cap
Commissioner Hoffbeck noted that the slide talked about the
genesis for SB 26, which was largely based on SB 128. He
discussed the provision for moving Constitutional Budget
Reserve (CBR) management to the Alaska Permanent Fund
Corporation (APFC), which had been left out of SB 26. He
recounted that APFC Executive Director Angela Rodell had
testified that she would have similar struggles in terms of
investment returns on the CBR until there was a structure
around the timing of draws.
Commissioner Hoffbeck showed slide 20, "PFPA: SCENARIO":
· Corpus Deposits:
o 25% of royalties
o Any ERA balance over 4 times the full POMV
calculation (after the current year draw) is
transferred to the corpus (inflation
proofing mechanism or "4 times" rule).
· Draw Calculation:
o Maximum POMV: 5.25% of the average fund
value 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 20% of the maximum POMV payout before
reductions, plus 20% of UGF royalties
o Overwriting the above calculation, the
October 2018 dividend is $1,000 per person
(the 2017 dividend is reflected in the
starting fund value)
Commissioner Hoffbeck informed that the treatment of the
corpus deposits was the same as under SB 70 as was the draw
calculation for the first 4 or 5 years. The dividend
calculation under SB 70 was 25 percent of POMV, while under
SB 26 the dividend calculation was tied to investment
returns and oil and gas development and success.
Commissioner Hoffbeck displayed slide 21, "Part IV - DRAW
DURABILITY."
Commissioner Hoffbeck turned to slide 22, "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
•Average fund value in the first 5 of the last 6
years = $48.1 billion
•5.25% of $48.1 = $2.5 billion
•Effective POMV: = 4.7% of 2017 value
· Aggressive, but sustainable … if the draw limit is
applied
Commissioner Hoffbeck stated that the slide was a review of
the POMV draw at 5.25 percent, and was the same as shown
under SB 70. The slide showed the net effect of a 5.25
percent draw when using five of the prior six years. The
draw was effectively a 4.7 percent draw.
Commissioner Hoffbeck showed slide 23, "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.
Commissioner Hoffbeck stated that the bar graph on slide 23
showed the effective Percent of Market Value (POMV) draw in
five-year increments back through 1995. The draw was
generally in the 4 percent to 4.5 percent range; with the
exception of 2006-2010, which was at 5.32 percent. There
would be variation in the POMV, but it appeared as though
it would be within the range of 4.5 to 5 percent, which was
modelled as durable.
9:21:40 AM
Commissioner Hoffbeck discussed slide 24, "DRAWLIMIT
· 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 looked at slide 25, "POMV & DRAW
LIMIT," which graphically showed the ERA draw started to
reduce over time. He recalled that Senator Micciche had
posed some questions about the location of trigger points.
The oil production tax reached $1.2 billion somewhere
between $65/bbl and $70/bbl. A reduction in the draw could
be seen at about $72/bbl, and at around $100/bbl there was
no draw on the ERA.
Commissioner Hoffbeck displayed slide 26, which showed a
graph entitled "Median UGF Revenue and Budget." He recalled
a question by Senator Micciche about the unfunded portion
of government expenditures under the plan, which the green
bars on the graph were trying to forecast. The dark blue
represented status quo revenue, the yellow was the planned
Permanent Fund withdrawals, and the green were other fiscal
measures necessary to balance the budget over the life of
the plan. He observed that there was a short-term window of
opportunity to close the fiscal gap, but a long-term issue
to address as well.
Co-Chair MacKinnon asked for a footnote to illustrate that
the green bars representing "Other Fiscal Measures" could
include any combination of budget cuts.
Commissioner Hoffbeck agreed with Co-Chair MacKinnon, and
indicated that the wordage had signified it could be either
cuts or new revenues.
Commissioner Hoffbeck turned to slide 27, "STATUS QUO
UNRESTRICTED GENERAL FUND REVENUE," which showed a chart
depicting the impact of additional production and
additional price on the amount of revenue available for
government expenditures. The slide reflected total UGF
revenue, and included all of the revenues including oil and
gas taxes and royalties. He noted that income taxes
adjusted with oil price and production changes. He thought
it was possible to see where the fiscal gap could be closed
with increased production and oil price.
Commissioner Hoffbeck turned to slide 29, "DIVIDEND
FORMULA":
· $1,000 per person for the first 2 years, then
· 20% of UGF royalties (15% of all royalties), plus
20% of the 5.25% POMV draw (about 1% POMV)(expected
to be about $1,000 per person into the future)
Commissioner Hoffbeck stated that the dividend formula was
slightly different than what was under SB 70.
9:25:42 AM
Commissioner Hoffbeck looked at slide 30, "PFPA, FULL
FISCAL PLAN," which showed a graph illustrating the
dividend per person under the Permanent Fund Protection Act
(PFPA). He stated that the median was the intersection of
the yellow and blue bars, which was the most likely
occurrence of the dividend amount. The graph showed the
2041 median value of the dividend to be $1,468 in nominal
dollars. The dividend's real buying power would be reduced
over time. He compared the value with the dividend
projection under SB 70, which had a nominal dollar value of
$1,603. The dividend grew faster under SB 70 than under SB
26.
Commissioner Hoffbeck turned to slide 31, "20/20 DIVIDEND
(OCT. 2017)," which was a new slide to show the relative
impacts at higher oil production and higher price.
Commissioner Hoffbeck discussed slide 33, "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).
· To address this concern, the 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 looked at slide 34, "PFPA, FULL
FISCAL PLAN," which showed a graph that demonstrated how
much the Permanent Fund itself would grow under the full
fiscal plan, with no unplanned draws against the fund. He
pointed out that the graph started out at approximately
$54.9 billion as an assumed fund balance, which would grow
to $61 billion during the 24 years of the modelling. He
pointed out that the ERA fail rate over 24 years was
approximately 1.52 percent. He recalled that under SB 70,
the real value of the fund grew to about $66 million. The
fund grew slightly higher under SB 70 than under SB 26, and
the failure rate under SB 70 was less than 1 percent. Both
rates of failure were within the errors of the modelling
and indicated that there was little chance of either of two
plans having a failure during the life of the modelling.
Commissioner Hoffbeck presented slide 36, "FUND SIZE
COMPARISON," which showed a line graph that compared the
relative fund value over time for SB 26, SB 70, SB 21, and
the status quo. He observed that the fund value grew in a
very similar fashion over time for all the plans. He
commented that all were substantially greater than the
growth from the status quo.
9:30:33 AM
Commissioner Hoffbeck showed slide 37, "UGF REVENUE
COMPARISON," which showed a line graph depicting the amount
of monies available for government expenditures under the
three plans. He observed that the PFPA yielded just
slightly more than SB 70. He considered that there was an
issue with SB 21 in that it provided substantially less
money available for government expenditures, and in doing
so created a greater risk of unplanned draws from the
Permanent Fund.
Commissioner Hoffbeck showed slide 39, "Conclusion," which
was a narrative comparison of plans shown on a table. He
stated that it was similar to the chart used for SB 70, but
with a few changes reflecting some of the comments by
members at the committee hearing. He pointed out that all
of the plans had substantial risk if the fiscal problem was
not fully dealt with. He reiterated the risk of unplanned
draws. If there weren't a sufficient amount of expenditure
reductions or sufficient additional revenue, the only other
source of income after the CBR was depleted was the ERA.
Commissioner Hoffbeck summarized that the three bills being
considered in the meeting were all rules-based, and all had
a five-year averaging of the POMV and had some investment
income stabilization. He continued that SB 21 had no
defined plan as to how to deal with the total revenue
issues, while the PFPA had a partial stabilization of total
revenues with the four-times draw and the turning off of
the ERA flows from oil price increases. The bill did not
deal with volatility of other revenues within the system.
Commissioner Hoffbeck continued to discuss slide 39, and
pointed out that SB 70 had a spending cap, and had more of
an ability to deal with other revenues. All three plans
protected the dividend. Both SB 26 and SB 70 protected the
corpus of the Permanent Fund. Under SB 21, the fund would
grow and keep it's buying power over time, but there was no
process for moving monies back into the corpus. Without
such a process the corpus would remain flat and all of the
growth would reside in the ERA. He did not feel SB 21 used
enough money to close the fiscal gap by maximizing use of
the ERA. The PFPA maintained a 5.25 draw, which he
considered the maximum draw; while SB 70 maintained a 5
percent draw over time.
9:34:20 AM
Commissioner Hoffbeck looked at slide 40, "Conclusion,"
which showed another table that examined the amount of
money actually available for government expenditures and
providing government services. He acknowledged that the
state was in the position of needing to use Permanent Fund
earnings for government services, and must examine how much
could be taken under each of the plans. He reviewed the
potential dividends under the various plans. He reviewed
the assumed budget under each plan, and highlighted
Unrestricted General Fund (UGF) revenues under the plans.
The revenues were a bit higher under SB 70, as there was no
draw on the royalties. He addressed the ERA draws; and
observed that while there was no planned draw under the
status quo, there was various draws under the under plans.
Commissioner Hoffbeck continued discussing the table on
slide 40. He addressed the bottom row, 'Additional Measures
Required for a Full Fiscal Plan,' noting that under status
quo, $2.8 billion was needed. Under SB 21 $1.5 billion was
needed, and under both SB 26 and SB 70 there was an
approximately 700 million gap to close. He found it was
significant that to close the $1.5 deficit under SB 21 it
would require all of the cuts proposed by the Senate as
well as all of the revenues proposed by the House. By
paying the larger dividend and having a lower draw, there
would be a need for substantially more pieces to achieve a
solution.
Commissioner Hoffbeck looked at slide 41, "PFPA (SB 26)":
· Provides a rule-based framework for use of the fund
earnings
· Stabilizes UGF revenues
· Protects the dividend
· Protects the permanent fund
· Maximizes the use of the earnings reserve
Co-Chair MacKinnon noted that there had been a similar
presentation the previous week, which was available for
review by the public. There had been substantial questions
from the committee at the previous presentation.
Senator Dunleavy asked if the governor was able to veto a
dividend under SB 26.
Commissioner Hoffbeck answered in the affirmative.
Senator Olson asked if there were any bills being
considered that would preclude the governor's ability to
veto the PFD.
Commissioner Hoffbeck understood that the governor would
have veto authority under all the bills being considered.
9:38:31 AM
EMMA POKON, ATTORNEY, DEPARTMENT OF LAW, discussed the
sectional analysis for SB 26 (copy on file):
Section 1 - Legislative Intent
Section 1 expresses legislative intent to reevaluate
the use of permanent fund earnings in three years.
Section 2 - Dedicated Mineral Royalties
Section 2 amends AS 37.13.010(a) to reduce the
percentage of mineral royalties directed to the
principal (or corpus) of the permanent fund from about
30% of all mineral royalties received by the state
(25% from pre-1980 leases and 50% from later leases)
to 25% of the total.
Section 3 - Conforming Amendment
Section 3 deletes the definition of "income available
for distribution" in AS 37.13.140. An amended
definition of this term will appear in a new
subsection, AS 37.13.140(b), created by section 4 of
this bill.
Section 4 - Draw formula (the amount to appropriate
from the ERA to the general fund)
Replacing the language removed in section 3, section 4
adds new subsections (b) and (c) to AS 37.13.140.
These new subsections contain the new formula for
determining "the amount available for distribution
each year" from the earnings reserve account (ERA).
This "draw formula" has two parts: (1) a percent of
market value (POMV) calculation and (2) a "draw
limit."
Contained in new subsection (b), the POMV calculation
is 5.25% of the average value of the fund for the
first 5 of the last 6 years. The 5.25% POMV is the
maximum amount that would be taken from the ERA under
the plan. This amount may be reduced by the draw limit
contained in new subsection (c).
New subsection (c) provides that after calculating the
5.25% POMV, the draw limit reduces that amount by one
dollar for every dollar by which unrestricted (i.e.,
non-dedicated) production taxes and mineral royalties
exceed $1.2 billion. Basically, when oil revenues go
up the draw from the permanent fund goes down.
Together, the POMV calculation and the draw limit
create a draw formula that: (1) stabilizes general
fund revenues; (2) avoids using permanent fund
earnings when oil revenues are high; (3) allows larger
withdrawals (larger than what would be sustainable
under a simple POMV) when oil revenues are low; and
(4) creates more opportunities for the permanent fund
to grow, resulting in larger dividends and more
funding available for the general fund when it is most
needed.
Section 5 - Conforming Amendment
This conforming amendment updates a cross-reference to
the calculation of the "amount available for
distribution" or the "draw formula." The cross-
reference is in AS 37.13.145(d) which exempts income
from the Amerada Hess portion of the fund from the
calculation of the amount available for distribution,
directing it to the Alaska capital income fund
instead.
Section 6 - Appropriations out of the ERA
Defining two types of appropriations out of the ERA,
one to the general fund and one to the principal,
section 6 adds new subsections (e) and (f) to AS
37.13.145.
To the general fund: New subsection (e) contemplates
an appropriation from the ERA to the general fund of
the amount determined by the draw formula in section
4. This provision specifies that the appropriation is
"up to" the amount determined by the draw formula.
To the principal: New subsection (f) amends the timing
and amount of transfers from the ERA to the corpus
(the inflation proofing mechanism) currently in AS
37.13.145(c). The current inflation proofing mechanism
in AS 37.13.145(c) contemplates an annual
appropriation from the ERA to the principal of the
amount necessary to offset the effect of inflation in
the prior year. AS 37.13.145(c) would be repealed by
section 13 of this bill.
To replace AS 37.13.145(c), new subsection (f) instead
contemplates appropriating any balance of the ERA that
exceeds four times the maximum 5.25% POMV draw (after
the transfer to the general fund contemplated in new
subsection (e)). In other words, when the ERA reaches
21% of the total value of the fund (5.25% multiplied
by four) any money in the account over that amount
goes to the principal. Over time, these transfers will
inflation proof the principal (grow the principal in
pace with inflation). This new formula also means that
the timing of inflation proofing transfers changes
from a fixed annual event to a more flexible "as we
can" schedule.
of protecting the permanent fund. However, depleting
the ERA would create pressure to realize earnings
based on general fund needs rather than on good
investment policy. Thus, to ensure investment
decisions remain independent of political
considerations, the ERA should hold a balance
sufficient to bridge several years of low or negative
investment returns (and low oil revenues). This more
flexible inflation proofing mechanism helps bolster
the ERA balance to prepare for that possibility while
keeping a mechanism for transfers to the corpus in
place.
Section 7 - Appropriations from the General Fund to
the Dividend Fund
Adding a new section (AS 37.13.146), section 7
effectively amends AS 37.13.145(b) (which is repealed
in section 13) to change the dividend calculation. The
new formula has two parts. It contemplates an
appropriation from the general fund to the dividend
fund of an amount equal to:
(1) 20% of non-dedicated royalties (which is about 15%
of all royalties), plus
(2) 20% of the POMV calculation (or about 1% of the
total value of the fund).
This only relates to the total amount appropriated for
dividends. The rest of the formula for per person
dividend check is in the dividend fund statute.
Section 8 - Conforming Amendment
Like the conforming amendment in section 5, this
provision updates a cross-reference to the "amount
available for distribution" or the "draw formula." The
update is in AS 37.13.300(c), which exempts income
from the mental health trust fund from the calculation
of the amount available for distribution.
Section 9 - Conforming Amendment
This conforming amendment updates a cross-reference to
the formula for the amount to appropriate to the
dividend fund.
Section 10 - 2018 and 2019 Dividends
Section 10 specifies that, notwithstanding the new
dividend formula, dividend checks in 2018 and 2019
will be $1,000 per person.
Section 11 - Conforming Amendment
Section 11 updates AS 43.23.045(a), specifying that
the dividend fund consists of money appropriated to it
under the new section AS 37.13.146 (section 7 above).
Section 12 - Conforming Amendment
Amends AS 43.23.055 to clarify that, once funds are
appropriated to the dividend fund under AS 37.13.146
(section 7 above) to pay dividends the Department of
Revenue may pay dividends without another
appropriation.
Section 13 - Repeals
Section 13 repeals three provisions in current
statute:
1. AS 37.10.430(c), which creates a CBR subaccount and
requires that the main account be invested short-term
if the Department of Revenue anticipates a need for
those funds within 5 years;
2. AS 37.13.145(b), which contains the current formula
for appropriations to the dividend fund that would be
replaced by the formula in section 7 of this bill;
3. AS 37.13.145(c), which contains the current
inflation proofing formula that would be replaced by
the new mechanism in section 6 of this bill.
Section 14 - Repeal
Section 14 repeals AS 42.23.025(c) on June 30, 2020.
Created by section 10 (above), this provision applies
to dividends in 2018 and 2019 and will be superfluous
after the October 2019 dividend distribution.
Section 15 - Immediate effective date
Co-Chair MacKinnon asked if there was a reason that there
was not a severability clause in the bill.
Ms. Pokon had not previously discussed the issue.
Co-Chair MacKinnon thought that dividends were very close
and personal to Alaskans and expected that someone could
take the state to court after any changes of any kind were
made to the dividend. She referenced past litigation.
SB 26 was HEARD and HELD in committee for further
consideration.
9:42:58 AM
AT EASE
9:46:13 AM
RECONVENED
SENATE BILL NO. 21
"An Act relating to appropriations from the income of
the Alaska permanent fund; relating to the calculation
of permanent fund dividends; and providing for an
effective date."
9:46:24 AM
SENATOR BERT STEDMAN, SPONSOR, introduced himself and
stated he would be presenting a bill he was very proud of.
He asked for the committee's support. He thought the
committee would observe that there had been no other bill
on the topic of the Permanent Fund with the same unique
aspects. He relayed that he would be giving a short
presentation, after which he would invite Legislative
Finance Division (LFD) staff to display some different data
inputs to further illustrate the provisions of the bill. He
stated that the bill had a basic structure and was a
starting point. He emphasized that the bill was not an all-
inclusive solution, and did not endeavor to solve the
fiscal gap.
Senator Stedman thought that members could recognize that
forecasts were not correct and with luck could provide
direction and magnitude. He referenced the pension
obligations of the state, and the recession of 2008-2009 as
examples. He noted that the focus of the bill was much
shorter; and was a different way of approaching the fiscal
issue at hand, rather than looking at filling the deficit
as quickly as possible.
Senator Stedman remarked that the state was very fortunate
to have a large savings account in the Permanent Fund. He
thought that it was important to take affirmative action to
protect the fund for future generations. He stated that the
approach of the bill considered what the Permanent Fund
could reasonably do to aid in the problem of the deficit,
and how to eliminate the structural deficit.
9:50:13 AM
Senator Stedman discussed the presentation, "SB 21 (2017)
"'GUARD and GROW' THE ALASKA PERMANENT FUND," (copy on
file). He showed slide 2:
Issue:
Structuring the Permanent Fund to Guard It from Being
Raided.
Opportunity:
Build a New Fiscal Framework
• Continues the Proper Management of the Fund,
• Provides a Fair Dividend,
• Allows for Transfers Back to Principle of Fund, and
• Limits Use For Public Services.
Senator Stedman commented that the Permanent Fund was a
sensitive subject; and thought the risk to the fund lie
with the legislature that had the power of appropriation to
destroy, hinder, protect or build the fund. He commented
onthe cartoon depicted on the slide, which depicted the
legislature as a wolf that would devour the earnings
capability and erode the purchasing power of the fund (or
not). He commented on the successful track record of the
Permanent Fund, and posited that the bill would leave the
important pieces intact.
Senator Stedman noted that the people of the state owned
the subsurface rights, unlike other states. He made a
special note that there were multiple generations
represented at the table. He emphasized that future
Alaskans had just as much right to the Permanent Fund as
people already in the state.
9:54:15 AM
Senator Stedman stated that the bill would allow fair
dividends to the owners of the resource. The bill would
also allow (in the case of additional income) back to the
Permanent Fund for future growth, to be added back to the
dividend, or used for public services. He thought everyone
recognized that it was not possible to solve the fiscal
problem without the help of the Permanent Fund. He thought
that looking forward to increased oil production, the state
would be in the position to add money back to help the
Permanent Fund grow at a faster rate.
Senator Stedman discussed slide 3, "CURRENT PRINCIPLES FOR
THE PERMANENT FUND":
· A "Permanent" Savings Account: The fund should
conserve part of the state's revenue from resources to
benefit all generations. AS 37.13.020(1)
· The Fund's Principle Should Be Protected While
Prudently Invested The fund should be managed to
protect the principal while maximizing total return.
AS 37.13.020(2)
· The Fund's Purchasing Power Over Time Should Be
Preserved While Maximizing Return AS 37.13.120(a)
Senator Steadman discussed the history of the Permanent
Fund. He cautioned against discussing the concept of an
"average dividend," which was contingent upon the size of
the fund.
Senator Stedman showed slide 4, "CURRENT PRINCIPLES WORK -
8.66% ANNUALIZED RETURNS FOR LAST 32.5 YEARS ($734,000 IN
1977 TO $57,304,500,000 2/21/17)," which showed a bar graph
entitled 'Fund's Long-Term Investment Performance." He
reiterated that the bill would not solve the state's entire
fiscal problem. He thought the safety of the fund should
come before solving the state's fiscal problem.
9:58:04 AM
Senator Stedman showed slide 5, "SB 21 (2017) PROTECTS THE
PERMANENT FUND UNDER CURRENT PRINCIPLES: INVEST PRUDENTLY,
PROVIDES A FAIR DIVIDEND, ALLOWS FOR REINVESTMENT, AND
LIMITS THE AMOUNT FOR GOVERNMENT!":
· Sets up a 4.5% payout based on a rolling 5 year
average. (Uses first 5 of the last 6 fiscal years)
· Splits the 4.5% payout and sets a minimum 2.25%
allocation for dividends
· The remaining 2.25% of the payout can be allocated
towards increased dividends, returned to the
permanent fund for investment, or to the general
fund for state services.
· Sets a maximum of 2.25% on the amount of the payout
that can be used for government services.
Senator Stedman reiterated that the bill was not a holy
grail of bill solutions, and was targeted to protect the
Permanent Fund. He discussed the closures of pulp mills and
saw mills in Sitka, Wrangell, and Ketchikan. He recounted
that at the time of the closure Sitka had a fund that was
all bonds. In the late 1980s he had a discussion with the
administrator in city hall about converting the fund to a
balanced approach of stocks and bonds with a POMV. The
community had converted the fund to a POMV with a payout
rate of 6 percent, and the configuration had been running
for over 20 years. He drew parallels between the
generations of Sitkans that had an interest in Sitka's fund
and the many generations of Alaskans who deserved benefits
from the Permanent Fund. He stated that the city was
considering lowering the payout rate of the fund.
Senator Stedman continued discussing the fund of the city
of Sitka, which had experienced a slight erosion of
purchasing power over the previous two decades. He thought
the bill was not dissimilar to how the community of Sitka
had dealt with its fiscal impact. He stated that the bill
was set with a 4.5 percent payout and had a smoothing
mechanism much like the other bills of the same topic. He
thought it was wrong to set the payout by considering the
size of the deficit rather than what could be borne by the
fund portfolio. He hoped to engage in discussion about the
4.5 percent rate of payout and examine stress points. He
considered that a 6 percent payout would erode future
purchasing power over time.
10:03:15 AM
Senator von Imhof looked at slide 5, and addressed the last
bullet point, which showed a maximum of 2.25 percent for
the amount the payout could be used for government
services. She noted that the bullet above showed there was
flexibility for the 2.25 percent portion that could be used
for dividends, returning to the fund, or for state
services. She wondered how to reconcile the extra
flexibility with the language in the bill that had a
maximum payout for government services.
Senator stated that the 4.5 percent payout was split with
one half for dividends (for the owners of the asset); and
the state had the ability to use one half of the payout
rate to help with the state's fiscal situation. He
explained that if there were strong fiscal returns, the
remaining 2.25 percent could be used in the ways
illustrated on the slide. He argued that the best course of
action would be to put the funds back to the corpus of the
fund for future generations.
Sentator Stedman thought that if there was less than a 50
percent split to the public, it would erode public support.
He thought going above 50 percent for the dividend would be
a fiscal strain. He observed that taking the entire 4.5
percent of the draw would solve the fiscal problem, but
would create a political problem. If the entire payout went
to dividends, the state would not be able to fix the
deficit. He thought a balance was necessary, and noted that
the bill was not prescriptive with regard to dispersal of
the payout. He thought it was important to give policy-
makers the ability to make the necessary decisions to
increase the dividend or route the funds back to the
Permanent Fund. He thought that the provision, in
combination with a spending limit that had been discussed,
was an attractive solution to help control government.
10:06:55 AM
Senator Stedman showed slide 6, "SB 21 (2017) - PROJECTED
4.5% DRAW, DIVIDEND AMOUNTS, AND OTHER FUNDS," which showed
a table. He pointed out that the dividend amount for 2018
would be roughly $1700 (for approximately 650,000
dividends) under the proposed plan in the bill. He thought
some might consider it to be an excessively large dividend;
and reminded that the size of the dividend was dependent
upon the size of the Permanent Fund. He thought flexibility
would be needed from the public to solve the fiscal crisis.
He wanted to see the payout set at 50/50, which could be
adjusted up or down if the need arose. In using the two
combinations, in conjunction with spending restraints and
possible revenue enhancements, it was possible to eliminate
the structural deficit without hindering the earnings
capability of the Permanent Fund in perpetuity.
10:09:23 AM
Senator Stedman turned to slide 7, "SB 21 (2017) -
SAFEGUARDS THE FUND SO IT CAN GROW AND LAST FOR
GENERATIONS":
· SB 21 (2017) is not intended to fill the entire
fiscal gap. It's primary focus is guarding the
permanent fund so it can grow for future generations
while keeping downward pressure on government
spending.
· Other pieces that address the fiscal gap, like
budget reductions, efficiencies, and revenue
enhancements may be bolted onto the fiscal framework
in the near future.
Senator Stedman reiterated that SB 21 was straightforward
and simple. He commented that the bill had taken two months
to draft, as earlier versions had been too complicated. He
thought that the public would be in support if the changes
to the Permanent Fund were transparent. He commented that
the primary goal of the bill was to protect the Permanent
Fund for future generations of Alaskans. He thought it was
possible for the current generation to address the
problems.
Senator Stedman thought the politics of the bill might beg
the question as to why there was a statutory change rather
than a constitutional amendment. He thought the bill would
show that the POMV worked, and enshrine it in the
constitution with a requirement for public support. He did
not think there was sufficient time for a constitutional
amendment. He asked the committee to look at the statutory
framework for a POMV, and work with the levers to payout
the dividend split for two years, ending with a 50-50
split. He wanted to confine the ERA and require the
legislature to deal with the issue of the deficit.
10:13:38 AM
Co-Chair Hoffman thought the people of Alaska were looking
toward the legislature to come up with financial solutions
to address the deficit. He stated that SB 70 accomplished
the task in the out years. He thought the dilemma was how
to address the deficit, while Senator Stedman was
addressing how to protect the Permanent Fund and the
dividend. He thought the dividend was protected by SB 70.
He thought that Senator Stedman asserted there could be
some form of SB 70 for ten years, during which the dividend
would be static. He wondered if Senator Stedman had
considered how such a change might work towards a fiscal
solution.
Senator Stedman commented that the members in the Senate
did not always agree. He did not necessarily agree that it
was fair to the people of Alaska to use the average to
conclude a dividend rate. He thought the dividend outflow
should be tied to the size of the fund.
10:16:51 AM
Senator Stedman addressed Co-Chair Hoffman's question
regarding freezing the dividend for ten years. He noted
that there would be five different legislative groups over
the period of time being discussed, with varied agendas and
opinions. His thought that the problem could be fixed at a
more rapid rate. He thought the focus should be on
solutions for the next three to five years. He commented on
the unpredictability of fiscal projections, and used the
example of the state retirement system.
Co-Chair MacKinnon asked if the legislature had statutorily
contributed about $24 billion of additional funds to the
Permanent Fund.
Senator Stedman was not aware of the precise amount that
had been contributed, but he knew that from time to time
the legislature had appropriated earnings reserves to
protect the corpus of the Permanent Fund. He emphasized
that he would be shocked if the legislature let the ERA
continually grow. He had seen projections in which the ERA
was $20 billion to $30 billion.
Co-Chair MacKinnon stated that the legislature had
contributed $17 billion and inflation proofing.
Co-Chair MacKinnon asked if Senator Stedman was prepared to
give an overview of the bill.
Senator Stedman stated that there was only one paragraph in
the bill.
Co-Chair MacKinnon observed that the bill was three pages.
10:19:58 AM
Senator Stedman read from the Sectional Analysis (copy on
file):
SECTION 1
Deletes language from AS 37.13.140 related to income
available for distribution.
SECTION 2
Deletes references in AS 37.13.145(d) to AS
37.13.145(b) and (c), which are repealed by section 5.
SECTION 3
Adds a new subsection to AS 37.13.145 that authorizes
the legislature use 4.5% of the average fiscal-year-
end market value of the balance of the fund for the
first five of the last six fiscal years, including any
unrealized gains and losses. The legislature must
allocate a minimum of 2.25% for dividends. The other
2.25% of the payout can be appropriated towards
increased dividends, reinvested into the Permanent
Fund, or to the General Fund for public services. A
maximum of 2.25% can be used for public services.
SECTION 4
Makes conforming amendment to AS 43.23.025(a) to
change a reference from AS 37.13.145(b) to AS
37.13.145(e)(1).
SECTION 5
Repeals AS 37.13.145(b) and AS 37.13.145(c).
SECTION 6
Provides an effective date of July 1, 2017.
Senator Stedman added that the bill was structurally so
basic that implementation would necessitate additions for
several items.
10:21:53 AM
AT EASE
10:23:46 AM
RECONVENED
Senator Stedman wanted to review interactive scenarios with
the assistance of LFD to illustrate the dynamics of SB 21.
He wanted to change variables and discuss deficit issues.
He addressed the spreadsheet "LFD Fiscal Model," which was
previously used in committee to discuss SB 70 [copy on file
under Senate Finance meeting 2/27/17].
Co-Chair MacKinnon commented that the committee had
previously modelled and tested fiscal plans through an
interactive graph from LFD. When reviewing different bills
and fiscal models, the committee first considered the
Undesignated General Fund (UGF). She referred to Designated
General Funds (DGF), and used the example of University
receipts and tuition, which were designated to go back to
the University. The committee would not want to hamper the
University from being able to take care of itself through
revenues of its own. She used the example the Department of
Fish and Game's designated funds that went toward managing
resources. She discussed federal funds and perceived budget
growth. She relayed that the state had used limited UGF
dollars to leverage as many federal dollars as possible to
fight the recession.
10:26:22 AM
Co-Chair MacKinnon detailed that the previous year's
capital budget had approximately $115 million to $117
million used to leverage approximately $1 billion in
federal funds to invest across the state to care for ports,
roads, and airports. She looked at the graph on the top
left of the fiscal model and pointed out that the blue
represented projected revenue from FY 16 to FY 26, and the
green represented anticipated draws from state savings. She
noted that the orange color on the graph denoted a CBR
draw, or a Statutory Budget Reserve (SBR) draw. She
specified that there was approximately $288 million
remaining in the SBR. The red on the chart represented
unanticipated draws. If the ERA was depleted (where the
current dividend calculation was from) the dividend would
be at risk. She communicated that when the committee
considered the dividend it had to consider it in balance
with funding services provided to communities.
Co-Chair MacKinnon recalled that the Senate Labor and
Commerce Committee had reviewed economic research that
alledged one in three dollars in local spending came from
the state. She observed that under SB 21, state reserves
were moving in a downward pattern. She reiterated that
Senator Stedman's plan was not to close the fiscal gap but
rather protect the corpus of the Permanent Fund and the
dividend. She noted that there were two additional graphs
on the model pertaining to the Permanent Fund, and there
was a table depicting payout dollars as well as fund
growth. In the middle of the fiscal model there was a table
of scenarios and assumptions being considered. She reviewed
the assumptions considered by the provisions of SB 21.
10:29:42 AM
Senator Stedman directed attention to the graph on the
upper left, "UGF Revenue/Budget," and thought it
demonstrated that the state would be using the ERA, which
he thought was indicative of a structural deficit. He
reviewed the lower left-hand graph "Budget Reserves," and
observed the diminishment of the SBR and the CBR. He argued
that the Permanent Fund could produce revenues of 4.5
percent annually, which would not solve the fiscal problem.
He thought additional measures were needed.
Senator Stedman changed variable assumptions on the fiscal
model, including a POMV payout of 4.75 percent, and
observed that with the structural deficit appeared again in
2023. He discussed different payout rates and considered
the lower right-hand graph, which showed the payout for
dividends. He thought there would need to be discussion
with the public. He considered the fiscal model with a
combination of $300 million in reductions and tax changes;
and observed the CBR extending to 2025. He thought it was
important to continually work so that the structural
deficit would not re-appear in the future.
Senator Stedman emphasized that the Permanent FUnd could
aid in getting out of the budget deficit. He thought that
if the public gave the legislature some flexibility, it
could be done with minimum disruption. He thought it was
possible to do more revenue enhancements, but that it would
necessitate political discussion. He considered options
such as flattening the dividend for four years or six
years. He stressed that the Permanent Fund should not be
subordinate to the budget deficit.
10:34:59 AM
Senator von Imhof referred to the rate of Permanent Fund
investment return. She pointed out that there were two
funds (the ERA and the corpus of the fund), which had been
invested in the same manner. She thought it was arguable
that if the state started taking predictable draws from the
ERA, its investment mix would need to be reviewed. She
observed that the CBR growth earnings were 2.89 percent,
and reminded that the CBR had to be kept relatively liquid
to enable access to the funds. She thought it was arguable
that the ERA as well had to be kept more liquid. She
thought increased liquidity would not enable the ERA to
reach the proposed 6.95 percent rate of return. She asked
if the sponsor could look at the fiscal model with a 6.25
percent rate of return for the Permanent Fund.
Senator Stedman thought Senator von Imhof had made a good
point. He remarked at the diminishment of the CBR. He noted
that the model did not take into account a constitutional
amendment for a POMV, and a shutdown of the ERA. He
reminded that the fiscal model was not all-encompassing,
but would provide an idea of magnitude when considering
some of the fiscal provisions being proposed. He added that
the bill would not require a structural change to the
permanent fund, but would try to keep the legislature out
of the ERA so that the Permanent Fund would not have to
diminish its risk tolerances.
10:37:40 AM
Senator von Imhof observed that with the change to the
fiscal model, it was possible to see the CBR maintain its
value over time, even when the Permanent Fund returns were
slightly less.
Senator Micciche asked if the model was flat.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
explained that the model currently showed a flat budget,
but could be changed to show other scenarios.
Senator Micciche commented that all the changes made to the
fiscal model moved the bill closer to SB 70 and SB 26. He
discussed modelling various assumptions for SB 70, and the
effect on the state reserves. He thought all the proposed
plans ensured the health of the corpus of the Permanent
Fund. He pointed out that some plans preserved savings in
perpetuity. He considered that SB 70 (as opposed to SB 21)
allowed response time if there was a dramatic increase or
decrease in the price of oil in accordance with the fall
revenue forecast. He was uncomfortable with the amount of
reserves, and thought that SB 21 did not have a structural
comprehensive solution that provided a level of comfort;
and thought the state would quickly need to look at either
dramatic cuts or new revenue measures. He wondered how the
sponsor felt about the health of the state's reserves.
10:42:19 AM
Senator Stedman strongly disagreed with Senator Micciche,
and thought the other plans put too much reliance and
pressure on the Permanent Fund. He noted that SB 70 would
take $4.9 billion from the ERA. He discussed other bills
and provisions to take funds from the ERA. He thought it
was unsustainable to rely overmuch on the portfolio. He
thought the Permanent Fund should be isolated before the
legislature dealt with other fiscal issues. He was
concerned that the easiest of all the legislative options
would be to loot the Permanent Fund. He thought there was a
management problem when 9 percent of the fund was taken out
in one year. He agreed that SB 21 left more work to do in
the future. He was adamantly opposed to taking out billions
from the Permanent Fund just because the legislature could
not make hard decisions as a group.
Senator Micciche pointed out that experts from the
Permanent Fund had testified in committee to ensure that
the payout of 5.25 percent did not compromise the corpus or
health of the fund. He agreed that it was not acceptable to
risk the corpus of the fund, but thought that experts had
concurred that an effective draw rate of 4.56 percent draw
rate the following year was extremely unlikely to find a
failure rate over time. He thought Senator Stedman might be
more conservative in his analysis.
Senator Stedman commented that the current year's dividend
in combination with draws from the ERA was significant. He
informed that the 4.5 percent in the bill was
coincidentally at the same rate that Callan and Associates
had considered a reasonable draw rate. He urged members to
look at the numbers and consider what was sustainable for
the Permanent Fund. He thought there was a better solution
that included action to isolate the Permanent Fund. He
stated that he would support SB 21 as a draft for the
committee to consider changes.
SB 21 was HEARD and HELD in committee for further
consideration.
Co-Chair MacKinnon discussed the agenda for later in the
day.
ADJOURNMENT
10:47:41 AM
The meeting was adjourned at 10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 PP Edited.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 21 |
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - Sectional Analysis (03.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - DOR White Paper 1.30.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - SFIN Permanent Fund Protection Act - 3.6.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |