Legislature(2015 - 2016)BUTROVICH 205

02/09/2016 09:00 AM Senate STATE AFFAIRS

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09:01:05 AM Start
09:01:43 AM SB114
10:38:57 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Presentation by Sponsor
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled 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                                                               
     - 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                                                               
9:04:10 AM                                                                                                                    
She  explained  the  history  of the  Alaska  Permanent  Fund  as                                                               
     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
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                                                                    
9:08:30 AM                                                                                                                    
SENATOR MCGUIRE continued to address the creation of the PFD as                                                                 
     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,                                                                    
She addressed the state's $3.5 billion to $4 billion deficit as                                                                 
     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
   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                                                                    
   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                                                                    
     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                                                                    
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                                                               
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                                                               
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                                                               
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                                                                    
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                                                               
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                                                               
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                                                               
SENATOR  MCGUIRE  responded  that  there would  be  no  inflation                                                               
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                                                               
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                                                               
SENATOR MCGUIRE responded to Senator Huggins' statement as                                                                      
     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