Legislature(2015 - 2016)BUTROVICH 205
02/09/2016 09:00 AM Senate STATE AFFAIRS
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| SB114 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 9, 2016
9:01 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
SPONSOR SUBSTITUTE FOR SENATE BILL NO. 114
"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; and providing for an effective
date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 114
SHORT TITLE: PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
SPONSOR(s): SENATOR(s) MCGUIRE
04/18/15 (S) READ THE FIRST TIME - REFERRALS
04/18/15 (S) STA, FIN
02/01/16 (S) SPONSOR SUBSTITUTE INTRODUCED-REFERRALS
02/01/16 (S) STA, FIN
02/04/16 (S) STA AT 9:00 AM BUTROVICH 205
02/04/16 (S) Scheduled but Not Heard
02/09/16 (S) STA AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
JESSE LOGAN, Staff
Senator McGuire
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Addressed the dividends from royalties plan
in SB 114.
ACTION NARRATIVE
9:01:05 AM
CHAIR BILL STOLTZE called the Senate State Affairs Standing
Committee meeting to order at 9:01 a.m. Present at the call to
order were Senators Wielechowski, Coghill, Huggins, McGuire, and
Chair Stoltze.
SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
9:01:43 AM
CHAIR STOLTZE announced the consideration of SB 114 and noted
the sponsor substitute. He said the bill is not necessarily
Senator McGuire's plan, but the legislation incorporates a lot
of ideas from other folks as another option for addressing the
state's fiscal crisis. He asked that Senator McGuire provide the
committee with an overview of SB 114.
SENATOR MCGUIRE said her hope is SB 114 is the Senate's
presentation. She detailed that she started looking at ways to
stabilize the way Alaska's budget was put together in January
2015. She said the Alaska budget process was a volatile ride
because the state was almost completely dependent on one
commodity. She said she started working with Senator Kelly and
floated ideas with other people to put together a series of
principles that led to SB 114.
She set forth that SB 114 was a placeholder for the Senate to
begin a conversation about the state's fiscal gap. She asserted
that her intent was not to sell the committee members a
particular idea, but to address why she believes the principles
in SB 114 are sound and why they were chosen over other
principles.
9:04:10 AM
She explained the history of the Alaska Permanent Fund as
follows:
In November 1976, there was a voter approved
constitutional amendment creating the Permanent Fund.
In February 1977, the 9th Alaska Legislature created
it officially through a committee substitute to HJR
39.
SENATOR MCGUIRE detailed that a statutory overlay created the
Permanent Fund Dividend (PFD) in 1982, an important piece for
the committee and public to understand. She pointed out that
people often refer to the Permanent Fund and the PFD
interchangeably. She emphasized that the Permanent Fund itself
was created constitutionally and SB 114 does not make changes to
the fund's constitutionally protected corpus. She detailed that
the 12th Legislature proceeded in 1982 with a statutory overlay
and created the Earnings Reserve Account (ERA) to inflation
proof the Permanent Fund and pay out dividends. She emphasized
that SB 114 proposes to change statute and not the constitution.
She opined that the statutory overlay was a reflection of the
values that one legislature does not bind another. She
summarized as follows:
Here we sit in 2016 and the question is whether it is
appropriate or not for us to consider that the ERA
doesn't just pay out a dividend, that we may in fact
need to redistribute the way that those payments go to
stabilize government.
9:06:38 AM
CHAIR STOLTZE noted that Senator McGuire skipped over the
Supreme Court ruling on Zobel v. Williams. He pointed out that
the "Zobel ruling" addressed the dividend's residency parameters
and not its constitutionality.
SENATOR MCGUIRE continued as follows:
You have the constitution, you have the corpus that's
created and a whole series of statements about why
that was created. You have the statutory overlay of
the Legislature at that time, a lot of dialog about
why it was decided that the ERA would create a
dividend; but also, understanding that the first
decision to payout a dividend was based on a notion of
rewarding longtime pioneers in the state, those that
have been here many years.
9:07:39 AM
She detailed Zobel v. Williams as follows:
There was a gentleman with the last name "Zobel" who
presented a court challenge that went all the way up
to the Supreme Court of Alaska; it was decided June 14
of 1982 that said that the plan as the Legislature had
conceived of it violated the equal protection clause
by creating a residency requirement that was too long.
So the rest is history after 1982, the dividend was
paid out to every man, woman and child that had lived
in the state for more than two years, and that's an
important part of the history of it, just to
understand that the original creators in the
Legislature didn't envision that it would be paid out
the way that it ultimately was paid out as a result of
"Zobel."
9:08:30 AM
SENATOR MCGUIRE continued to address the creation of the PFD as
follows:
Just to think for a second as you are envisioning what
it would have been like to be in that Legislature that
created it. In the year 1982 there were 1.6 million
barrels a day chugging through the Trans-Alaska
Pipeline, rising all the way as we know in 1989 to 2.1
million barrels a day and adjusted for today's dollars
the price per barrel was $77. So that's just something
else to keep in mind when the Legislature decided to
create the ERA with a mission of only paying dividends
to Alaskans, that we were doing very well,
financially.
She addressed the state's $3.5 billion to $4 billion deficit as
follows:
There's a deficit, we know that, and there's a
difference between what we have said we will pay out
in operational costs. We cut the capital budget last
year, almost entirely, except for "matches," and the
public has kind of missed out on that. So I would like
to emphasize again and again that we have enacted
heavy spending cuts over the last two years. We have
several accounts, but revenue models show that if oil
prices do not rebound, those savings will be gone
within about two years. My opinion is we can't wait
and hope for high oil prices and the price of inaction
could be disastrous for the state's future.
SENATOR MCGUIRE addressed Alaska's FY16 situation as follows:
I don't disagree with many of my colleagues that
perhaps $5.2 billion is too high, but what I will say
is that everything we've looked at in our office shows
that unless you fundamentally restructure the
government in core ways that beyond about a billion
more, you're going to start getting into very serious
opportunity costs for federal matches and a great
percentage of capital that's infused into the private
sector as well as jobs, government jobs themselves
which also contribute to the economy.
She detailed how the state was paying for FY16 as follows:
· $3.608 billion from savings.
· $531 million from "other revenues."
· $1.062 billion from oil revenues.
She remarked that the state's spending model was upside down and
asked how a household would feel if the majority of its expenses
were paid from savings and other revenues. She opined that
Alaska has both a spending problem and a revenue problem due to
its dependence on a single commodity to balance the state budget
that is combined with low oil volume and prices.
9:11:30 AM
She said she reflected on Alaska's problem by addressing the
"Five Stages of Grief" when drawing up SB 114:
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
She noted that the committee recently had a presentation by
Bradford Keithley where some cuts were recommended, but the
basic proposition was to wait for oil to get back to $80 a
barrel. She commented as follows:
So that brings you to the "bargaining" part again and
I kind of went through that exercise mentally and
thought maybe we really don't have to stabilize the
volatility of this commodity and we don't have to
think about restructuring the Permanent Fund, and then
I went all the way back through the "stages of grief"
to acceptance.
9:12:28 AM
SENATOR MCGUIRE said the Senate State Affairs Committee was
tasked with looking at the relationship between the public, the
constitution, things created by the constitution and the
statutory overlays that come from the legislatures. She
addressed the "status quo" from the cost of doing nothing and
referred to a chart that addressed "Unrestricted General Funds
(UGF) Revenue and Budget" from FY16-FY25. She pointed out that
the chart showed a consistent fiscal gap of approximately $3
billion between revenue and the budget from FY16 through FY25.
She addressed a "status quo" chart and its impact on the
dividend check as follows:
In this case you can see that if we do nothing, by
about FY21, unless a miracle happened which would be
about $109 a barrel with the volume we have today, the
dividend program will likely end and the choice will
be harder earlier. In FY19 that's going to be the
place where all $7 billion that is left in the
Constitutional Budget Reserve (CBR) and the General
Fund will have been completely used up because you can
see with only $1 billion roughly in revenues and a
little more in other revenues, you need about $3.5
billion a year to balance the current budget.
She set forth that the question for the committee was whether
the Earnings Reserve Account (ERA) was to continue to be used
exclusively to payout a dividend or for stabilizing the
government. She asserted that waiting was not a good option
because the Legislature would run out of choices that allow for
being more nimble. She detailed as follows:
You will have used up all of the $7 billion that's
ready on hand in your General Fund and then with a
three-quarters vote in your CBR, your savings, and
then you will be with your back up against the wall
facing that inevitable question that we could face
today a little calmer and a little more rationally.
9:15:03 AM
SENATOR MCGUIRE addressed the state's budget reserves, absent of
new revenues as follows:
The price of oil-per-barrel times the volume is
roughly $1 billion. Unless something dramatic changes,
what we have left, besides the corpus that's
constitutionally protected, is roughly $14 billion and
you divide them roughly in half between the ERA and a
combination of the CBR and the General Fund.
She summarized that if nothing is done, the CBR will gradually
go down and ultimately a decision will have to be made in FY18
whether to simply use the ERA to payout dividends or as another
way of stabilizing the government.
9:16:09 AM
She revealed that she applied five principles when crafting SB
114:
1. Retain a dividend.
2. Reduce the volatility in the state budget.
3. Clearly expose the size and cost of government.
4. Endure to allow maximum use of the state's wealth over
generations.
5. Simple and easy to implement.
She addressed "retaining a dividend" in SB 114 as follows:
There are other solutions out there that utilize a
Percentage of Market Value (POMV) approach that do not
guarantee a dividend. I think the dividend has become
a part of Alaska's culture; I think it has done
exactly what it was intended to do to connect the
people to the fund in a way that has allowed for its
protection and I also think that there is an economic
role. Bradford Keithley talked about it, others have
talked about it, rural Alaskans depend on it, those in
lower-income levels depend on it and certainly there's
commercial value to it circulating.
She addressed "the volatility in the state budget" as follows:
This was actually the most important to me. When I
came into the Legislature, I was absolutely shocked in
my first budget cycle to realize that the way that we
budgeted was to be presented with a fall and spring
forecast telling us roughly what the value of this
single commodity would be. I said in my office, "At
least it's not pork bellies," but it may as well be.
Commodities are volatile, as we know they are valued
not just by facts, but by perceptions in world markets
far away from us and the fact that we would simply
say, "We'll decide what we can spend based on that
single value," I think is not appropriate.
SENATOR MCGUIRE addressed the principle to "clearly expose the
size and cost of government" as follows:
So that downward pressure would ensure that Alaskans
could begin an honest assessment of needs versus
wants, also another important principle in my bill.
There are other bills out there that use similar
principles, but were designed to give it a dollar
amount to serve.
So we agree that $5.1 or $5.2 billion is the cost and
size of government, this bill does not do that on
purpose; it purports to change the way we distribute
the earnings of the Permanent Fund and to guarantee a
dividend for the people, but it's only designed to
bring in about half of our problem, so roughly $2
billion. My hope is that future legislatures will
continue a conversation about what Alaskans really
want and need.
I think we all know this in our own families that you
have times of surplus where you add on to your home,
you buy extra things for your children, you have
things you might really enjoy, and honestly if the
family sat down they would probably be sad to give
them up, an extra playhouse or extra tutoring in a
musical instrument or something like this, but when it
comes down to it, if that family has to contract,
they're going to go back to the basics, they are going
to make sure there's food in the refrigerator and it's
going to be milk and bread and your basics first, and
then the rest comes on top of it; Alaskans are going
to have to have that conversation, what are the
staples and what are the extras.
She explained "the principle for the bill to be enduring" as
follows:
It should be enduring to allow maximum use of our
wealth over generations so that benefits and burdens
are shared and this is another reason that I think
acting now is important. Arguably we have acted too
late. The POMV bill that I voted for when I was a
freshman 16 years ago would have stabilized government
already and affected the dividend four times to the
tune of about $50, we wouldn't be sitting here today
facing this problem and we would have had more
choices, but if we wait now beyond today, you'll have
fewer and fewer choices and the net effect of that is
that it disproportionally impacts in a negative way
the future generations, our grandchildren and
children, and I don't think that is fair.
SENATOR MCGUIRE summarized that the fifth principle should be
that the bill is simple and easy to implement.
9:20:28 AM
She explained "what SB 114 is not" as follows:
It's not a raid on the Permanent Fund. The Permanent
Fund cannot be touched without a constitutional
amendment by the people and it remains that way in
this bill. SB 114 would only draw funds from the ERA.
It's also not a way for the government to increase the
budget, this is a really important point. I think that
the public is right to be skeptical about us looking
at changing the way the Permanent Fund is distributed
if our only goal is to bloat government and to put
more capital projects in that they may or may not
agree with; I think that is a very fair point, many
people in this state believe that the government is
too large.
Finally, it's not a dividend killer, this is the only
plan I see that will guarantee one. I'm anxious to
continue the conversation with this committee, but
there are three bills right now out there that propose
a couple of different methods, mine is the only one
that I think guarantees a dividend. If you wait until
you are at that place where you are looking at
touching the corpus, I don't believe a dividend
survives.
She detailed "what SB 114 is" as follows:
SB 114 is a way to connect Alaskans to their share of
natural resources, it's a way to protect your dividend
into the future. Without a structural change, the
dividend will go away in a few short years, I predict;
it is a way to ensure that services you enjoy can
continue to be provided.
As much as I have talked about cutting the budget, I
think it's important to understand and appreciate here
in the State Affairs Committee that we all benefit
from a certain size of government; that's been a
tenant of any civilization, particularly those that
have democracy at hand that we don't have to stand out
in our driveway with our guns every morning and sort
of guard our property. We have police, public safety,
firefighters, we have people who provide public
education and even if you don't partake in it, even if
your children are educated privately, I think we can
all agree that we would like our general population to
be educated, so public education is a good thing. The
Marine Highway for those that live here, that's a
lifeline. Parks and recreation has become an
interesting point, when you look at my generation and
younger, in their top five reasons that they will move
and can move now, they can quite literally work from a
computer and they can teleport. Why will they
relocate? Parks and recreation are in the top five, so
are schools, they want places they can raise a family
and enjoy a good quality of life. Fish and game
management, I don't have to say a lot there, you know
this committee cares a lot about that.
9:23:30 AM
SENATOR MCGUIRE addressed a graph by Gunnar Knapp regarding the
impacts of selected options for reducing the deficit by $100
million. She asserted that the impacts from cuts should be
considered when talking about the size of Alaska's government.
She pointed out that the largest single item of things paid out
was the PFD, $2.4 billion. She remarked that Bradford Keithley
talked about the impact of the PFD and everyone was aware of
that. She summarized that reducing the deficit impacts state and
private sector jobs.
CHAIR STOLTZE asked if Gunnar Knapp was speaking for the
University of Alaska Anchorage Institute of Social and Economic
Research (ISER).
SENATOR MCGUIRE answered that she believed so. She detailed that
Mr. Knapp's report was gleaned for the Alaska Business Monthly
magazine. She conceded that Mr. Knapp should be asked to verify
his report's affiliation.
9:25:31 AM
She addressed spending limitations and commodity price
volatility. She asserted that without oil tax's revenue flowing
through the ERA, available general funds will continue to swing
with commodity prices. She said some volatility will remain
unless limitations are put into place and there are many
options.
She revealed that she purposely left places open in SB 114 for
the committee to fundamentally focus on a spending cap. She
admitted that many Alaskans are skeptical about spending if the
oil prices go up or if production increases where the
Legislature simply goes back to spending exactly what revenue is
brought in. She suggested that language could be added that
says, "In fiscal year "X," the appropriation cannot exceed 120
percent of the previous year's draw." She noted that SB 114 is
pegged in at a POMV of 5 percent, but the reality is the
Permanent Fund earnings have been more like 6.5 to 6.8 percent.
She suggested that the POMV could be a range between 3 and 8
percent, depending on returns, oil tax revenue, cash flow needs,
capital project outlays, etc. She continued that a POMV range
would give some flexibility to provide some downward pressure.
She summarized that a final option would be to create an overall
spending cap.
9:28:12 AM
CHAIR STOLTZE called attention to a spending cap and noted that
the Legislature has had very little success, going back to a cap
approved by the voters in 1982. He pointed out that the CBR
started out as a spending limit by Senator Faiks that evolved
into the CBR Fund as a compromise. He suggested that a revenue
cap be considered where limitations are placed on what can be
drawn. He opined that the public can grasp a spending limit more
than revenue limit, but a revenue limit might be a
consideration.
SENATOR MCGUIRE agreed with Chair Stoltze and thanked him for
his suggestion. She noted that she has enlisted input from
different individuals. She remarked that she liked her first
idea better as being more of an appropriation limit.
SENATOR MCGUIRE addressed the state's $3.5-$4 billion deficit
due to commodity price volatility. She said there is one
equation for Alaskans to burn in their mind is that the story of
Alaska is:
Oil Price x Volume = State Budget.
She reviewed the state's history that is tied to volatile and
unstable oil prices. She asserted that the difference today was
lower-volume oil production. She said current production was
hovering around 500,000 barrels a day, resulting in $108 per
barrel to balance the budget. She pointed out that world events
have impacted oil: China's economic contraction, the shale
revolution from fracking, and OPEC's reduced power.
9:32:29 AM
SENATOR HUGGINS pointed out that Alaska cannot control the price
of oil, but the state can control volume. He asserted that the
state has to keep "wildcatters" operating and exploring on the
North Slope to address future revenue.
SENATOR MCGUIRE opined that the state's budget planning lies
between knee-jerk and 30-year planning. She remarked that
longer-term planning would help the state avoid being in a
crisis-driven reactionary mode. She noted a quote from Albert
Einstein, "We cannot solve our problems with the same level of
thinking that created them."
9:35:08 AM
She called attention to 2016 oil-pricing forecast graphs from
the Economist Intelligence Unit (EIU), The World Bank, and the
U.S. Energy Information Administration. She said predicting
future oil prices is difficult and noted that all three
organizations' forecasts were inaccurate. She set forth that the
question is should the state bet its future on oil prices.
9:38:08 AM
She conceded that the public has a trust issue where they are
being asked to consider a fundamental statutorial restructuring
of the Permanent Fund. She remarked that accusations have been
made that the Legislature never saves and always uses the money.
She referenced a graph that showed end-of-year balances of State
Reserve Funds, excluding the Permanent Fund, for the increased
balances in the Statutory Budget Reserve Fund and the CBR Fund,
specifically from 2008 to 2014. She reiterated that depending
exclusively on a volatile commodity was not smart, but noted
that even though the Legislature saved money during high oil
prices, savings ultimately did not save the state. She asserted
that a fundamental structural problem needs to be addressed in
the future.
9:40:28 AM
SENATOR MCGUIRE referenced a chart that showed how the
Legislature was spending $5.2 billion in FY16. She pointed out
that the payment for the PFD checks was the state's largest
expense, followed by the Department of Education and Early
Development, and the Department of Health and Social Services
(HSS); the two departments make up between 50 and 60 percent of
the state's budget. She explained the impacts on cutting the
budget as follows:
We talk about this all of the time, we say if we are
going to get below $5.2 billion, we all understand
that the cuts and restructuring are going to have to
come in part from those two areas. So it's going to
have to be a fundamental change in the way that we pay
out through the foundation formula, dollars, or it's
going to be in how many schools we fund; that
conversation is taking place, it's going to have to be
in Medicaid and whether or not a lot of the pre-
screening and extras that have be added legislatively
on top of the federal mandate from Medicaid. Are we
going to continue to provide those or not? Those are
hard conversations, things like colorectal cancer
screening and mammograms for poor people, those are
hard conversations and that's the only way you're
going to get to a big budget cut.
She explained the need to address changes outside of budget cuts
as follows:
The last point on this slide that is important to
understand why I came forward with a restructure of
the payout on the corpus of the Permanent Fund is to
show that you can't get there with cuts alone. You
could literally cut every dollar in HSS and every
dollar in Education, every job, and you still would
not fix the budget deficit and that's an important
thing to think about. Yes, we should restructure. Yes,
we should consider cuts, but you cannot get there by
cuts alone.
9:42:41 AM
SENATOR MCGUIRE addressed potential new revenue from the
governor's "Sustainable Alaska Plan" as follows:
The next slide shows that you can't get there by
revenues and other-revenues alone either. That is why
you come back to the point of the Permanent Fund, it's
not that any legislator goes there lightly, it's that
you have to go there, the math doesn't make sense any
other way. So this slide shows you the potential new
revenue from the governor's "Sustainable Alaska Plan,"
this is literally the modeling of every revenue that
he has put in there and so you see the income tax as
he has it modeled, Governor Walker, is $200 million.
Our office and David Teal and others have estimated it
would be approximately $50 million to put a plan in
place, a system administering an income tax because we
don't have one right now. So you can argue about those
numbers, you can even increase the amount of the
income tax up to its most illogical cap and you are
still only going to get about $400 million from that.
The oil and gas revenue proposal that he has is $100
million; tobacco, alcohol, motor fuel tax, I mean you
can just see how small these things are. Then in the
purple you see the deficit [$3.6 billion]. So just
compare them, the visual is absolutely compelling,
there's just no way to get there with revenues alone.
9:44:08 AM
CHAIR STOLTZE noted that the administration has not presented
what an appropriate level is for a sustainable budget. He
remarked that the administration has maintained that enough has
been cut. He asked how Senator McGuire's plan addresses budget
spending and cuts.
SENATOR MCGUIRE replied as follows:
To be very clear, my plan is predicated on the fact
that the size and cost of government is too large; so
that's the first premise and because of that, mine is
not a whole plan, it doesn't purport to equal a
number, only purports to deal with the one piece of
the puzzle that has to be dealt with which is the
single largest asset we have in the Permanent Fund
corpus. The premise behind it is that with my plan
you'll bring in approximately $2 billion and that will
put you on a glide path that will stabilize the
volatile commodity that we have and stabilize
government into the future, but it still leaves open
the conversation for restructuring the size and cost
of government which has to occur, but it forces that.
The governor's plan, respectively, does not because if
you adopt that plan today, you would agree and assume
that $5.3 billion is the appropriate size and cost of
government and I feel in doing that, quite frankly,
the governor knows that; I oppose that plan because I
think the Legislature and the public need this
conversation to happen, they have to have it happen,
so this is only meant to stabilize one part of it
because on the one hand, as Senator Huggins said, we
need to go somewhere between knee-jerk and 30-year, it
is irresponsible to just let it completely go to the
wire, that would also encourage the same conversation,
but with fewer choices.
So my bill does not currently contain a revenue-
restraint measure and I would like this committee to
put its prints on it that way, and it also does not
contain any other revenue raising device; there's no
income tax, no alcohol taxes, nothing else is in this.
So that would have to be a conversation upstairs on
the "fifth floor" [Senate Finance] about whether they
would like to incorporate SB 114 as part of another
package, but respectively I think this is the best
plan, the best way to deal with the Permanent Fund.
9:47:07 AM
SENATOR HUGGINS agreed with Senator McGuire that the
conversation on tailoring the budget to a sustainable level
should have happened yesterday, but needs to happen today or
tomorrow. He remarked that both parties in the Legislature need
to be part of the conversation to bring forward whatever
packages there are for the state's budget. He asserted that
Alaskans are angry that the Legislature is spending their money
on lobbying them to take some of their money in taxes. He opined
that on the other hand, Alaskans understand that the Legislature
has to do something. He commended Senator McGuire for her
presentation on a hard conversation that Alaskans can hopefully
get their arms around.
SENATOR MCGUIRE analogized that SB 114 is liken to addressing a
tooth infection during its early stages. She remarked that
continuing to live in denial, the first state of grief, is
easier.
9:49:16 AM
SENATOR MCGUIRE reiterated that the budget gap cannot be closed
with cuts alone or with broad-based revenue alone. She said the
reality is a sound fiscal solution will necessarily involve the
Permanent Fund.
She reiterated that if the PFD was considered spending, the PFD
is the largest single FY16 budget item, even excluding inflation
proofing. She specified that the PFD was $1.4 billion in FY16,
approximately $2.4 billion with inflation proofing. She
addressed a chart that showed the disparity between departments
when compared to the expenditures for the PFD, Department of
Education [$1.302 billion], and the Department of Health and
Social Services [$1.165 billion].
9:51:40 AM
She said her intent is to compare the governor's plan [SB 128]
and SB 114. She asserted that her office had worked with the
legislative-finance people as well as the administration to
share numbers and data. She revealed that royalties go to
dividends under both plans. She asserted that preserving the
dividend was important to her, but also understanding that the
state could not continue financially paying out the dividend as
it had. She disclosed that previous discussions with Alaskans
had shown to her that most people did not realize how dependent
the state is on oil. She pointed out that early presentations in
the committee noted that Alaska was the most hydrocarbon-
dependent democracy on the planet, no other state depends on one
source of revenue.
She explained her process in creating the dividend plan in SB
114 as follows:
I decided that when we restructured it, we should pay
a dividend out based on royalties, so if the state
does well, we do well. If the oil industry does well,
you do well. It's a partnership and that is the
partnership that exists today, but let's "call a spade
a spade," let's get Alaskans in the business of
creating a healthy economy, one that is competitive
for both oil and gas, in the future by the way. This
is an exciting thing, I think, when you think about
the potential for revenue that will come in from the
gas line from monetizing North Slope gas; but the
governor took this model, he liked it, he agreed with
it, we met on it many times, the only difference there
is he takes 50 percent, he does a 50-50 split and in
mine I do an exact swap. So in my bill the dividend
would be larger, because it will be 74.5 percent of
the royalties, in the governor's it will only be 50
percent. My bill also guarantees a $1,000 dividend no
matter what.
9:55:37 AM
SENATOR MCGUIRE specified that the governor's plan moves the CBR
and oil tax revenue into the ERA. She noted that the committee
has discussed the potential legal issues with the governor's
plan and explained as follows:
There are clearly potential legal issues with this,
there's just no question about it, they are up front
about it, they understand it, but I don't think they
are resolved and I have a deep concern about it. So I
feel SB 114 is superior in the sense we are keeping
every exactly where it is, in state law. The CBR is
what it is, it remains, it is subject to a three-
quarters vote, it is available for us to use after
this restructuring to use as we need it. The ERA stays
exactly where it is statutorily, even though the
payout changes, and those are important premises.
She disclosed that SB 128 sets a target spending number where SB
114 uses a POMV approach. She detailed as follows:
The next is the governor's plan is not a POMV, it sets
a target number instead of $3.3 billion for withdrawal
and spending; this is telling the Legislature you have
"X" amount to spend every year and doesn't adjust for
market returns and actual earnings of the ERA, this is
a huge point right now for this committee to think
about. The reason that I believe my bill or something
like it is superior is because a POMV approach is a
tried-and-true method of an endowment, it has worked
in every major institution, every major capital
investment company, every government besides ours,
frankly, that has a sovereign-wealth fund uses a POMV.
So that's important for us as lawmakers and it's
important for the public because we are not taking a
risk on something new and it's also important because
a POMV gives you hindsight, you can look back over the
past five years and know exactly what happened.
She reiterated that predicting oil prices was difficult. She
asserted that the governor's plan is projecting as an annuity
plan. She set forth that the state should not be doing a 30-year
plan based on "a hope and a prayer."
9:58:12 AM
SENATOR MCGUIRE continued as follows:
SB 114 does not change oil-tax revenue, it still goes
right to the General Fund as I mentioned. The General
Fund stays, CBR stays, ERA stays, and all of the
accompanying AGIA opinions, Supreme Court opinions,
and statutes affecting those remain legal and
provable.
She summarized as follows:
The governor's plan is designed as an annuity, it's
going to look 25 years into the future which relies on
foresight. I like to have foresight, but I don't
always have it exactly and I think we can see in the
energy market that many don't. POMV is based on actual
values, so it is hindsight and we often say that
hindsight is 20/20 for a reason.
9:59:00 AM
She addressed a chart that showed the state's current cash flow
and payouts from royalties. She pointed out that the royalty
percentage going to the seldom addressed Public School Trust
Fund would remain in SB 114 [0.5 percent]. She added that the
necessity of a three-quarters vote to access the CBR remains as
well. She pointed out that the three-quarters vote for the CBR
often causes a problem when the minority party often finds
political power to try and leverage things they care deeply
about. She noted that a three-quarters vote to access the CBR
was required for the first time in a decade during last year's
session.
CHAIR STOLTZE addressed the previous year's CBR vote and noted
that a member of the House minority has said the Legislature
would remain in session until May or June unless their proposed
budget increases were agreed to.
10:03:06 AM
SENATOR MCGUIRE responded that she specifically premissed
"minority" and "majority" so that legislators could have an
honest conversation without people thinking it was pejorative.
She conceded that a minority party is going to use the tools
they have to advance causes they believe in, but a potential
conundrum of a potential increase could occur when the exact
opposite is needed for the budget. She pointed out that the
reason she brought up the CBR is that people do not like the
idea that the CBR would be eliminated in the governor's plan, in
addition to possible constitutional problems.
SENATOR MCGUIRE explained that a change from SB 114 would be the
addition of a POMV payout from the ERA to the General Fund. She
specified that the corpus of the Permanent Fund is not being
touched because the fund is constitutionally protected. She
explained that the narrowly passed legislative decision that
created the dividend would be changed. She specified that SB 115
currently pays a 5 percent POMV draw that goes directly into the
General Fund. She added that production taxes and less-volatile
revenues would continue to go into the General Fund as well. She
reiterated that the CBR remains as a cushion if needed.
10:04:56 AM
She stated that the next change from SB 114 removes inflation
proofing. She specified as follows:
Inflation proofing, again, everybody quibbles about
the numbers, call it $1 billion a year, roughly, we
spend inflation-proofing the Permanent Fund. We do it
because of a statutory requirement and that is $1
billion right there. The reason we are doing it is
because the POMV approach, by definition, inflation
proofs, that's why it is used; that's why that
particular model is used by endowments because it
maintains and protects your corpus so that it grows
into the future, allowing for some revenue to spinoff.
CHAIR STOLTZE noted that the inflation-proofing concept was
proposed by the late Elmer Rasmussen. He revealed that Mr.
Rasmussen said, "Inflation is like the thief in the night that
robs the value."
SENATOR MCGUIRE remarked that the priority for the committee
should be to address the revenue cap or the size of government
cap.
10:06:36 AM
She explained that another change from SB 114 addresses the
dividend source and calculation. She specified that SB 114 takes
74.5 percent of the previous year's royalties on all production.
She pointed out that new "wildcatting" discoveries would be
included and noted that a new 4-billion barrel potential field
was currently producing 100,000 barrels a day. She noted that a
new change to Alaska's Clear and Equitable Share (ACES) oil tax
regime makes the state more competitive with other oil-producing
states and countries should another oil-production spike occur.
10:08:45 AM
SENATOR WIELECHOWSKI described a scenario where the Permanent
Fund was $50 billion with a 5 percent POMV draw of $2.5 billion.
He asked if a 5 percent draw was a little bit on the high end.
SENATOR MCGUIRE responded that her office had debated the POMV
draw percentage. She said one of her preferred methods would be
to insert a 3 to 8 percent POMV range in the bill. She noted
that historical returns for the Permanent Fund have been about
6.8 percent. He pointed out that Representative Hawker's bill
was also a POMV at approximately 4 percent.
SENATOR WIELECHOWSKI readdressed his 5-percent draw scenario of
$2.5 billion and inquired if an additional 3 or 4 percent draw
would occur to cover the dividend in addition to inflation
proofing.
SENATOR MCGUIRE responded that there would be no inflation
proofing.
SENATOR WIELECHOWSKI asked if a 5 percent POMV with a dividend
that equaled last year's $1.4 billion draw was sustainable. He
remarked that a 3 or 4 percent total draw would be more
sustainable.
10:10:58 AM
SENATOR MCGUIRE replied that the POMV percentage can be altered
and noted that an upside and downside exists for each way. She
reiterated that a POMV range was probably the most appropriate
by giving Alaska the most flexibility for stabilization. She
continued as follows:
As far as the dividend payout, there are also some
conversations that we can have about that. Right now I
have it guaranteed to payout $1,000. You're correct,
in times where the commodity price of oil is lower,
there will be a need potentially to pull in revenue
and that depletes then the overall amount going into
government stabilization. So that's a question for the
committee, do they want to maintain that floor or not?
The other question is, do they want this program to go
into effect this year or wait?
10:12:20 AM
JESSE LOGAN, Staff, Senator McGuire, Alaska State Legislature,
Juneau, Alaska, pointed out that the PFD payment in SB 114 is
paid out only from royalties. He detailed that an additional $1
billion or $1.5 billion would not be removed from the ERA.
SENATOR MCGUIRE concurred with Mr. Logan as follows:
The old way of paying out $1.4 billion plus roughly $1
billion at $2.4 billion is gone completely under this
bill, so that no longer happens. I assumed what you
were saying is that because we guaranteed a $1,000
dividend that at 74.5 percent if you came in below
$1,000, you would have to pull a little bit to make up
the difference on that. Again, at $50 oil, you're at
about $1,700 dividend, so it moves depending on the
price per barrel; but just to be clear on the record,
the statutory-overlay of $1.4 billion and $1 billion
for inflation proofing is gone.
10:13:35 AM
SENATOR COGHILL asked Senator McGuire to verify that royalties
would make up the bulk of the dividend and then based on the
floor, the remainder would be paid out of the 5 percent that
goes into the General Fund.
SENATOR MCGUIRE answered correct.
CHAIR STOLTZE noted that SB 114 would be addressed at the next
meeting with the inclusion of an evening session to hear the
initial comments from the public as was done on the governor's
bill. He specified that the two bills were separate issues with
separate testimony.
SENATOR MCGUIRE commended the Senate for getting out of the gate
right away to look at either a revenue raising device,
restructuring, or a way at getting at the fiscal gap.
10:15:29 AM
She set forth that SB 114 was a swap between the dividend and
the Rents and Royalties (R&R). She said currently, 30 percent of
the R&R was deposited into the Permanent Fund and 69.5 percent
was deposited to the General Fund. She specified that a swap
would occur under SB 114 where 74.5 percent of all R&R would be
deposited into the Dividend Fund. She noted that the governor's
bill, with respect to the Permanent Fund part, does a 50/50 swap
rather than an even swap. She pointed out that the R&R deposit
into the Dividend Fund would include all existing leases to
date, but all future leases as well, including "wildcatting"
finds and future mining development.
SENATOR MCGUIRE said the dividend change from SB 114 gets
Alaskans to start understanding that a dividend check was a
product of teamwork for the state's shared subsurface rights.
She pointed out that Chairman Stoltze had remarked in a previous
committee meeting about the premise of Alaska's owner-state
where individuals give up the chance to have private investment
interest. She noted that a lot of Oklahoma and Texas families
for generations have private-direct royalty interest whereas
Alaskans share in the R&R. She conceded that Alaska's economy
can be more diversified, but in the near term, what the state
has is in its land. She summarized that under SB 114, no
Permanent Fund earnings would be used for the dividend and a
$1,000 floor would be set for the dividend as well.
10:17:41 AM
She explained that in exchange for the R&R to the Dividend Fund,
5 percent of the total value of the Permanent Fund, [Corpus +
ERA], would be withdrawn from the ERA and deposited into the
General Fund. She noted that the returns on the Permanent Fund
investments have historically averaged more than 5 percent and
added that the POMV concept plus the 25 percent R&R will
inflation-proof the Permanent Fund.
10:19:12 AM
MR. LOGAN detailed that the Permanent Fund investments'
historical returns have been somewhere between 6.7 to 6.9
percent. He specified that if a POMV draw is 5 percent, then the
remaining 1.9 percent would go to the ERA as inflation proofing.
He added that 25 percent of the R&R would go to the Permanent
Fund "corpus," as constitutionally required, to grow and
inflation proof the fund. He added that the semantics of
addressing "inflation proofing" and or "growing" the fund is
nomenclature that requires additional discussion.
SENATOR MCGUIRE summarized that the extra revenue from the 25
percent from R&R arguably inflation proofs the Permanent Fund.
She reiterated that the POMV concept, as done in education
endowments, also inflation proofs the Permanent Fund as well.
She referenced a graph that addressed the "Statutory Net Income
of the Permanent Fund" from 2011 to 2015 and noted that the
annual average was $2.6 billion.
10:21:35 AM
SENATOR MCGUIRE said another decision point for the committee is
to address two scenarios for the 2016 dividend: leave the
dividend harmless or begin the new methodology from SB 114. She
noted that the sponsor substitute for SB 114 holds the 2016
harmless, or "status quo." She pointed out that the Permanent
Fund Corporation has already put the money aside for on October
dividend payout.
She detailed the first scenario, holding the dividend harmless
as follows:
If we hold the dividend harmless, keep it in status
quo, the dividend as we know will be more than $2,000
to every man, woman and child that qualifies, meeting
the residency requirement. The total payout, about
$1.4 billion. The POMV is leaving you netting about a
$1.2693 billion net increase to the General Fund. So
that would cut the deficit by one third.
She detailed the second scenario, immediately enacting the new
formula from SB 114 as follows:
We pay the dividend out according to this new formula
and the dividend would be $1,023.74 and the amount of
the POMV that goes to the General Fund would be $1.958
billion, so that cuts the deficit in half.
10:23:49 AM
SENATOR COGHILL asked what would occur if the dividend would
rest totally on the R&R.
SENATOR MCGUIRE replied that the second scenario would occur.
She pointed out that SB 114 is based on an actual average model
while the governor's plan is entirely based on a probabilistic
forecast model. She asserted that if SB 114 was adopted, a
$1,023.74 dividend would still be a big dividend. She noted that
previous testimony had shown that dividends above and below
$1,000 over the historical course of the PFD was nearly 50/50.
SENATOR COGHILL asked if SB 114 and SB 128 essentially shifts
risk to the dividend while saving the government.
10:26:32 AM
SENATOR MCGUIRE replied that the easy answer was yes, but
asserted that some volatility remains on both sides under SB 114
because the state's main bread-winner, crude oil, is still a
commodity that is traded on many markets while being effected by
global decisions. She conceded that volatility to the government
would be reduced, but noted that the dividend would have a
$1,000 floor with an upside that benefits Alaskans at the high
end too. She noted that dividends could be as high as $3,000.
10:27:49 AM
SENATOR COGHILL commented that SB 114 was a fundamental shift of
tying the dividend to a renewable-fund that is based on the
royalty value of oil. He opined that the upside is everybody
will focus on Alaska's production rather than watching how a
market ebbs and flows in New York. He continued as follows:
The risk that is so volatile really is in, not just
our royalties, but it was also in the tax base on the
severance tax that we put in, huge part of that,
because that's what's gone right now.
SENATOR MCGUIRE agreed with Senator Coghill's volatility
assessment. She pointed out that had the legislature not changed
the broken system of ACES, today the state would be trying to
find an additional $420 million.
She continued to address SB 114 versus SB 128 as follows:
The other point that I want to make is that mine [SB
114] is a hybrid. If you think about the governor's
plan is the most risk that you could have, it's the
most volatile. What we do in mine is it's true that we
are asking Alaskans to partner with us in creating
more opportunities for production and as a premise of
that, the dividend will be primarily based on R&R;
however, it's a hybrid because we are endowing their
dividend by saying it will be $1,000 no matter what
and so it will protect on the low end, but we are
giving them the opportunity on the high end.
She addressed the role of government pertaining to the dividend
as follows:
Right now we are sitting in a scenario that I don't
think any company or any household would do which is
that we are about to pay, as we just did, another
$2,000 dividend to every man, woman, and child while
the state is on paper in bankruptcy and I just
encourage us to think about that. The Permanent Fund
dividend check is a value that we appreciate and it is
important, but it's not the only thing that is
important and even Republicans can say that because we
know as I pointed out in those other slides that
government spending, and especially in a state of only
735,000 people, is directly intertwined to the private
sector and that's part of the reason that the private
sector has gotten so involved in this is that they've
got capital outlay "A" and capital outlay "B," and
they are saying, "We're not going to invest in capital
outlay "A" if we don't have confidence that you guys
are going to stabilize the government, at least at the
basic." Again, this only goes halfway there, and so
you can and should make cuts in restructuring on top
of it, but we have to have public safety, we have to
have roads, they have to be maintained, we have to
have some level of public education, that's going to
cost something, and then on top of that, there is that
intersection between the private sector and the public
we talk about. We have already gone from a Triple-A
bond rating to a Double-A bond rating and what that
means materially is $100 million more every time we
borrow $1 billion and if it goes further, that's even
more interest we pay out; but more importantly, it's
the signal to the private sector because now the banks
are looking at this and this is what happened in the
'80s and why it happened so much quicker in Alaska
because we are such a small polis, we talk to each
other, then your housing prices start to erode. So I
just want us to consider that the dividend itself as a
payout is an important thing and yes we should
consider it and this bill protects it, but it's not
the only thing.
10:32:20 AM
SENATOR HUGGINS pointed out that SB 114 would payout a dividend
of $1,023 in 2016 whereas the governor said SB 128 would have a
$1,000 dividend the first year with a "falling" dividend after
that.
SENATOR MCGUIRE responded to Senator Huggins' statement as
follows:
This is a very important part about SB 114 and the
difference from the governor. When I proposed the
swap, I gave the entire upside benefit of the 75
percent to the people of Alaska, his bill cuts it in
half and in my opinion, marginalizes the opportunity
for Alaskans to have a higher dividend, because as you
have run it every time in committee, you will do the
numbers and you can see that it's 50 percent of what
mine will be. So this year there was a political
compromise to say that it will be $1,000 this year,
but there's no mechanism in the governor's plan to
ensure $1,000 or more in the future and so it will
literally be 50 percent of the royalties and if you
run some of the numbers in the probabilistic scenarios
at $30 oil, you're at about a $350 dividend this next
year, so it's a major difference between the two bill.
10:34:26 AM
CHAIR STOLTZE announced that SB 114 will be back before the
committee next week.
10:38:57 AM
There being no further business to come before the committee,
Chair Stoltze adjourned the Senate State Affairs Committee at
10:38 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SS for SB 114 Presentation to SSTA 2-9-16.pdf |
SSTA 2/9/2016 9:00:00 AM |
SB 114 |
| SS for SB 114 Fiscal Note DOA-VCCB 02-03-16.pdf |
SSTA 2/9/2016 9:00:00 AM |
SB 114 |