01/26/2016 09:00 AM Senate STATE AFFAIRS
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| SB128 | |
| Adjourn |
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= bill was previously heard/scheduled
| *+ | SB 128 | TELECONFERENCED | |
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ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
January 26, 2016
9:00 a.m.
MEMBERS PRESENT
Senator Bill Stoltze, Chair
Senator John Coghill, Vice Chair
Senator Charlie Huggins
Senator Lesil McGuire
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 128
"An Act relating to the Alaska permanent fund; relating to
appropriations to the dividend fund; relating to income of the
Alaska permanent fund; relating to the earnings reserve account;
relating to the Alaska permanent fund dividend; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
PRESENTATION: Making Appropriations from the Permanent
Fund/Permanent Fund Dividend
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB 128
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, FIN
01/26/16 (S) STA AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
CRAIG W. RICHARDS, Attorney General
Alaska Department of Law
Juneau, Alaska
POSITION STATEMENT: Provided an overview of SB 128.
MALAN RIETVELD, Fellow
Center for International Development at Harvard Kennedy School,
Cambridge, Massachusetts
POSITION STATEMENT: Provided an overview of sovereign wealth
funds as it pertains to SB 128.
ACTION NARRATIVE
9:00:48 AM
CHAIR BILL STOLTZE called the Senate State Affairs Standing
Committee meeting to order at 9:00 a.m. Present at the call to
order were Senators Wielechowski, Huggins, McGuire, Coghill, and
Chair Stoltze.
SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
9:01:28 AM
CHAIR STOLTZE announced the consideration of SB 128. He detailed
that SB 128 is the governor's initiative regarding
appropriations from the Permanent Fund earnings and dividend to
address the state's fiscal crisis.
9:03:11 AM
At ease.
9:04:23 AM
CHAIR STOLTZE called the committee back to order.
9:04:30 AM
CRAIG W. RICHARDS, Attorney General, Alaska Department of Law,
Juneau, Alaska, announced that the administration's presentation
focuses on the theory of sovereign wealth funds (SWF) and how
Alaska's SWF would operate within the SWF system as well as its
advantages and disadvantages relative to other SWFs.
CHAIR STOLTZE asked Attorney General Richards to lay out his
vision of SB 128 in order to assist the public as much as the
committee members.
ATTORNEY GENERAL RICHARDS explained that SB 128 does the
following:
1. Creates a way for Alaska to transition from a budget that
is 90 percent based on oil revenues to a budget based on
financial assets. SB 128 places the royalties and
production taxes that the state receives every year into
the Permanent Fund and draws $3.3 billion. The goal is to
provide a long term, stable source of financial revenues to
the state on an annuity basis.
2. Changes the way the Permanent Fund dividend is calculated
so that rather than having dividends based on the Permanent
Fund's stock market returns and earnings, dividends would
reflect the financial health of the state by making
dividends based upon royalties.
9:06:18 AM
CHAIR STOLTZE asked Attorney General Richards to provide the
committee with the Mr. Rietveld's background.
ATTORNEY GENERAL RICHARDS explained that Mr. Rietveld and his
team has a consulting and academic background in advising oil
dependent nation-state and provincial clients on SWFs. He
detailed that SWFs allow oil-dependent states to transition away
from budgets that are based on boom-bust oil-price cycles. He
revealed that Mr. Rietveld and his team recently advised Saudi
Arabia on transitioning to a rule-based SWF. He said the
administration determined that designing an efficient and
sustainable SWF using the Permanent Fund required the assistance
from Mr. Rietveld, one of the world's foremost experts on
designing rule-based frameworks around a SWF. He stated that the
hope is Mr. Rietveld can pass his knowledge on to the committee
as well.
CHAIR STOLTZE thanked Attorney General Richards on behalf of the
public. He addressed Mr. Rietveld and asked if he was an
employee or graduate.
9:09:53 AM
MALAN RIETVELD, Fellow, Center for International Development at
Harvard Kennedy School, Cambridge, MA, explained that he is a
"fellow" at the Harvard Kennedy School, which means he is an
unpaid researcher. He noted that he worked with a particular
team at the Harvard Kennedy School called the Center for
International Development, a team that does a lot of work with
resource rich, resource-dependent countries, states, and
provinces around the world. He noted that the Center for
International Development consists of people with a lot of
practical experience, including former finance ministers of oil-
rich countries. He revealed that he has been studying SWFs for
more than a decade, has worked on a couple of edited volumes
published by university presses, and has written a number of SWF
reports.
9:11:09 AM
SENATOR WIELECHOWSKI asked that Mr. Rietveld discuss his
background.
MR. RIETVELD detailed that he was an economics graduate and
recently finalized his PhD on the topic of SWFs. He noted that
he worked in asset management within the investment management
industry for four years. He added that although he was currently
a Harvard Fellow, he also consulted with governments on SWF
issues, especially big ones in the Middle East. He revealed that
he has worked with U.S. states on permanent funds, SWFs in Latin
America, and a whole bunch of countries looking to introduce
legislation to create SWFs. He summarized that SWFs are his
particular area of expertise within the field of economics, but
he also looks more generally at issues around the management of
resource revenues.
CHAIR STOLTZE quipped that Mr. Rietveld's PhD dissertation might
be "How I fixed Alaska's economy."
MR. RIETVELD replied that he was not sure if he had all of the
solutions, but Alaska's circumstances were very interesting from
a comparative perspective. He set forth that Alaska has a number
of comparative strengths and an interesting case with a lot of
best-practice ingredients that will help in transitioning
towards a system that helps the state cope with some tough
environments.
9:12:51 AM
He detailed the growth of new SWFs as follows:
The number of SWFs has really proliferated,
particularly since the 2000s, driven, I think, in
large part from the resources boom, both in terms of
prices and in terms of new producers, globally. Some
SWFs have certainly grown in number and they have
grown very significantly in the size of assets under
management of the existing funds as well. One of the
big drivers has been the commodity-revenue boom since
roughly 2003. In some case there are SWFs that don't
manage natural resource revenues per se, but other
kinds of government surpluses whether it is proceeds
from a privatization or other appropriated fiscal
surpluses; but, the overwhelming majority of SWFs are
funded by resource revenues and that's what almost all
of my remarks today will pertain to.
Just as we are talking about definitions and concepts,
I think it is important, this whole issue of
"sovereign." Of course Alaska is not sovereign, but I
use the term "sovereign wealth fund" and most people
in literature would use "sovereign wealth fund" to
describe state funds and provincial funds like the
Canadian province of Alberta Heritage Fund, the Alaska
Permanent Fund, the Wyoming Permanent Fund and other
sub-national funds owned and managed by sub-national
jurisdictions. So I don't want the use of the word
"sovereign" in the title to be misleading. I
definitely, for the purposes of this discussion,
certainly include the Permanent Fund in that category
of definitions of SWFs.
9:14:52 AM
MR. RIETVELD addressed three-SWF categories as follows:
In the first instance for resource-rich countries
there is "stabilization funds;" these are essentially
highly liquid buffer-funds the intention of which is
not to grow the asset base, but rather to be able to
draw on the assets when you need to in a very short
term manner and those rules might be rule-based or
discretionary. I certainly have a preference for a
rule-based system, but the defining characteristic of
them relative to the other funds is that they are
largely sitting on fixed income and cash securities
and it's not controversial when they are drawn upon
heavily in times like this and the idea is to restore
them in boom periods.
The second category that I would identify is what I
would call "savings funds," these are also often
called "future generations funds" and here the asset
allocation is very different. The fund's portfolio is
orientated towards growth and a decent amount of risk
exposure in order to generate high returns that funds
some kind of earmarked liability in the future. So the
Australian SWF, the New Zealand SWF or such funds,
they have a target date of 2030 and 2035 I believe
respectively, and the idea is that their funds are
supposed to just grow, they have no liabilities to
them and the government wants to grow this pot of
money to help meet an anticipated pension liability a
decade and a half, two decades down the road. So the
defining characteristic there is that these funds
don't have a draw component to them.
The overwhelming majority of funds however are what I
would call "investment income funds," of which the
North American permanent fund is a prime example. The
asset allocation is relatively risk exposed and the
idea is to grow the corpus of the fund and certainly
to protect the corpus of the fund from drawdowns and
in the case of North American permanent funds is
normally embedded in the constitution as it is here,
which is a very positive and important institutional
characteristic which I'll come to later in the
presentation of things that I like about the Alaskan
scenario. But these funds the defining characteristic
is that they do have an annual draw and best practice
is to have a fixed-amount draw based on what you think
is a sustainable return for the fund in real terms so
that grows the capital of the fund through inflation,
or some notion of a percentage of market value, or a
target return or observed past return. But in broad
strokes the point is these funds, while the capital is
there for current and future generations, their
defining characteristic is they provide a stream of
financial income in the form of financial returns to
help fund governments and they are particularly
popular in resource-based countries and jurisdictions
as a way to offset dependence on commodity revenues.
9:17:59 AM
MR. RIETVELD noted that SWFs were very established and addressed
the growth of new SWFs as follows:
The oldest SWFs in my definition is the Texas Special
Schools Fund, now called the Texas Permanent Schools
Fund, which was created in 1850 in Texas as part of
the process that led to Texas' statehood from federal-
land grants and there's a related Texas fund that
funds the university system, they are the oldest
funds. But what I'd like to draw attention to is the
proliferation of funds since the 2000s and this is
just the number of funds, not the assets they manage,
just a number of new funds created in these decades
and it's quite striking that the growth period of the
past 15 years has been significant. The other
significant growth period was the late 1970s with the
commodity-price boom then and the start of new
production as it was in the State of Alaska.
9:19:08 AM
MR. RIETVELD addressed the context of major-global trends as
follows:
Having defined and sort of categorized very broadly
the SWF world, I'd like to talk about the broad trends
that I observe studying SWFs and certainly working
with them fairly hands-on. If I have one overarching
message, particularly for the resource based SWFs,
it's that the attention now is on the fiscal framework
around SWFs. What do I mean by that? I mean that in
the past the focus was perhaps on simply the creation
of the funds, the legislative process, or otherwise if
it's more of an autocratic system of how do you
establish this fund, how do you create this fund that
carves out revenues and resources out of the budget,
and that was the emphasis and that was the struggle
and the process that had to go through.
Given that SWFs are now fairly well known and widely
regarded as state-of-the-art in terms of how to manage
resource revenues, the emphasis is now moving more
towards how do we improve upon on our rules that lead
to how money flows into these funds and in the case of
investment-income funds and stabilization funds, how
the money flows out in a rule-based way, in a
predictable way, and in a transparent and fair way.
That's the shift and I can say that particularly in
resource-based countries, every single country in the
world is going through this and every single state and
province that is resource-dependent or resource-rich
and has a SWF is going through this. Everybody is
going through it in a different way given their
different legal context, political context, their
existing institutional infrastructure; but, Alaska is
by no means alone in this and in many ways I think at
the vanguard in taking appropriate and early action to
try and adjust to the new realities.
9:21:08 AM
MR. RIETVELD stated that he identifies the three-distinct SWF
stages as: SWF 1.0, SWF 2.0, and SWF 3.0. He described the SWF
stages as follows:
The past decade has been a period of SWF 2.0 and I
think we are transitioning to SWF 3.0. SWF 1.0 was the
very-early stage in which the very-early adopters of
the SWF model emerged as I mentioned: Texas in the
1850s, followed by New Mexico. Then in the 1970s a
whole bunch of Middle Eastern countries: Saudi Arabia,
Kuwait, Abu Dhabi, a little bit later Qatar; Alberta,
and Alaska. Here the emphasis was on creating these
funds, it was very much dominated by resource-rich
countries and the investment model was very simple.
The overriding purpose was to cut out a share of
revenues from the budget process and park it
somewhere. Consequently the investment models were
very simple, it was largely deposited in bonds and
cash securities without a huge amount of attention
paid to the portfolio and the characteristics of the
portfolio itself.
SWF 2.0 emerged at the turn of the century where we
saw, as I have already mentioned, significant growth
in the number of funds, significant growth in the size
of assets managed by these funds, driven by commodity
revenues in the case of Asian countries, driven by
trade surpluses and privatizations. The funds also
grew, not just by their funding sources, but also by
fairly healthy financial returns over this period
since the Asian financial crisis in 1998 to 2014. With
the exception of the collapse of Lehman Brothers, it
was a period of high and fairly steady financial
returns which also buoyed the size of these funds.
9:23:11 AM
He addressed the SWF model going mainstream as follows:
The important thing to understand about this period is
that it really led to the idea of a SWF model going
fairly mainstream, so it now sits in the International
Monetary Fund's recommendations of best practices for
any resource-rich country to have a SWF, to transform
its resource wealth and resource income into some form
of financial wealth. This is absolutely standard
practice and at the IMF it's one of the first things
they mention when they go visit any resource-rich
country that reports to them, it also led to the
creation of something called the International Forum
of Sovereign Wealth Funds, of which the Permanent Fund
is a member; they meet annually and it includes
roughly 40 of the world's largest funds. Very few
funds now are not participating in that forum, they do
a bunch of things, most important of which they have
come up with a set of 24 principles and practices for
the governance and management of these funds. There's
no doubt in my mind that the Alaska Permanent Fund is
sort of best-in-class among this group. I have very
little doubt that the Permanent Fund would adhere to
all 24 principles stated in the International Forum's
principles of best practices.
The other point of the International Forum is that it
is a platform for SWFs to meet, to exchange ideas
around the management of their portfolios, to exchange
ideas around the fiscal frameworks around them, and
it's a way for the community to engage with each
other, so Alaska's participation in this is I'm sure
very beneficial and should be encouraged.
The final aspect of this era that has proceeded where
we are today is that in earlier stages, SWFs tended to
be fairly politically controversial and tended to be
prone to raids on their capital in tough times, now
that's less of an issue if your capital and corpus is
constitutionally protected; but, in this most recent
period I think some of those political pressures have
been reduced worldwide as people understand the
importance of these funds in managing medium and long
term fiscal affairs.
9:25:25 AM
CHAIR STOLTZE noted that Mr. Rietveld referenced "political
compromise" and "political pressure" when explaining SWFs. He
asked what he meant by the two terms.
MR. RIETVELD explained that an example of "political compromise"
would be when Wyoming raised taxes in 1976 on oil, gas and coal
companies. He specified that Wyoming's compromise occurred when
the added revenue was used to establish its permanent fund in
order to benefit future generations rather than just cashing-in
on a short-term commodity price-spike. He explained that he
referenced "political pressure" when SWFs where formed during
boom-periods that ultimately broke down in bust-periods due to
political pressure. He noted that political pressure is not an
issue for Alaska's Permanent Fund due to its strong legal
foundations.
CHAIR STOLTZE commented that he was glad to hear that Alaska was
immune from the political pressure that Mr. Rietveld explained.
9:28:22 AM
MR. RIETVELD explained the end of SWF 2.0 as follows:
SWF 2.0 came to an end when commodity prices collapsed
towards the end of 2014 and we all know about the
steady and devastating collapse in global-oil prices
in particular since then. For some SWF skeptics I
imagine the question is now really whether SWFs and
particularly the growth that we saw since the mid-
2000s in SWFs will be sort of a historic-blip on the
radar whether some of these funds will in the first
instance be drawn down upon and the second instance
whether they will actually be growing as was expected
a few years ago when oil prices were still high; for
me, that is not really called into question, I think
the degree of consensus around the importance of SWFs,
the many incidences right now, well designed SWFs are
helping resource-dependent countries cope is
significant and sufficient evidence for the SWF models
appeal to remain intact. But what I do think is that
the current era is about adjusting to the fiscal
realities of SWFs.
He explained SWF 3.0 and the adjustment to the new-fiscal
realities as follows:
SWF 2.0 was a period of rising-commodity prices, SWF
3.0 will be about coping with lower commodity prices.
For resource-rich countries and what a lot of the rest
of my presentation is all about is the need now to
introduce what we academically call "cyclically
robust" or "counter cyclical fiscal frameworks" and
that's just a mouth full for saying we want fiscal
frameworks that allow us to accumulate assets in the
SWF in good times and we want sensible, sustainable
policies for drawing on SWF assets and income in the
tough times so that you have a policy that takes care
as much for the boom-period of the cycle as it does
for the bust-period of the cycle. Many rules that we
see in place right now only do one-half of the story,
they only take care of saving some portion of the
boom, so the emphasis is now on that second half of
the equation. As you go through that, the two major
concerns is how do you avoid the depletion of assets
and I'll say again, unless it is constitutionally
protected, you have less reason I think to worry about
that.
9:30:54 AM
CHAIR STOLTZE stated that he appreciated Mr. Rietveld's
parenthetic remarks pertaining to Alaska's constitutional
protection. He said the constitutional protection was an issue
for the committee to discuss. He opined that the constitutional
protection appeared to be a stronger threshold than any.
MR. RIETVELD answered correct. He said the constitutional
protection of capital is among the most firm and robust for
SWFs, a strong and very positive feature.
MR. RIETVELD addressed the effect from the "ebbing tide" of
commodity prices as follows:
I think big-picture what is also emerging from the SWF
landscape as we deal with lower-commodity prices is
that this "ebbing tide" has revealed that some
countries have been swimming essentially naked as the
ebbing tide sometimes does; their policies, while
appropriate for the boom-period, are not necessarily
right and robust to the tough times. So we are finding
out which structures and which systems are equipped to
handle the boom and the bust and which ones are more
for the boom.
9:32:24 AM
He addressed SWF 3.0 and the world's adjustment to new fiscal
realities by identifying three groupings as follows:
There is one group of countries and jurisdictions that
are really hurting right now, group A, and they are
the group that never managed to save at all or save
enough of the resource-boom of the past decade and a
half, and they are really approaching "basket case"
status right now. Venezuela is the most obvious
example, Nigeria and some other countries are in the
same boat.
The second group of countries did manage to accumulate
some amount of assets, you could argue about whether
it was sufficient, whether they saved enough, but what
they are going through right now is drawing down on
their assets very heavily. Russia has drawn down on
some $150 billion, it's hard to know exactly because
as you can imagine, the Russian system is not the most
transparent one in the world, but they have drawn down
on a huge amount of assets. Saudi Arabia likewise has
drawn down on $150 billion to $200 billion in assets
since we wrote our Harvard Report.
The third group of countries are the proactive ones
who in the first instance saved a good amount of money
in the previous boom and are now looking at if their
spending policies and their withdrawal policies are
appropriate and sustainable. I would put Abu Dhabi,
Norway and Chili in that group with great certainty,
Kuwait most likely, and Saudi Arabia if they were to
follow our recommendations.
9:34:35 AM
MR. RIETVELD referred to a graph which plotted Alaska's fiscal
dependence on oil and break-even price relative to other
countries and states, and detailed as follows:
I've simply gone and said based on the share of oil
revenue to the budget just prior to the slump, how
much does oil account for total government revenue and
on that metric? Alaska finds itself with a bunch of
countries you would regard as petro-states: Abu Dhabi,
Kuwait, Qatar; they are dependent of around 90
percent, of course that share drops when commodity
prices drop, but in good times we are talking about
governments that fund themselves for at least 90
percent on oil revenues.
He plotted the price of oil needed to balance budgets that
prevailed before prices collapsed and addressed results as
follows:
Alaska finds itself in rather uncomfortable territory
to the extent that you needed $110 a barrel to
maintain the level of spending that proceeded before
the price drop. What is striking to me is that Alaska
finds itself on these two measures in the same
territory as Saudi Arabia, which by itself is not good
news. There's a group of countries in the Middle East
that I've plotted there: Kuwait, Qatar and Abu Dhabi,
that while having the same degree of fiscal dependence
on oil as Alaska does, is able to balance the budget
with much lower oil prices and the simple reason for
that is they have SWFs that can provide a stable
source of income to supplement and offset the drop in
oil prices. What I've basically indicated there is
that in my assessment, if Alaska was to implement the
SWF model to the full extent, you would be in that
group and conceivably be slightly better off than that
group for reasons I'll come to in a second. You could
probably balance the budget with a $40 to $45 oil
price if you made sensible and sustainable use of your
financial assets. The other group of countries,
provinces, and states that can balance their budgets
at lower oil prices includes Wyoming, Alberta, and
Norway; the advantage that these countries have is
that they are way less dependent on oil, so for these
countries oil accounts for roughly 30 to 45 percent of
government revenues, so that's the other way out of
this.
If you want to be able to adjust to a world of lower
oil prices and balance the books, you either move
towards a system in which you implement the SWF model,
draw on the financial assets that you have accumulated
in a rule-based sustainable manner, or you find other
sources of revenue as Norway does, oil accounts for
roughly a third of revenue and Norway has incredibly
high personal-income taxes and corporate taxes.
MR. RIETVELD summarized that outside of the oil sector, Alaska
does not have the economic and taxable base to cover the kind of
holes it sees in its fiscal framework.
9:38:43 AM
He explained the economies of Alberta and Australia relating to
oil dependency as follows:
Their discovery of oil essentially came on when they
had really diversified industrial economies and large
taxpayer pools that they could draw on so oil for them
was a top-up on top of other established existing tax
base, it's much harder if your economy is still
largely oil dependent to introduce other forms of
revenue creation.
CHAIR STOLTZE noted that South Korea has two companies that
account for 33 percent of the country's gross domestic product
and Alaska is at 90 percent for oil. He asked if any other
province or sovereignty that has anywhere near Alaska's 90
percent.
MR. REITVELD answered that in terms of oil dependence, Alaska is
right up there amongst the most oil dependent. He opined that
the only places that are comparable are the Middle Eastern
states. He specified that there is no doubt that Alaska is in
the highest category of oil dependence worldwide where it's hard
to imagine a greater share of oil accounting for revenue than it
does in Alaska. He stated that he could have mentioned Venezuela
and Nigeria, but Alaska is incredibly reliant on oil revenues
based on its current infrastructure. He summarized that based
upon the metrics of oil dependency and the oil price needed to
balance the books under the status quo, the news was not good
for Alaska.
SENATOR MCGUIRE pointed out that Venezuela, Nigeria and Russia
were not included on Mr. Rietveld's oil dependency graph. She
surmised that the exclusion was due to the countries not saving
enough or depletion.
MR. RIETVELD pointed out that the countries noted on his graph
had some form of SWF. He said Venezuela did not fit on the graph
because the country required $350 per barrel pricing.
9:42:43 AM
He stated that there was better news on the way for Alaska. He
examined SWF assets that were relative to budgets and noted the
following:
If you consider also just the size of SWF assets, it's
easy to look around the world and look at Norway with
its $820 billion fund, Abu Dhabi with its $775 billion
fund, and Saudi Arabia with $600 billion, and think
that these funds sort of dwarf Alaska, and certainly
in purely absolute terms, Alaska's Permanent Fund is
considerably smaller. But I think the more pertinent
point here is that what I do in the next slide is
scale that same pool of capital held in the SWFs and
scale it relative to budget and what I find there is
that Alaska is the richest country in the world based
on SWF assets; that is, Alaska's SWF assets and
accumulated financial assets relative to its budget is
the highest in the world and I've quantified that by
saying there is roughly 11 times the budget coverage
in accumulated financial assets and Norway, which is a
best-case example of how to manage SWFs in many
people's books, isn't anyway near that, in fact, it's
almost half of that, they've got about 6 times
coverage of their annual budget in the form of their
financial wealth.
There's no doubt to me that while there are problems
for Alaska based on commodity dependence, based on the
kind of oil prices you need to balance the budget, the
big weapon in your arsenal is your financial wealth
which is a direct consequence of your constitution,
it's a direct consequence of prudence on part of past
legislatures in terms of making sure that the fund is
inflation-proof, historically it's a testament to the
good management of the Alaska Permanent Fund over
time, a whole bunch of factors. But the good news is
at least you have the ingredients to a solution which
many other countries don't have or at least don't have
to the extent that Alaska has here.
9:45:14 AM
MR. RIETVELD addressed a sustainable draw as a percentage of
budget as follows:
A similar sort of chart to the previous one is just to
say if we were to apply a very standard, very
uncontroversial idea of drawing 4.5 percent annually
from those assets, so this is not I think in its
entirety, the proposal on the table, but just to
quantify the financial wealth. If you were to draw 4.5
percent per annum on that wealth, what percentage of
the budget would that draw cover? Alaska is
approaching 50 percent of the draw being able to be
covered by what is a sustainable draw on those assets
that would not jeopardize the real purchasing power of
the Permanent Fund's capital; again, Norway is in a
position where just slightly more than a quarter of
their budget can be covered by a sustainable draw.
CHAIR STOLTZE asked Mr. Rietveld's if the 4.5-percent draw
hypothesis takes inflation-proofing into consideration.
MR. RIETVELD answered as follows:
The 4 percent idea is something that sort of emerges
from the financial planning literature for
individuals, it's something that emerges from the
university endowment literature, and the idea is that
with the kind of portfolio you have in a SWF, or a
university endowment, or a diversified financial
portfolio, the return will exceed 4.5 percent by
enough to offset inflationary pressures. So the
nominal return, taking inflation into account, would
be something like 6.5 to 7.5 percent, so that if you
draw 4.5 percent, you're essentially making sure that
you are not eroding the purchasing power.
CHAIR STOLTZE asked Mr. Rietveld to clarify that the mechanics
of the fund will replace the mechanics of actual appropriations
to inflation-proofing. He pointed out that the fund's mechanics
will be a pivotal point for a lot of members.
MR. RIETVELD replied that he was addressing a notional concept
rather than the fund's mechanics and would get to the dynamics
of the fund later in his presentation.
CHAIR STOLTZE remarked that there was ambiguity about inflation-
proofing and the committee would come back to the topic later in
the presentation.
9:47:59 AM
MR. RIETVELD addressed Alaskan strengths and weaknesses relative
to other countries, states and provinces by listing four
categories as follows:
The first set of criteria pertains to the fiscal
story, the second set of issues pertains to the
potential to raise non-oil revenues, the third is
about the outlook for resource production in the
jurisdiction, and the fourth set of questions pertain
to the management and governance of the entity and
structure that manages the SWF asset.
I think based on the size of savings, given what I've
just shown you in terms of the size of Alaska's
savings relative to the budget, this is a huge
positive. On any metric that I can come up with,
Alaska is, scaled to its fiscal need, the richest SWF
in the world. So that's a huge positive.
What I think is more concerning here is whether the
existing infrastructure gives sufficient access to
accessible financial buffers. I know you have the
infrastructure here, you have funds that are intended
to be drawn upon in tough times, I think the concern
there is whether those are big enough to help you
through a protracted period of time absent some other
changes. Where some other countries have provision
funds in their stabilization funds or other budget
buffer funds that will provide five to ten years of
fiscal coverage, here in Alaska it is much shorter. I
think something needs to be done in that respect to
increase the amount and something can be done in that
respect to increase the amount of accessible fiscal
buffers at the state's disposal. As I've already
mentioned, just purely on fiscal dependence, it's a
big negative for me, Alaska does have a much lower
recourse to non-oil revenues through taxation, etc.
The fourth thing is the existence of a savings rule
here, it is a constitutionally provisioned and 25
percent of mineral royalties is constitutionally
required. I know that the historical tradition has
been to increase that to 30 percent, effectively
that's a huge positive, a lot of countries don't even
have that.
9:50:27 AM
CHAIR STOLTZE asked Mr. Rietveld why he only showed a "one
checkmark" approval for Alaska's "existence of saving rule."
MR. RIETVELD answered as follows:
The question for me is whether you shouldn't
essentially be saving more, particularly if you are
transitioning to a SWF model in which the state's
ultimate source of wealth and financing is its
financial assets rather than oil wealth, whether there
shouldn't be more money and whether that rule should
be adjusted to allow for more money to flow into the
SWF. I do regard it as a positive that the rule
exists, I think there's some scope for improving the
rule.
Finally, so that sort of speaks to my second point
about the appropriateness of the fiscal rule. In my
preamble I was talking about cyclically adjusted
policies, policies that are as good for the upside as
they are for the downside. I think that's on the
fiscal-rule side where the bulk of the adjustment is
required. There is action that needs to be taken that
the rule is appropriate as much for tough times as
they are for good times.
9:51:31 AM
MR. RIETVELD addressed long-term and near-term non-oil revenue
as follows:
I put question marks around the two issues around the
prospects for raising non-oil revenues, both long-term
and near-term. I'm leaning towards the negative side
on the near-term front, I don't think there's that
much you can do to plug the magnitude of the fiscal
hole by non-oil revenues, particularly in the short-
term. In the long-term I imagine there's potential for
it given the very low base, but I'm not sure about it.
So I haven't taken a definitive view on it and put
them as question marks.
In terms of the long-term viability and profile of all
production, I'm simply going here on the model you
have all received that the state is working with, the
assumption there is of gradual decline in oil
production, whereas a lot countries I'm looking at
quite the opposite, they are looking at booming
production off a very low base. In Alaska it's
probably the case that you need to confront the
reality of declining production. I didn't make it
three-negatives because I do believe they are all
prospects, perhaps in a different price environment,
perhaps in a different set of circumstances there will
be more production coming on stream.
My third set of categories pertains to the management
of the funds themselves, in this case the Alaska
Permanent Fund. I take it as an absolute strength of
your system that the Alaska Permanent Fund is a well-
managed entity that it is independent. Through public
and political pressures, the Alberta Heritage Fund,
which most of you are familiar with, suffered greatly
in the 1980s from being used as basically an
instrument through which to provide subsidies to
invest in uneconomically-unfeasible projects in their
province. That's not really under discussion at all in
the case of the Permanent Fund and it's managed by an
arms-length, independent authority that has
demonstrated clear competence over a long period of
time.
Second, I would say that the Permanent Fund's
investment style, its asset allocation, what it's
investing in, is appropriate and makes sense in terms
of what is expected of it; that again, sounds obvious
but it's something else that many other funds are
struggling with, they have investment income funds and
savings funds that are still sitting 70 to 80 percent
on bonds because of the inability to diversify the
portfolio for a number of reasons. That's not the case
in Alaska, you have, I think, a very sensible asset
allocation for the fund relative to what you want it
to do.
My only concern around the Permanent Fund is
particularly pertinent looking forward if Alaska is
going to transition towards a state that funds itself
through financial income rather than purely oil income
is whether there is support for the Permanent Fund to
really grasp the nickel of what that implies. If this
is the transition that Alaska is making, you need to
be able to devote more resources to that organization
to do a number of things, most pertinently I think to
potentially manage money in-house which economizes on
fees paid to third-party asset managers which are
quite considerable for the Permanent Fund and it's a
logical consequence of the fact that the Permanent
Fund currently finds it hard to build up its staff and
internal team.
9:54:47 AM
SENATOR WIELECHOWSKI asked Mr. Rietveld why he gave two-positive
checkmarks rather than three to the Permanent Fund's investment
style, what risk level should the Permanent Fund take, and how
the risk level would impact the rate of return.
MR. RIETVELD answered as follows:
The only reason why I wouldn't give three "ticks" on
investment style is it's sort of more an operation
issue. With me with the Permanent Fund, the fact that
under the appropriate set of circumstances the fund
and the corporation could probably economize on fees
to third-party managers, particularly in private
markets rather than public markets. So I think if that
transition was successfully made, I would give it
three "ticks." I think if this transition occurs, that
places Alaska in a position of funding itself through
financial wealth and financial income. That is where
the bulk of the action needs to happen in terms of
what the Permanent Fund does and it requires. I have
to be very clear about this, it requires political and
public support for the Permanent Fund to become truly
a world-class, in-house investment manager.
So, SWFs around the world, the large and very
successful Canadian public pension funds have no issue
around having very significant internal teams, sure it
costs you to hire those people, it costs money to
build that internal infrastructure, but over the long-
run you certainly economize on paying third-party
asset manager fees and it also changes the way you do
things like real-estate investment. Instead of going
to some Wall Street firm and investing in their real-
estate fund or creating some kind of real-estate
investment platform run by some bulge-bracket
investment bank, you are able to initiate the deal
flow yourself and find assets that you want to invest
in. So it's a mind shift and I think it's one that
would serve Alaska very well if you are able to
achieve that.
9:57:06 AM
CHAIR STOLTZE pointed out that the committee intends to bring
forward Ms. Angela Rodell, the Alaska Permanent Fund's executive
director, to address the committee at a future meeting. He said
the committee would address Mr. Rietveld remarks with Ms.
Rodell.
SENATOR WIELECHOWSKI recounted that the historical rate of
return average for the Permanent Fund was around 6 percent. He
asked Mr. Rietveld if he envisioned the investment's level of
risk changing in a SWF.
MR. RIETVELD answered that he envisioned the fund's broad and
balanced asset allocation strategy to more or less be the same.
He remarked that the Permanent Fund was in line with best
practices for similar investors such as university endowments
and other permanent funds.
SENATOR WIELECHOWSKI asked what rate of return should be
expected from Alaska's SWF in order to have a sustainable rate
of draw.
MR. RIETVELD answered that the fund's rate of return and draw
are directly related to each other. He explained that the fund's
return has to be realistic to what the draw is going to be. He
specified that a 6.5 to 7.5 percent rate of return would be
realistic and appropriate based upon the fund's proposed draw, a
rate that had been achieved historically by the Permanent Fund.
9:59:24 AM
CHAIR STOLTZE opined that the administration had been focusing
more on the Permanent Fund's harvesting rather than on its
sustainability.
SENATOR HUGGINS pointed that the Permanent Fund has been good at
operating independently and keeping an eye on Alaskan's
investment. He added that the state's other independent
corporations should also be recognized as well for acting as a
"check." He set forth that the country was based on independence
and Alaska would be wise to make sure that independence is
celebrated by each of the entities that the state has developed,
not only for the Permanent Fund.
10:02:07 AM
MR. RIETVELD addressed the key aspects for a sustainable SWF
model as follows:
What I would like to do now is draw down a little bit
into the critical elements of if you make this
transition to what I call the sustainable, rule-based
SWF model. What do you need to do? What is the check
list of critical things that need to be achieved? Just
to be clear, what I mean by this sustainable, rule-
based SWF model in broad strokes is that you're
transitioning away from relying on commodity revenues
directly, but you are rather transferring it over to a
SWF and drawing down on the earnings and financial
resources of the SWF.
He explained what the resource-based SWFs are really about as
follows:
What are resource-based, commodity-based SWFs really
about? I think it all really comes down to a quote by
the father of economics, the father of free market
thinking, Adam Smith, who described in his case
mining, but he might as well been talking about
commodities more generally as "the most
disadvantageous lottery in the world," it is a lottery
if you are dependent on commodity revenues. Our human
ability to forecast commodity prices has time and
again been proved to be very limited. Commodity prices
act in a completely unpredictable way and putting all
of your eggs in that basket is a particularly risky
proposition.
So that's really what SWFs in a very big picture is
about, it is about removing that degree of uncertainty
and dependence on commodities. The first thing they do
is they save and in doing so they transform a volatile
and depleting asset and income stream into something
that can be held into perpetuity, in the case of a
permanent fund, and that's a very important point. If
you set up the permanent fund in the right way, and I
don't think any of the proposals under consideration
here would jeopardize that, that financial wealth will
outlive oil wealth if you make sure that you are not
unsustainably drawing on the fund. Once the last
barrel of oil has come out of the ground, you'll still
have the Permanent Fund, that's a very significant
point to remember.
The second point is that they provided a degree of
macroeconomic and fiscal stabilization. The thing here
is you are trying to, through the use of the funds and
sustainable draws on the fund, decouple the
government's spending cycle from the resource-revenue
cycle and the resource-price cycle. In Alaska since
1976, essentially, government spending and capital
spending has tracked the oil price and oil revenue as
it has done in many resource-rich countries prior to
the establishment of the SWF model. So you are trying
to break that cycle, the decoupling of spending from
commodity revenues. You can never get rid of the
inherent volatility, it's not like you're going to
hide it under someplace where no one is going to see
it and it's going to reside in your SWFs. But I
believe and proponents of the SWF model believe that
that is a better place to place the volatility rather
than in the budget. The budget effects all Alaskans,
it effects property prices, it effects corporations'
planning and investment cycles, and it effects
households' planning and savings cycles. If fiscal
policy could contribute towards stability and
ameliorating the volatility of the Alaskan economy,
that would be a significant achievement.
10:05:42 AM
SENATOR MCGUIRE asked if there were other funds like the
"Alberta model" that addressed volatility by diverting monies
when commodity prices hit trigger-prices. She noted that she had
proposed trigger-pricing over a decade ago.
MR. RIETVELD answered yes and specified that the funds Senator
McGuire described were called the reference-price model. He
explained as follows:
You set a price for oil, if oil exceeds that
reference-price, you save equivalent percentage of
revenues, if it is under that price you are able to
draw on it; that is that version of the rule-based
policy. That system has some problems, the one is how
do you decide which oil price to base it on; that
could become incredibly controversial. I think two
years ago we probably would have felt comfortable
saying the price should be $100 a barrel, now we see
oil prices just touched $26, we probably don't feel
comfortable with $100. So there is this risk that you
would constantly be chasing-your-tail in adjusting the
reference-price, unless you have some very
sophisticated process for establishing that reference-
price, that's my main concern with that model, but it
is used and it is employed by some countries.
10:07:11 AM
He addressed the prevention of waste and bad investments as
follows:
Finally, the point of these resource-based SWFs is to
avoid really wasteful spending on the boom-side.
Economies all have a limited capacity to absorb
capital in boom-times, it leads to poor investments
and it leads to misallocation of capital to very often
unsustainably rising real estate prices, particularly
in things that cannot be easily traded tend to really
rise. There's a real prevalence of "white elephants,"
that is large scale investment projects with poor
economic performance and rational.
CHAIR STOLTZE asked if a $65 billion gas line would be
considered a "white elephant."
MR. RIETVELD replied no comment. He addressed oil-to-equities as
follows:
So just to think through some of the other underling
logic of the SWF model, the Norwegians, whose model I
wouldn't necessarily advocate in its entirety for
Alaska for the simple reason that Alaska is more
fiscally dependent on oil than Norway is, but some of
the logic applies. The Norwegians describe what they
are doing as turning oil-to-equities and they believe
that financial assets have historically had a much
better risk-adjusted return than oil and also that if
you think about it in a truly risk-adjusted sense, the
risk of holding oil doesn't compensate you
sufficiently for the return that you get and if you
think about standard financial theory, the kind of
risk you observe from oil would demand much higher
returns.
He referenced a graph showing rate of returns since the start of
"The Great Depression" in 1928 for stocks, oil, money markets,
and bonds as follows:
Stocks have essentially massively outperformed money
markets and bonds, but also oil. Oil has exhibited
stock-like levels of volatility for bond-like levels
of returns. So at least historically, the financial
case for turning oil into financial wealth has been
very strong, it's even more compelling if you think
about the total wealth of Alaska. You have wealth
under the ground and you have wealth in financial
wealth and if you think about the balance between
those two you still will have a significant amount of
your current and future wealth in oil, even if you
adopt the SWF model. So it's just another reason to,
as much as you can, break the consolidation of your
wealth in the form of oil wealth and try and grow
financial wealth.
10:09:52 AM
He addressed the reasons to have a rule-based SWF as follows:
I mentioned on a few occasions that the framework
should be rule-based and I think that is easily said,
but is worth reflecting for a moment on the attractive
feature of a rule. As with all rules in the domain of
economic policymaking, the ultimate idea here is to
constrain discretion. Why is that important for oil-
based economies? In oil-based economies subject to
significant booms and busts, I find that memories tend
to be quite short and for all of the pain Alaska is
going through right now fiscally with low oil prices
and economically, when oil prices recover it's very
easy to forget that and continue on your merry way. If
you have a rule-based policy, that essentially forces
you to save in good times, it makes it sort of more
reasonable and more sustainable to draw on assets in
tough times.
CHAIR STOLTZE asked how rules are enforced.
MR. RIETVELD answered that the state has a number of legal
options at its disposal. He stated that the most obvious way was
to introduce a law that had significant legislative oversight
with public disclosure of what the plan was.
CHAIR STOLTZE pointed out to Attorney General Richards that Mr.
Rietveld recommended legislative oversight.
MR. RIETVELD continued to address a rule-based SWF as follows:
I think the second reason for having a rule is the
previously mentioned human inability to really
forecast where oil prices are going to go. If you have
a rule and a framework that doesn't require you to
formulate a budget based on your expectation of oil
prices, but rather allows you to form a budget based
an assessment of your financial wealth, you are
basically expecting a lot less and you are not
expecting the impossible from people who write the
budget to come up with a forecast of oil prices.
10:11:57 AM
CHAIR STOLTZE asked Mr. Rietveld to verify that he had
previously noted that the most enforceable rule was a
constitutional amendment.
MR. RIETVELD answered correct.
SENATOR MCGUIRE recounted the following:
Just on this point to remind the committee, we banded
together to pass a piece of legislation that created a
competitive oil-review committee that's made up of
members of the public and members of the legislature
and it's a competitiveness-board based on Alberta's
model with an idea that it is our bread-and-butter and
we should have more focus on how we manage our
competitiveness as a state and it seems like this is a
place where that could come in, having somebody, that
group, their task is to be looking at how competitive
we are with respect to other jurisdictions, but
certainly assessing what the price of oil is based on
a forecast and things I think would be something.
MR. RIETVELD divulged that the International Forum of Sovereign
Wealth Funds codified an encouragement for clear communication
and transparency around what the rules are. He set forth what
the benefits of rules are as follows:
Helps manage expectations and it helps ensure the
credibility of medium and long-range fiscal policy and
that's a general truth, but I think it has some
specific applications. For example, the rating
agencies will have, I think, reason to take
significant confidence in a plan that is sustainable,
rule-based and clearly communicated; it will help
underline the credibility and stability of Alaska's
fiscal future if you could communicate a plan like
this to the rating agencies; it will help businesses
in Alaska break the perception that Alaska is a boom-
bust economy and encourage long-term investment in the
state; it will help the public's households plan their
financial affairs; it will leave their home prices,
which is where the majority of their equity and wealth
resides, less vulnerable to wild swings based on the
whims of energy prices. So I think that's all very
important and enhancing the predictability and
stability of fiscal policy through this rule-based SWF
framework is one of its most attractive features.
10:14:21 AM
CHAIR STOLTZE remarked that he liked the most enforceable rules.
He said a politician he admired, the late Everett Dirksen, said
he was "a man of unbending principles" and his first and
foremost principle was "flexibility." He asserted that he wanted
to make sure that a SWF does not become politically flexible and
noted that the best way to create a $20 billion permanent fund
was to start with a $50 billion one.
10:15:00 AM
MR. RIETVELD addressed the changing nature of fiscal rules as
follows:
I want to pay a little bit of attention now to how
rules are changing, so it's not as if there aren't
rules in place around the world right now. There is a
rule in place in Alaska, a savings rule, but I'd like
to talk a little bit about how under this SWF 3.0,
this adjusting to new fiscal realities where the
action is in terms of the changes that are happening
and need to happen. Essentially what I think is in
place now in the overwhelming majority of cases is a
rule-of-thumb measure for savings, that is how I would
describe what Alaska has right now. You have 25
percent required in the constitution that has
effectively been 30 percent of savings; let me be
clear, having that is better than not having it. The
question is can you improve upon it and add a spending
component to it, add a sensible policy that integrates
your savings decisions with your spending decisions?
That's really what it's all about.
In terms of those rule-of-thumb measures, I think
there's three in principle. The first one is a fixed
percentage savings, that's what you have in Alaska,
that's what frankly the majority of countries have.
The second one is a deviation from some moving-average
so that you save when revenues exceed some moving
average of let's say the past four years and maybe you
draw down on assets when they are below the moving-
average. The third example is the one that Senator
McGuire mentioned is the reference-price approach
where you set a price in the budget and you say we're
going to formulate a budget based on a $75 per barrel
price for oil for example, and if prices end up
exceeding that we save that equivalent amount. As I
mentioned, these are not terrible rules to have, they
are better than not having rules, but they do have
problems, particularly with respect to the last one as
I mentioned. How do you determine what's the right
price? How do you ensure that that process of
reference-price setting is not backward looking and if
it's going to be forward looking? How do you cope with
inherent unpredictability of oil prices and how do you
make sure that the process does not become highly
politicized?
10:17:07 AM
SENATOR MCGUIRE commented as follows:
Just on that point, you're right, but consider that
this state has been relying on a spring and fall
forecast every year, which is never right, without any
trigger at all. So the volatility of what we have is
so immense that just ratcheting it back a bit, even if
we are slightly wrong on the trigger at least puts us
in a place of a bit more predictability.
SENATOR WIELECHOWSKI asked if most SWFs have an inflation-
proofing component.
MR. RIETVELD answered that inflation-proofing was a critical
element and the best countries did it. He pointed out that
Alaska's proposed draw-down rate is below its nominal return and
that sort of ensures inflation-proofing because it is through a
direct mechanism where money needs to be transferred based on
some calculation of what inflation was in previous periods.
SENATOR WIELECHOWSKI asked if the governor's plan had an
inflation-proofing component.
MR. RIETVELD answered yes. He detailed that the plan's draw was
prudent relative to the expected return of the fund.
CHAIR STOLTZE remarked that one of the rules he did not see was
how to avoid getting back into the same spending scenario. He
asked if a provision should be included that acts as a de facto
spending limit that reduces the amount of money on the table
when revenue streams are pretty good.
10:19:15 AM
MR. RIETVELD replied as follows:
The way I understand the governor's plan is that will
happen because the spending rule is based on a fixed
amount draw so that if good times return, the fixed
amount of spending will remain the fixed amount to
spend and the incremental additional revenue will go
to the fund. So spending might be able to rise in the
future, but it won't respond immediately through the
budget process, it will lead to growth in the
Permanent Fund and higher spending for future
generations.
CHAIR STOLTZE commented that the Commissioner of Revenue and the
Attorney General will be asked to address inflation-proofing and
spending rules more in depth. He remarked that the
administration has to, most importantly, convince the public.
MR. RIETVELD replied that he agreed. He specified that he was
addressing the committee to paint-the-broad-picture, but details
were important to review as well. He stated that he could not
say that he liked the details of the governor's plan, but
remarked that the plan fits with international best practices.
SENATOR WIELECHOWSKI asked if any SWFs existed that spinoff
dividends for its citizens and inquired if dividends were a good
idea.
MR. RIETVELD addressed the first question and answered no. He
specified that the dividend was a particular feature of the
Alaskan situation and remarked that he did not take particularly
strong views on whether the dividend was a good thing or a bad
thing. He commented that the dividend was a liability that the
government knows it needs to fund and it needs to think about
what the dividend's appropriate level was. He set forth that the
SWF was a big-picture plan for enduring the fiscal future for
the state to the extent that it helps pay for the dividend in
the future. He conceded that dividends might create some
opportunities and hindrances in terms of advancing legislation,
but dividends should not undermine the transition to the SWF
model.
CHAIR STOLTZE pointed out that Mr. Rietveld showed that the
Permanent Fund's diversified portfolio was far more reliable
than a commodity and the plan switches the dividend payment from
the more dependable market-based diversified fund to the
vagaries of oil.
10:22:49 AM
MR. RIETVELD addressed the Saudi Arabian report as follows:
I wanted to discuss it here because I think it
underlines the danger of not having a rule-based
system in place, it's a very different country to the
U.S. and it's a very different set up to the Alaskan
set up, I think fortunately in your case, but there
are a number of important lessons that I think we can
draw on in doing this. I hope that at the end of these
slides, nobody should think that if this proposal is
the Saudi Report that I or anyone else is advocating
that Alaska does what Saudi Arabia does, it's more the
avoidance of the Saudi Arabian Plan.
MR. RIETVELD provided details of the Saudi Arabian report as
follows:
The basic economics of Saudi Arabia is that it is the
world's largest oil producer, it has sort of been
challenged now by Russia and the U.S., but on some
metrics it's the largest and certainly one of the
largest-oil producers, it has decades if not centuries
of remaining oil reserves under the ground, which in
general has the lowest-marginal cost of extraction, so
their oil wealth is not really in question. At the
time we finished writing this report in September
2014, they had $850 billion in accumulated financial
assets, so you might look at those things and say what
on earth could be wrong with this country, they have
oil beyond their wildest dreams and they have
financial wealth; but in fact, there are quite a
number of things wrong with the Saudi Arabian economy.
The overarching one is that their policies for
accumulating and spending assets was entirely ad hoc
rather than rule-based, rather than sustainable and
rather than appropriately counter-cyclical. In a
nutshell, they didn't save enough in the good times
and they were drawing too heavily in the bad times.
10:24:55 AM
He addressed the lessons for Alaska from the Saudi Arabian
report and referenced the estimated-oil price required to
balance 2015 budgets in various countries as follows:
This is one estimate of the kind of oil price they
need to balance the budget [$106 per barrel], and they
are essentially in a different league from the likes
of Norway [$40 per barrel], Abu Dhabi [$55 per
barrel], and Kuwait [$54 per barrel]; they need
roughly twice as high oil price to balance the books
compared to those other states who have implemented
the SWF model more fully and more appropriately.
MR. RIETVELD pointed out that Saudi Arabia's aging population
might require oil prices in excess of $300 a barrel under its
current spending path to balance its books by 2030.
He addressed Saudi Arabia's budgeted versus actual government
spending as follows:
Another mistake that they have made is to consistently
increase the budget in line with rising oil prices and
they have more overspending of the budget in the past
decade and a half consistently by roughly 20 percent,
which is just directly meaning they are not saving
enough money.
He addressed a chart that showed Saudi Arabia's cyclicality in
capital spending since 1980. He noted a very close correlation
to oil prices and detailed as follows:
We can see they track each other historically. The
first thing to give in the Saudi fiscal setup when oil
prices collapse is to cut capital spending, that
exacerbates the inherent boom-bust cycle of the Saudi
economy and I believe has done the same in Alaska and
a number of other resource-rich countries and
resource-dependent countries, that's certainly not
exceptional.
10:26:44 AM
He addressed a set of investment policies recommended to Saudi
Arabia as follows:
Have them manage their wealth institutionally much
more like Alaska does, through an independent
investment authority with clear expectations in terms
of financial returns, people know what targets they
have to hit and it's governed in a way that with the
particularities of their political setup is
essentially arms-length. We call for them to establish
a clear demarcation of what is their investment income
fund, what is their buffer fund, and we really stress
the importance of implementing a rule-based fiscal
framework.
He stated that he has three-key takeaway messages for Alaska as
follows:
The first message is Alaska is not alone in this
response to the oil-price slump; that said, I think
Alaska is better placed than almost any place that I
have been to with respect to the magnitude of previous
savings. You have that very, very significant string
in your bow to draw on and that is frankly not the
case for many other countries that are going through
the kind of pain that Alaska is.
My second and third takeaways pertain to the logic of
the SWF model. The SWF model in the first instance is
about dealing with the volatility of the budget and
it's about transferring that volatility out of the
budget, out of spending, out of capital spending and
into the level of the SWF, that's very important. The
SWF model is a means through which to stabilize the
Alaskan budget and to break your historic boom-bust
type link to commodity prices.
The third thing I want to leave you with around the
SWF model is that it is part of the transition of the
Alaskan-state funding itself, no longer as it has in
the past through oil revenues, but through its
financial wealth and relying on investment income on
the wealth rather than revenues from oil production to
fund government. I go back to the first point, you're
not alone, but you are in a stronger position. You've
laid the foundations to make this transition and under
the right set of rule-based policies, Alaska has no
reason to think that it doesn't have a stable and
sustainable fiscal future.
10:29:34 AM
SENATOR WIELECHOWSKI asked that if dividends are a high priority
for Alaskans, wouldn't tying dividends to the stock market be
safer than to oil prices. He pointed out that oil prices greatly
fluctuate and are projected to continue to decline.
MR. RIETVELD answered yes and pointed out that there are various
ways for the state to formulate its dividend policy. He
explained the advantage of the governor's proposal as follows:
The advantage of the proposal as I see it is that it
allows in good times for the Alaskan citizens to
benefit from increased oil revenues, if they are to
return, but at the same time allowing the fund to
grow, so it sort of is equitable in terms of Alaska's
underlying economic wealth and fortunes tying in part
to the Alaskan citizen and in part to the stability of
the fiscal framework. So I think the current proposal
has the features, I think others are worthy of
consideration too.
SENATOR WIELECHOWSKI asked Mr. Rietveld to verify that the
proposed plan prioritizes government spending over dividends to
Alaskans because the government receives a more stable flow.
MR. RIETVELD answered yes. He specified as follows:
I think the rules sort of balances the benefits of
potential higher future-commodity prices to citizens
and to the budget. I think there is a tradeoff there,
but I think dramatically cutting government spending
in the future has an impact on Alaskans' households
and individuals too through, for example, their house
prices. If you have a 20 to 30 percent drop in your
house prices due to a period of protracted low-oil
prices; that is a much more significant impact on your
household balance-sheet and net wealth.
10:31:34 AM
CHAIR STOLTZE pointed out the confusion with the plan because
the bill is called "The Dividend Protection Act."
SENATOR WIELECHOWSKI asked if Mr. Rietveld would be okay with
the plan being flipped where dividends are tied to the stock
market and the government expenditures are tied to the price of
oil and production.
MR. RIETVELD answered as follows:
I would rather not have government spending tied to
the stock market, but I think the SWF model is a way
to filter the volatility of the stock market. I do
think it's worthy of consideration of other ways of
thinking about the dividend. As I said, the way I
think about the dividend, and not to get into the
details of exactly how it is structured, I think the
SWF model, to the extent that it helps ensure fiscal
sustainability in the future of Alaska, feeds into the
ability to continue paying the dividend, which might
otherwise be under threat under whatever circumstances
are proposed, particularly the status quo.
10:32:34 AM
SENATOR HUGGINS asked Mr. Rietveld to verify that Saudi Arabia
was bonding their debt.
MR. RIETVELD explained as follows:
What they have essentially done in the first instance
is to cut capital spending and the second instance to
draw on their accumulated financial assets to the tune
of $150 billion to $200 billion since December 2014.
They have gone to the local bond market and a Saudi-
riyal bond of $37 billion and there's talk of them
going to the international bond market to raise a
dollar bond. So that's the spectrum of things they are
needing to do, all of which are different ways of
essentially drawing down on savings that they had
previously committed.
SENATOR HUGGINS pointed out that the U.S. has a horrible track
record with $18 trillion in debt and that some people in Alaska
have advocated that the state use bonding to take on debt and
have somebody pay for it in the future. He asked if the state
should consider taking on debt during its transition period.
MR. RIETVELD replied that Alaska has the financial resources not
to have to be in a situation where its recourse is to the debt
markets and burning future generations. He remarked that the
state has the resources in-hand to avoid issuing debt. He
pointed out that Alaska's high-credit rating would be under
serious threat if the state were to issue debt if the status quo
prevailed in the fiscal framework, which would make the debt
more costly for future generations.
SENATOR HUGGINS stated that Mr. Rietveld's presentation was
meaningful and he was hopeful that the average Alaskan got a lot
out of it.
10:35:11 AM
SENATOR MCGUIRE remarked that a SWF could be created that
included dividends being paid out. She said the thinking about
attaching a dividend to the royalty itself was to create a
revenue-source connection with Alaskans as well as providing an
opportunity to experience some highs. She remarked that putting
the dividend within a SWF would by definition limit the
dividend. She opined that what good was paying dividends if
rating agencies said the state was down-the-tubes, businesses
relying on ratings were no longer investing and creating new
jobs, the public loses its hope and belief, and housing prices
start to go, a scenario that occurred in the 1980s. She asserted
that lawmakers were not sitting around finding a way to keep
funding government, but were trying to find ways to keep the
state economically stable in a way that provides basic services
and keeps the economy alive so that the private sector continues
to invest.
CHAIR STOLTZE reiterated that the administration focused the
discussion on the dividend by calling the bill the "Dividend
Protection Act."
SENATOR MCGUIRE opined that the bill was called the "Dividend
Protection Act" because the dividend would go away if nothing
was done.
CHAIR STOLTZE asked Attorney General Richards to address Mr.
Rietveld's presentation, primarily on the deferred questions to
the administration relating to inflation-proofing and the
dividend.
10:38:58 AM
ATTORNEY GENERAL RICHARDS explained that the governor's proposal
does inflation-proof the assets by defining sustainability and
assessing risk for the fund's draw.
CHAIR STOLTZE replied that the committee looked forward to the
administration's elaboration on its plan for the fund. He
pointed out that the Permanent Fund belonged to the people and
not the government. He stated that addressing the governor's
bill is an Alaskan debate and the committee would welcome public
testimony at a future hearing.
10:42:10 AM
SENATOR COGHILL commented that Mr. Rietveld's presentation
focused on sovereign wealth and the "sovereigns" are the people
of Alaska. He asserted that with the way Alaska came into
statehood, private individuals' subsurface rights were barred
and the state's sovereign wealth is a way to balance and share
royalty rights. He said a discussion about sovereign wealth has
to include sharing royalty rights with Alaskans.
He remarked that SB 128 is a matter of balancing risk and
reward. He said the bill stabilizes the function of income to
the government, but the benefit to Alaskans as dividend
recipients would be destabilized. He said stabilizing the
government's economy is a real benefit, but the dividend
destabilization's impact on the private economy has to be taken
into consideration as well.
10:44:56 AM
CHAIR STOLTZE announced that the committee would spend
additional time on the fiscal issues and hold SB 128 in
committee until the committee also heard SB 114. He added that
public testimony as well as constitutional issues would also be
addressed to facilitate a thorough and public-vetting process.
10:46:56 AM
ATTORNEY GENERAL RICHARDS announced that he and Commissioner
Hoffbeck from the Department of Revenue were presenting the
bill's framework at the next committee meeting.
CHAIR STOLTZE remarked to Attorney General Richards that probing
questions on behalf of committee members' constituents may be
asked at the next meeting.
[SB 128 was held in committee.]
10:47:46 AM
There being no further business to come before the committee,
Chair Stoltze adjourned the Senate State Affairs Committee at
10:47 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 128 - SSTA Presentation - Sovereign Wealth Fund - Malan Rietveld 1.26.2016.pdf |
SSTA 1/26/2016 9:00:00 AM |
SB 128 |
| SB 128 Sponsor Statement - Governor's Transmittal Letter 1-15-2016.pdf |
SSTA 1/26/2016 9:00:00 AM |
SB 128 |
| SB 128 Supporting Document - DOR Hearing Request Letter 1-20-2016.pdf |
SSTA 1/26/2016 9:00:00 AM |
SB 128 |