Legislature(2017 - 2018)BUTROVICH 205

02/02/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:31:16 PM Start
03:32:17 PM SB21
04:15:05 PM Presentation: Dr. Ralph Townsend - Institute of Social and Economic Research, Answering Questions on Alaska's Economy.
05:10:44 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Dr. Ralph Townsend, Institute of Social and TELECONFERENCED
Economic Research (ISER)
Answering Questions on Alaska's Economy
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
            SENATE STATE AFFAIRS STANDING COMMITTEE                                                                           
                        February 2, 2017                                                                                        
                           3:31 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Mike Dunleavy, Chair                                                                                                    
Senator David Wilson                                                                                                            
Senator Cathy Giessel                                                                                                           
Senator John Coghill                                                                                                            
Senator Dennis Egan                                                                                                             
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 21                                                                                                              
"An Act relating to appropriations from the income of the Alaska                                                                
permanent fund; relating to the calculation of permanent fund                                                                   
dividends; and providing for an effective date."                                                                                
     - HEARD & HELD                                                                                                             
PRESENTATION: Dr. Ralph Townsend, Institute of Social and                                                                       
Economic Research, Answering Questions on Alaska's Economy                                                                      
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 21                                                                                                                   
SHORT TITLE: PERMANENT FUND: INCOME; POMV; DIVIDENDS                                                                            
SPONSOR(s): SENATOR(s) STEDMAN                                                                                                  
01/18/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/18/17       (S)       STA, FIN                                                                                               
02/02/17       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
SENATOR BERT STEDMAN, Alaska State Legislature                                                                                  
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Sponsor of SB 21.                                                                                         
ANGELA RODELL, CEO                                                                                                              
Alaska Permanent Fund Corporation                                                                                               
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Explained the status of the permanent fund.                                                               
DR. RALPH TOWNSEND, Director and Professor of Economics                                                                         
Institute of Social and Economic Research (ISER)                                                                                
University of Alaska-Anchorage                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Addressed Alaska's economic issues.                                                                       
ACTION NARRATIVE                                                                                                              
3:31:16 PM                                                                                                                  
CHAIR  MIKE DUNLEAVY  called the  Senate  State Affairs  Standing                                                             
Committee meeting  to order at 3:31  p.m. Present at the  call to                                                               
order  were Senators  Wilson, Giessel,  Coghill, Egan,  and Chair                                                               
         SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS                                                                      
3:32:17 PM                                                                                                                    
CHAIR DUNLEAVY announced the consideration of SB 21.                                                                            
3:32:43 PM                                                                                                                    
SENATOR BERT  STEDMAN, Alaska State Legislature,  Juneau, Alaska,                                                               
set forth  that SB  21 is  very straight  forward and  simple. He                                                               
said  the  bill's goal  is  to  protect  the permanent  fund.  He                                                               
explained  that the  state has  struggled the  last two  or three                                                               
years through a budget deficit  without the fortune of increasing                                                               
oil production and  or prices. He said Alaska has  slipped into a                                                               
state with  massive hemorrhaging  of its  savings. He  noted that                                                               
the Legislature  put away  $16 billion  outside of  the permanent                                                               
fund,  but  the  savings  accounts have  been  depleted  to  $3.6                                                               
billion. He opined that $3.6 billion  may sound like a lot, but a                                                               
$2.8 billion deficit makes the amount very small.                                                                               
3:34:50 PM                                                                                                                    
He said over the last couple  of years the Legislature has talked                                                               
about how  to fix  the deficit through  budget reductions  or tax                                                               
increases,  but the  "clock  has ticked"  and  "Alaska's cash  is                                                               
burned."  He  set   forth  that  the  state   has  the  fortunate                                                               
opportunity  to  be  backstopped   by  the  permanent  fund  that                                                               
Alaskans  have  set  away   for  generations,  approximately  $56                                                               
billion. He  added that  the state  is also  fortunate to  be the                                                               
owners  of the  largest conventional-hydrocarbon  basin in  North                                                               
America, which  has been very  profitable for Alaska.  He pointed                                                               
out that his generation has lived  through a huge wealth boon and                                                               
asserted that  one of  the most  important things  his generation                                                               
can do in  public service is protect the state's  wealth that was                                                               
created for future generations.                                                                                                 
3:37:23 PM                                                                                                                    
SENATOR  STEDMAN opined  that  a  reoccurring structural  deficit                                                               
will bankrupt the  state. He set forth that the  intent is to get                                                               
out of the structural deficit  and move to more profitable times.                                                               
He pointed  out that not only  does the Legislature need  to make                                                               
sure  the  permanent  fund  is  protected, but  to  also  have  a                                                               
framework  to   bolt  other   solutions  to;   example,  spending                                                               
reductions, taxes, or improvements to the state's oil basin.                                                                    
He voiced  his concern  that the Legislature  can more  easily be                                                               
backed into the permanent fund's  earnings reserve account (ERA).                                                               
He  emphasized  that  the  permanent fund  is  protected  by  the                                                               
constitution, but  the fund's trading  profits and  dividends are                                                               
not. He  noted that  the Legislature  has appropriated  over time                                                               
about $7  billion to  the permanent  fund's corpus,  but ensuring                                                               
that  the state  has  a long-term  asset  for future  generations                                                               
requires   the  permanent   fund   to  be   protected  from   the                                                               
Legislature.  He  remarked  that  the  Alaska's  legislators  are                                                               
collectively the appropriators,  good or bad the  "buck stops" at                                                               
the Legislature.                                                                                                                
He explained that he put forward  a framework that he thought was                                                               
worthy  of the  Senate's consideration  and hopefully  beyond. He                                                               
said he offered  his framework as a starting point  and points of                                                               
discussion to  bolt onto. He  asserted that the  permanent fund's                                                               
current structure  has been a  good structure that has  been very                                                               
productive for the people, but a  hard look must be taken to make                                                               
the fund more protective because  only the corpus is protected by                                                               
the constitution whereas the ERA and the rest of it is not.                                                                     
3:41:04 PM                                                                                                                    
CHAIR DUNLEAVY  pointed out that  Senator Stedman  emphasized how                                                               
to  protect the  permanent fund  and  opined that  he was  really                                                               
talking about the ERA.                                                                                                          
SENATOR  STEDMAN  answered  correct  and specified  that  he  was                                                               
talking about  the entire $56  billion, roughly the value  of the                                                               
permanent  fund.   He  pointed  out  that   the  Legislature  can                                                               
currently  access  approximately   $9  billion  without  "trading                                                               
profits," in  addition to held assets  that can be sold  for even                                                               
more spending.  He voiced his  concern that the  Legislature ends                                                               
up cannibalizing the  permanent fund to work  through the state's                                                               
current  situation.  He  agreed  with  Chair  Dunleavy  that  the                                                               
permanent fund's corpus is protected, but the ERA is not.                                                                       
He  stated   that  SB  21   would  protect  the  ERA   and  limit                                                               
appropriations to guard the permanent  fund from being raided. He                                                               
provided an overview of SB 21 as follows:                                                                                       
   · Builds a new fiscal framework that provides a fair                                                                         
   · Continues the proper management of the permanent fund.                                                                     
   · Limits use for public service.                                                                                             
He revealed  that based  on financial  markets' history  over the                                                               
past  100 years,  pulling 4  percent to  5.5 percent  out of  the                                                               
permanent fund  will also allow  savings to last. He  opined that                                                               
higher withdrawals  will erode the permanent  funds' savings over                                                               
3:45:32 PM                                                                                                                    
He  specified  that SB  21  will  access  the permanent  fund  as                                                               
   · Withdraw 4.5 percent of the market value so that the fund's                                                                
     value does not erode for future generations.                                                                               
   · The permanent fund will grow most likely in perpetuity by                                                                  
     inflation proofing itself because the asset returns will                                                                   
    exceed the rate of inflation and withdrawal, on average.                                                                    
He pointed  out that over  the past 30  years there have  been 10                                                               
economic shocks in the financial  markets and the state will have                                                               
economic shocks  in the future;  however, limiting  the permanent                                                               
fund's  withdrawal might  not exceed  its rate  of return  in the                                                               
long run. He added that  limiting the withdrawal will protect the                                                               
fund from the legislative "wolves" from getting to it.                                                                          
3:47:44 PM                                                                                                                    
He  admitted   that  the  Legislature  cannot   fix  the  state's                                                               
financial situation  without the help  of the permanent  fund. He                                                               
asserted that the operating budget  cannot be reduced enough, and                                                               
the state cannot tax enough. He  said if the state is forced into                                                               
using the permanent  fund, how to protect the  permanent fund and                                                               
be fair with  Alaskans on the permanent fund  dividend (PFD) must                                                               
be addressed.                                                                                                                   
SENATOR  STEDMAN detailed  how SB  21 addresses  the 4.5  percent                                                               
withdrawal from the permanent fund as follows:                                                                                  
   · Half or 2.25 percent of the "citizens' money" goes to the                                                                  
   · Half or 2.25 percent goes towards "core services" in the                                                                   
     operating budget.                                                                                                          
   · Legislature's 2.25 percent can either be added to the PFD                                                                  
     or returned to the permanent fund during strong economic                                                                   
   · Market returns will be based on a five-year average over a                                                                 
     six-year period for budgeting purposes and to smooth out                                                                   
     fluctuation "ripples" from the financial markets.                                                                          
   · Addressing how the Legislature appropriates its 2.25                                                                       
     percent on an annual basis would not be a spending cap, but                                                                
     does exert downward pressure on the "appropriating body."                                                                  
He noted his concern that the  Legislature will get itself into a                                                               
situation over the  next couple of years where  billions from the                                                               
ERA are appropriated that cannot be replaced.                                                                                   
3:53:51 PM                                                                                                                    
He addressed page 3, "Current  Principles for the Permanent Fund"                                                               
and emphasized that SB 21 does  not change how the permanent fund                                                               
is currently managed.                                                                                                           
He  addressed page  4, "Current  Principles Work  - 8.66  Percent                                                               
Annualized  Returns for  Last  32.5 Years  ($734,000  in 1977  to                                                               
$56.3 billion  Last Week)."  He said  the permanent  fund returns                                                               
over  time   vary  due  to  economic   conditions  and  portfolio                                                               
allocations. He noted  that Ms. Angela Rodell, CEO  of the Alaska                                                               
Permanent  Fund,   was  in  attendance  and   could  address  the                                                               
intricacies of  the permanent fund  as well as her  comfort level                                                               
with the 4.5 percent withdrawal.                                                                                                
He addressed  page 5, "SB  21 (2017) Protects the  Permanent Fund                                                               
under  Current  Principles:  Invest Prudently,  Provides  a  Fair                                                               
Dividend,  Allows for  Reinvestment,  and Limits  the Amount  for                                                               
Government."  He  specified  that  SB   21  closes  the  door  on                                                               
government  spending  and  would  not allow  the  Legislature  to                                                               
appropriate  over  4.5 percent  out  of  the permanent  fund.  He                                                               
specified  that  the  Legislature  would have  to  take  spending                                                               
seriously during  a financial downturn  because the ERA  will not                                                               
be available  to draw upon.  He pointed out that  the Legislature                                                               
can build upon  the constitutional budget reserve  (CBR) or other                                                               
savings   accounts  outside   of  the   permanent  fund   if  the                                                               
Legislature  so chooses;  however,  the permanent  fund would  be                                                               
taken out of the discussion  as an absolute fallback of unlimited                                                               
proportions that  forces the Legislature  to act rather  than not                                                               
responding to deficits and swinging economic conditions.                                                                        
3:56:41 PM                                                                                                                    
SENATOR  STEDMAN  revealed  that  Sitka  switched  their  "little                                                               
permanent  fund" in  the 1990s  from all  bonds to  a percent-of-                                                               
market-value  approach with  an  annual payout  of  6 percent  to                                                               
their general  fund. He noted  that he assisted Sitka  with their                                                               
fund restructuring. He  said a 6 percent withdrawal  has shown to                                                               
be too  high where Sitka  has seen  a slow erosion  of purchasing                                                               
power over the  last 20-plus years. He asserted that  there is no                                                               
magic with a  4.5-percent withdrawal, but 6 percent  is too high,                                                               
and  2 percent  is too  low to  fix the  problems that  the state                                                               
faces in  addition to dividend amounts  coming down substantially                                                               
as well.  He set forth that  he is trying  to put on the  table a                                                               
framework that facilitates discussions  with the Alaska Permanent                                                               
Fund  Corporation, legislative  finance committees,  and all  the                                                               
experts to work collectively.                                                                                                   
3:58:23 PM                                                                                                                    
He addressed page 6, "SB 21  (2017) - Projected 4.5 Percent Draw,                                                               
Dividend Amounts, and  Other Funds" and asserted  that his intent                                                               
with SB 21 was  not driven by how much the PFD  should be, but by                                                               
what structure  should the  state have  to protect  the permanent                                                               
fund.  He said  with the  structure  in place,  the structure  is                                                               
split  50/50  and  the  PFD  is determined  for  the  public.  He                                                               
projected  that the  PFD from  SB  21 would  be in  the range  of                                                               
$1,700  in 2018  and total  $1.89 billion.  He admitted  that the                                                               
state's situation is so grave that  the PFD strategy will have to                                                               
be  phased  in,  but  the Legislature's  ability  to  access  4.5                                                               
percent  would  be  blocked.  He  said the  public  gets  a  fair                                                               
dividend, a  fair split,  and a  fair shake  for the  assets they                                                               
own, and the  legislature oversees. He set forth  that the wealth                                                               
created  over  the  last several  decades  continues  for  future                                                               
He addressed  page 7, "SB 21  (2017) - Safeguards the  Fund So It                                                               
Can  Grow and  Last for  Generations." He  reiterated that  SB 21                                                               
helps close  the fiscal gap  and provides a framework  to bolt-on                                                               
other tools  as the Legislature sees  fit, which will have  to be                                                               
added. He  asserted that  SB 21 helps  keep downward  pressure on                                                               
government  spending and  noted  that  one of  the  tools is  the                                                               
spending cap that Chair Dunleavy has  worked on as well as others                                                               
that will  be coming  out. He  said budget  reduction discussions                                                               
are  underway  in  addition  to  revenue  enhancements,  but  the                                                               
Legislature needs  a framework. He asserted  that the Legislature                                                               
needs  to  have public  support  if  the  wealth coming  off  the                                                               
permanent fund is structured to  be protected and shared with the                                                               
public.  He said  the public  would share  with the  general fund                                                               
where objectives  and obligations  for education,  public safety,                                                               
and the Department  of Natural Resources are met.  He opined that                                                               
without support  the public will  demand changes and that  is why                                                               
the Legislature needs to set stability and predictability.                                                                      
4:02:42 PM                                                                                                                    
SENATOR STEDMAN summarized that he is  one of the "wolves" in the                                                               
Legislature  and  there  are  60   in  total.  He  said  Alaska's                                                               
legislators   have   good   intentions,  but   collectively   the                                                               
Legislature is  very dangerous when  there is  a pot of  money in                                                               
front  of  it, especially  with  the  biggest stack  of  billions                                                               
relative to the  amount of people in the state.  He remarked that                                                               
other states  cannot even imagine  Alaska's wealth. He  set forth                                                               
that he  just wants  to make sure  that the  generation fortunate                                                               
enough  on the  timeline  of  life to  be  in  Alaska during  the                                                               
wealth-bubble deals with  the deficit to pass  the wealth forward                                                               
to the next generation of Alaskans.                                                                                             
CHAIR  DUNLEAVY opined  that some  legislators see  themselves as                                                               
"wolf  hunters"  who  go  after   the  "wolves"  to  protect  the                                                               
permanent fund.  He remarked that  Senator Stedman's  focus seems                                                               
to be on protecting the fund  and noted his argument that the ERA                                                               
is  a portal  to the  permanent fund  where withdrawing  too much                                                               
reduces the permanent fund. He  asked why Senator Stedman did not                                                               
propose a  constitutional amendment rather  than a bill  that can                                                               
be changed by future legislators.                                                                                               
4:04:36 PM                                                                                                                    
SENATOR  STEDMAN agreed  with Chair  Dunleavy and  explained that                                                               
his  decision was  based on  the public  supporting the  bill. He                                                               
said  he  thought  starting  with a  statutory  change  would  be                                                               
better, even though the next legislature can change it.                                                                         
CHAIR  DUNLEAVY  asked  how  a   statutory  change  protects  the                                                               
permanent fund.                                                                                                                 
SENATOR STEDMAN replied that if  the public supports the concept,                                                               
which he  thinks they  will when they  realize how  defensive the                                                               
bill is for  permanent fund and how the bill  does not change the                                                               
permanent fund's structure.  He specified that the  bill does not                                                               
put the  permanent fund at  risk of  being raided and  closes the                                                               
door and "welds  it shut." He opined that the  public is going to                                                               
be  very receptive  to a  constitutional amendment  and he  would                                                               
personally like to see one.                                                                                                     
CHAIR  DUNLEAVY  asked  to confirm  that  Senator  Stedman  would                                                               
support  a  constitutional  amendment   for  his  permanent  fund                                                               
SENATOR STEDMAN answered yes.                                                                                                   
CHAIR  DUNLEAVY pointed  out that  the  state has  a statute  for                                                               
decades that calculated  a PFD payout which was  vetoed this past                                                               
SENATOR STEDMAN answered correct.                                                                                               
CHAIR DUNLEAVY  opined that if  the permanent fund  protection is                                                               
not constitutionalized, the  "wolves" in one form  or another can                                                               
"monkey" with it. He asked  why Senator Stedman did not initially                                                               
advocate for his legislation to be a constitutional amendment.                                                                  
SENATOR STEDMAN  replied that Chair  Dunleavy made a  good point.                                                               
He stated  that his  legislation is  a point  of timing  where he                                                               
would  like to  see  the public  support  whatever framework  the                                                               
Legislature puts forward.  He opined that SB 21  is a cornerstone                                                               
that  is  straightforward like  an  endowment  portfolio with  no                                                               
"smoke and  mirrors." He said  he thinks the public  will support                                                               
and  want a  constitutional amendment  to keep  the "wolves"  out                                                               
because the  next several years  are going  to be tough  years in                                                               
the Legislature for  appropriating enough funds for  the state to                                                               
make its  payroll. He remarked  that he  would like to  see input                                                               
from  the  Alaska  Permanent  Fund  Corporation  and  the  Alaska                                                               
Department of Revenue.                                                                                                          
4:07:41 PM                                                                                                                    
CHAIR  DUNLEAVY  noted  that  Senator  Stedman  said,  "It's  the                                                               
people's  money" when  referring  to the  PFD.  He asked  Senator                                                               
Stedman if  he supported SB  1 and SB 2.  He specified that  SB 1                                                               
and  SB 2  would return  the  vetoed portion  of the  PFD to  the                                                               
people  of  Alaska.  He  said  he  wanted  to  be  sure  that  he                                                               
understood what Senator Stedman is  saying that he believes it is                                                               
the "people's money."                                                                                                           
SENATOR STEDMAN replied as follows:                                                                                             
     There's no  doubt, not only  is it the  people's money,                                                                    
     but it's the  people's oil, it's the  people's gas, the                                                                    
     "people's fish, bear,  and deer. We are  a state unlike                                                                    
     all other states  that is owned in commons.  We are not                                                                    
     Texas, we don't  have the "Ewing's Ranch" on  top of an                                                                    
     oil well, we collectively own it.                                                                                          
CHAIR  DUNLEAVY  remarked  that  he  looked  forward  to  Senator                                                               
Stedman's support on SB 1 and SB 2.                                                                                             
SENATOR  GIESSEL noted  that another  proposal from  the previous                                                               
year took  a higher percentage  from the  ERA. She asked  how the                                                               
lower percentage change  in SB 21 effects how  the permanent fund                                                               
is managed.                                                                                                                     
4:09:05 PM                                                                                                                    
SENATOR  STEDMAN  replied  that  Angela Rodell  from  the  Alaska                                                               
Permanent  Fund Corporation  would  be more  adept at  addressing                                                               
Senator Giessel's question.                                                                                                     
SENATOR EGAN pointed  out that the state would currently  be in a                                                               
more difficult financial situation if  it were not for the Senate                                                               
Finance Committee  that Senator Stedman chaired  when $12 billion                                                               
was into the CBR. He thanked Senator Stedman.                                                                                   
SENATOR STEDMAN replied as follows:                                                                                             
     It's all about timing, trying  to get public support. I                                                                    
     wish in  retrospect we would  have taken some  of those                                                                    
     massive  savings and  put them  in the  permanent fund.                                                                    
     None of  us expected  to have this  big of  an economic                                                                    
     downdraft. We  knew downdrafts come, but  this has been                                                                    
     a doozy  for the  state, so  it caught a  lot of  us by                                                                    
     surprise, I think.                                                                                                         
4:10:26 PM                                                                                                                    
ANGELA RODELL,  CEO, Alaska  Permanent Fund  Corporation, Juneau,                                                               
Alaska,   addressed  Senator   Giessel's  previous   question  as                                                               
     The  management   of  the   fund  under   the  proposed                                                                    
     legislation probably  would not  change. What  is going                                                                    
     to  drive changes  to the  management of  the ERA  as a                                                                    
     result of  any legislation  that might come  forward is                                                                    
     going to  be the liquidity  demands and how  quickly we                                                                    
     see that ERA getting drawn  down and the expectation. I                                                                    
     think one of  the things that is helpful in  all of the                                                                    
     pieces of  legislation including  the senators  is that                                                                    
     there is  this "lag," so  we are walking into  a fixed-                                                                    
     dollar amount  into the budgetary  season and  there is                                                                    
     not an  expectation of expected earnings  or an unknown                                                                    
     amount that  may crop up  in any  of them. So  the more                                                                    
     certainty we  can have on  the expected draws  and what                                                                    
     those draws  will be  because due to  the lags  and the                                                                    
     percentages,  the  better  able  we  will  be  able  to                                                                    
     manage. Now, the higher the  percentage draws, the more                                                                    
     we will have to look at  the risk profile of the ERA to                                                                    
     make sure  we have that higher  dollar amount available                                                                    
     that you're expecting to be available for budgets.                                                                         
4:11:47 PM                                                                                                                    
SENATOR  COGHILL asked  to  confirm  Senator Stedman's  statement                                                               
that the valuation process would  be straight forward. He said he                                                               
knows  the  Permanent  Fund  Corporation's  asset  allocation  is                                                               
dynamic and inquired  if a "continuous valuation"  would say that                                                               
the  4.5  percent withdrawal  would  come  from a  certain  asset                                                               
MS. RODELL  replied that SB  21's evaluation is  straight forward                                                               
and  complies  with  all  the  issues  that  the  Permanent  Fund                                                               
Corporation  has.  She  noted that  the  Alaska  Constitution  is                                                               
written that  the income is  what is available for  spending. She                                                               
said SB  21 continues to  recognize the challenges  the Permanent                                                               
Fund  Corporation  has   between  generally  accepted  accounting                                                               
principles and what can be  made available for spending balances.                                                               
She summarized that SB 21  is a very straight forward calculation                                                               
for the Permanent Fund Corporation.                                                                                             
SENATOR GIESSEL  noted that Senator  Stedman projected  that $1.1                                                               
billion would  be made  available by  SB 21.  She asked  how much                                                               
would have been made available by SB 128 [29th Legislature].                                                                    
MS. RODELL replied that she does not remember.                                                                                  
4:13:29 PM                                                                                                                    
CHAIR DUNLEAVY held SB 21 in committee.                                                                                         
4:14:03 PM                                                                                                                    
At ease.                                                                                                                        
^PRESENTATION:  Dr.  Ralph Townsend  -  Institute  of Social  and                                                               
Economic Research, Answering Questions on Alaska's Economy.                                                                     
   PRESENTATION: Dr. Ralph Townsend - Institute of Social and                                                               
  Economic Research, Answering Questions on Alaska's Economy.                                                               
4:15:05 PM                                                                                                                    
CHAIR DUNLEAVY  announced that  the next order  of business  is a                                                               
presentation  by  Dr.  Townsend  with  ISER  to  address  various                                                               
revenue  measures,  cuts,  impact   to  the  PFD,  and  behaviors                                                               
associated with some of the proposed actions.                                                                                   
4:16:33 PM                                                                                                                    
At ease.                                                                                                                        
4:16:42 PM                                                                                                                    
CHAIR DUNLEAVY called the committee back to order.                                                                              
4:16:46 PM                                                                                                                    
DR.  RALPH   TOWNSEND,  Director  and  Professor   of  Economics,                                                               
Institute of  Social and Economic Research  (ISER), University of                                                               
Alaska-Anchorage,  Anchorage,   Alaska,  noted  that   his  staff                                                               
provided input from his previous  presentation that also followed                                                               
up on  Senator Stedman's point regarding  Alaska's current fiscal                                                               
challenges. He  set forth that a  good first step is  to say that                                                               
the Legislature is helping the people manage four-major assets:                                                                 
   1. Oil and gas resources;                                                                                                    
   2. Financial assets (Permanent Fund, ERA, CBR);                                                                              
   3. Physical infrastructure;                                                                                                  
   4. Human capital.                                                                                                            
He pointed out that the  "physical infrastructure" that the state                                                               
has  invested in  heavily is  a very  substantial investment.  He                                                               
opined that  "human capital"  is sometimes  left off  and vitally                                                               
important to the future of the  state. He detailed that the state                                                               
makes investments in its people in  the form of education and the                                                               
state also  makes investments in  institutions; for  example, the                                                               
state creates court  systems and finds the resources  to define a                                                               
court system where  having to invent a court  system from scratch                                                               
would be difficult to equal the current system's functionality.                                                                 
He said  the oil  and gas  reserves were a  very large  asset and                                                               
dwarfed  the  state's financial  assets;  the  strategy for  that                                                               
period was straight  forward where resources were  taken from the                                                               
oil  and  gas reserves  and  placed  into the  financial  assets,                                                               
physical  infrastructure, and  continuous  investment into  human                                                               
capital that included  education and health care.  He pointed out                                                               
that the  straight-forward strategy was not  a difficult decision                                                               
process because moving assets from  oil and gas reserves into the                                                               
other ones  was obvious where  both the financial assets  and the                                                               
physical  infrastructure were  used to  balance out  the economic                                                               
4:19:34 PM                                                                                                                    
DR. TOWNSEND set forth that  the state has missed the significant                                                               
shift in  the relative  importance of oil  and gas  reserves over                                                               
time. He  asserted that oil  and gas reserves resources  are much                                                               
less valuable in the present-value  sense than the permanent fund                                                               
and its  associated reserves. He  pointed out that the  state has                                                               
invested  substantially  in  physical  infrastructure  and  those                                                               
assets have  increased so that  today the financial  and physical                                                               
infrastructure are  a much bigger  part of the  management issue.                                                               
He remarked that  the change was highlighted in 2015  and in fact                                                               
has been a long time coming. He  said the slow decline in the oil                                                               
production was  masked to some  extent by the high-oil  price. He                                                               
commended the  Legislature and  the people  of Alaska  for making                                                               
the  decision to  invest in  both the  fiscal infrastructure  and                                                               
permanent fund rather than spending.                                                                                            
He said  the issue  going ahead  is exactly  the kinds  of issues                                                               
related to SB  21 as to how does the  state manages its financial                                                               
assets and how  do the assets interact with the  cyclical oil and                                                               
gas revenues  as well  as the state's  decisions with  respect to                                                               
fiscal  infrastructure  and  human   capital.  He  summarized  as                                                               
     2015   wasn't   this   dramatic   turning   point,   it                                                                    
     unfortunately   highlighted  a   long-term  trend   and                                                                    
     despite  the fact  of having  the  budget reserve  with                                                                    
     enough funds to  handle three or four  years, the truth                                                                    
     was that  the world  was changing  to a  greater extent                                                                    
     than  we had  realized and  planned for.  The challenge                                                                    
     for us  is managing  these assets together  going ahead                                                                    
     rather than worrying about managing  any one of them or                                                                    
     the simple question of closing this year's budget gap.                                                                     
4:22:55 PM                                                                                                                    
SENATOR  WILSON noted  that Dr.  Townsend  had previously  talked                                                               
about how the  state won't be able to  support its infrastructure                                                               
if the state  continues its capital budget at  current levels. He                                                               
asked what number  or budget percentage is needed  to sustain the                                                               
state's capital infrastructure.                                                                                                 
DR. TOWNSEND  replied that  his background  is not  sufficient to                                                               
provide  a specific  number. He  pointed out  that the  state was                                                               
putting  in $100  million to  match  the federal  match and  that                                                               
would  not keep  up  with the  state's  large infrastructure.  He                                                               
opined that it's  likely the state will want  to consider funding                                                               
its infrastructure  much the same way  as the other 49  states by                                                               
relying on their  favorable access to capital  by bonding longer-                                                               
term  infrastructure   projects.  He   noted  that   interest  on                                                               
accessing capital  is tax  deductible and  states have  access to                                                               
capital at  a lower interest  rate than the private  sector does.                                                               
He  summarized  that  most  states   support  their  highway  and                                                               
building construction  not entirely from their  operating budget,                                                               
which is the way Alaska has done it for a long time.                                                                            
4:24:56 PM                                                                                                                    
CHAIR DUNLEAVY asked if he has looked at Alaska's indebtedness.                                                                 
DR. TOWNSEND answered no.                                                                                                       
CHAIR  DUNLEAVY  suggested that  Dr.  Townsend  look at  Alaska's                                                               
indebtedness because  that may  help with what  the state  can or                                                               
cannot do regarding the idea of  bonding. He opined that there is                                                               
a belief that  "We can keep the  party going as was,  all we have                                                               
to do is just ante up,"  whereas some people question whether the                                                               
state can  keep the party  going even if  we "ante up."  He asked                                                               
that Dr.  Townsend address the  behaviors that will occur  due to                                                               
"anteing up" from income taxes,  sales taxes, property taxes, and                                                               
reductions.  He said  some decisions  must be  made soon  and the                                                               
Legislature wants the best possible advice, data, and research.                                                                 
4:27:29 PM                                                                                                                    
DR. TOWNSEND  remarked that  Chair Dunleavy's  inquiry is  a very                                                               
broad  question.  He  said  decisions on  leaving  the  state  or                                                               
investing in  the state are  long-term decisions. He  opined that                                                               
people are not looking at this  year's budget, but are looking at                                                               
their situation  over the next 5  to 10 years. He  set forth that                                                               
an important piece  is providing people with the  ability to plan                                                               
for their  futures with an  outline of  where the state  is going                                                               
for both  businesses and private  individuals. He said  the high-                                                               
level  issue of  identifying  how  the state  is  going to  solve                                                               
various aspects of a complicated  problem is important in helping                                                               
people make better decisions.                                                                                                   
DR.  TOWNSEND  said  predicting  short-run  impacts  from  taxes,                                                               
changes to  the PFD, and various  kinds of cuts to  government is                                                               
not too  difficult. He  asserted that  the short-run  impact from                                                               
taxes is  going to be very  similar whether it is  an income tax,                                                               
sales  tax, or  increases in  the property  tax; however,  a $100                                                               
million  reduction to  the PFD  is a  little worse.  He explained                                                               
that  sales and  income  taxes  by their  nature  are not  evenly                                                               
distributed,  people with  more money  pay more  sales taxes  and                                                               
people with  more income pay more  income taxes. He said  the PFD                                                               
is evenly  distributed and more of  it goes to people  who are at                                                               
the lowest end of income.                                                                                                       
4:32:40 PM                                                                                                                    
CHAIR DUNLEAVY  asked how  Dr. Townsend  defines "short  term" in                                                               
terms of duration.                                                                                                              
DR. TOWNSEND explained  that economists refer to  the "short run"                                                               
as a term of  art. He specified that the "short  run" is when the                                                               
obvious impacts  are being played  out; for example,  cutting the                                                               
PFD  has an  immediate  impact whereas  the  direct impacts  from                                                               
cutting the  capital budget  are felt  over a  period of  five or                                                               
more years rather  than within the first year. The  "long run" is                                                               
the period  in which people  have made all their  adjustments. He                                                               
summarized that  "short run" is typically  a year or two  and the                                                               
"long run" takes  five or more years for changes  to work through                                                               
the economy.                                                                                                                    
SENATOR EGAN addressed tax options  and asked which tax is better                                                               
or worse for a family of four with two adults and two children.                                                                 
4:36:03 PM                                                                                                                    
DR.  TOWNSEND said  there's been  a great  deal of  research done                                                               
over tax  regressivity and progressivity.  He said the  PFD makes                                                               
Alaska different where  the same dollar amount  is distributed to                                                               
everyone, so a cut to the  PFD has a more negative and regressive                                                               
impact on  lower-income people. He  asserted that a sales  tax by                                                               
its nature  is somewhat more  regressive than a  flat-income tax,                                                               
but an income  tax can be made progressive by  focusing on upper-                                                               
income individuals. He said people  with fixed incomes tend to be                                                               
adversely   affected    by   property   taxes;    however,   many                                                               
jurisdictions  address   that  feature  with  various   kinds  of                                                               
"circuit breakers."                                                                                                             
4:39:53 PM                                                                                                                    
SENATOR GIESSEL pointed  out that Dr. Townsend  previously made a                                                               
statement about  the importance  of making  changes over  time to                                                               
allow  people  to  plan  for  adjustments.  She  noted  that  the                                                               
Legislature  is dealing  with a  significant issue  regarding the                                                               
tax-credit program  the state of Alaska  has for the oil  and gas                                                               
industry.  She explained  that the  companies that  were promised                                                               
tax credits are  new entrants into Alaska and compared  them to a                                                               
lower-income family  without the assets  to start their  work and                                                               
Alaska  offered  to  "back fill"  the  businesses;  however,  the                                                               
governor  vetoed the  tax credits  and suddenly  their loans  are                                                               
coming  due  and the  businesses  cannot  pay the  interest.  She                                                               
remarked  that   the  tax-credits   veto  is  analogous   to  the                                                               
government suddenly imposing a tax  that is causing a credibility                                                               
gap for  the state.  She opined  that government  inserted itself                                                               
into what  was otherwise a  free market and distorted  the market                                                               
by promising  the tax credits  and then suddenly pulled  out. She                                                               
set forth  that a promise  was made, and  the state has  not paid                                                               
its promise. She asked that  Dr. Townsend address the state's tax                                                               
credit program.                                                                                                                 
4:42:54 PM                                                                                                                    
DR.  TOWNSEND explained  that Alaska's  oil-tax-credit system  is                                                               
complicated with 15 to 20  different programs and sub-pieces that                                                               
applies  to  latitudinal locations.  He  detailed  that the  tax-                                                               
credit  program  interacts  with  the system  of  how  the  state                                                               
collects its  benefits from the  oil reserves. He set  forth that                                                               
resolving the question about oil  and gas credits is an important                                                               
piece of  moving forward from a  fiscal point of view.  He opined                                                               
that the  tax-credit program  is inherently  complex and  hard to                                                               
understand for many  people to make decisions. He  set forth that                                                               
the two-immediate  issues are: the state  created expectations in                                                               
terms of  being a  partner, and the  credits became  cashable. He                                                               
detailed as follows:                                                                                                            
     Having  people feel  that  your  expectations that  you                                                                    
     created can be  met is important, so it's  part of that                                                                    
     resolution; but, the  last piece of course  is that the                                                                    
     oil  and gas  credits when  they became  cashable moved                                                                    
     from  being what  we think  of  as traditional  credit,                                                                    
     that is they  reduce our tax revenues,  they moved over                                                                    
     to  the expenditure  side of  the budget  and that  has                                                                    
     created  some  real  problems for  the  current  fiscal                                                                    
     situation because the  size of those are  very large at                                                                    
     present relative to the revenue  that is coming in from                                                                    
     the oil industry.  I think all of those,  it's a knotty                                                                    
     problem,  but it  strikes me  that in  terms of  moving                                                                    
     ahead and  managing our  future assets  that is  one of                                                                    
     the  issues  that  absolutely   needs  to  be  resolved                                                                    
     because   leaving  it   unresolved   both  leaves   the                                                                    
     operators  in uncertainty,  but also  means year-after-                                                                    
     year it's back.                                                                                                            
4:46:57 PM                                                                                                                    
SENATOR  COGHILL asked  if ISER  has  analyzed Alaska's  regional                                                               
4:49:13 PM                                                                                                                    
DR.  TOWNSEND replied  that local  government employment  has not                                                               
been very  directly impacted through  2015 and 2016,  but changes                                                               
seem   inevitable  as   the  economy   declines   on  the   local                                                               
governments. He  said ISER  is putting  more analysis  into local                                                               
economies, but getting data on  smaller communities is difficult.                                                               
He pointed out  that the permanent fund does  generate data about                                                               
residents and  non-residents. He  said Fairbanks' economy  may do                                                               
better  from increased  military  spending;  however, areas  that                                                               
depend on  government employment,  the PFD, and  subsistence will                                                               
be disproportionally effected when  compared to the urban centers                                                               
with diversified  economies. He stated  that ISER will  be trying                                                               
to quantify  the magnitude  of the  changes that  local economies                                                               
will see.                                                                                                                       
4:52:37 PM                                                                                                                    
SENATOR  COGHILL   explained  that   the  Legislature   looks  at                                                               
subsidies for a lot of  different things; for example, power-cost                                                               
equalization. He  opined that knowing  the most  productive parts                                                               
of  the  state's  economy  in  relation  to  subsidies  would  be                                                               
beneficial when addressing a broad-based  tax regarding who bears                                                               
the weight.  He set  forth that  one size does  not fit  all very                                                               
well. He remarked that the state's  geography has a big impact on                                                               
what the Legislature does.                                                                                                      
DR. TOWNSEND  replied that data  is available to  distinguish how                                                               
the recession  has played out  and will  continue to play  out in                                                               
rural areas.                                                                                                                    
4:55:43 PM                                                                                                                    
SENATOR COGHILL commented that he  was expressing his frustration                                                               
in implementing something that is broad based.                                                                                  
CHAIR DUNLEAVY  asked to  confirm that reducing  the PFD  by $700                                                               
million impacted both those with the  lowest incomes as well as a                                                               
larger percentage that spends their money in Alaska.                                                                            
DR. TOWNSEND replied that he agreed  to an extent. He pointed out                                                               
that stores in  Alaska primarily bring in  resources from outside                                                               
of  the  state.  He  said  the question  is  whether  people  are                                                               
spending  their  PFD on  things  that  are processed  within  the                                                               
SENATOR COGHILL  pointed out that  one of the biggest  impacts to                                                               
the  reduction in  the PFD  are families  that carry  an economic                                                               
load just outside of the poverty level.                                                                                         
4:58:33 PM                                                                                                                    
DR.   TOWNSEND    opined   that   programs    with   income-based                                                               
qualification is much  less the case than 30 or  40 years ago. He                                                               
conceded that people face large health-care costs, but income-                                                                  
based programs exist for specific maladies.                                                                                     
SENATOR COGHILL  countered that he  has seen a  dramatic increase                                                               
in health-care costs  in his district, almost  a 60-percent rise.                                                               
He  said combined  with energy  costs and  no subsidies,  middle-                                                               
income people were nearly broke to the starvation point.                                                                        
5:00:33 PM                                                                                                                    
CHAIR  DUNLEAVY revealed  that  he had  gone  to many  "Alaskana"                                                               
businesses  that   sell  four-wheelers,  snow   machines,  boats,                                                               
etcetera and  owners said they  were not  doing very well  due to                                                               
oil company  lay-offs and the cut  to the PFD. He  asked how much                                                               
the $700 million PFD cut impacted the Alaska economy.                                                                           
5:03:23 PM                                                                                                                    
DR.  TOWNSEND replied  that the  $700 million  to the  PFD had  a                                                               
significant impact  on the  economy. He opined  that if  the $700                                                               
million  was put  into  the  economy, the  level  of the  state's                                                               
recession would  have been moderated  significantly with  a 3,000                                                               
or 4,000 job  difference. He explained that the  reduced PFD also                                                               
had  an impact  on future  purchases as  well. He  noted an  ISER                                                               
study that showed Alaska's PFD  program has reduced poverty by 25                                                               
percent. He  opined that  Alaska's PFD program  is unique  in the                                                               
U.S.  and  is like  European  countries  that provide  income  to                                                               
families with children. He said  that taking the programs away in                                                               
Europe would  be viewed as  having a negative impact  on families                                                               
and reducing the PFD would have  a similar negative impact on the                                                               
lowest income Alaskans.                                                                                                         
CHAIR DUNLEAVY asked if he moved to Alaska for the PFD.                                                                         
DR. TOWNSEND answered that he did not.                                                                                          
CHAIR DUNLEAVY remarked that people  have moved to Alaska for the                                                               
PFD and inquired if research has been done on the topic.                                                                        
5:08:46 PM                                                                                                                    
DR.  TOWNSEND remarked  that  moving to  Alaska  is expensive  in                                                               
addition to the  state's higher cost of living.  He conceded that                                                               
receiving the PFD would be part  of the calculation on whether to                                                               
move to Alaska,  but the PFD would not dominate  the decision due                                                               
to other factors.                                                                                                               
CHAIR  DUNLEAVY announced  that  the committee  will welcome  Dr.                                                               
Townsend back  for future meetings.  He opined that  the research                                                               
and data ISER  provides is important so that  the Legislature can                                                               
make sound decisions.                                                                                                           
5:10:44 PM                                                                                                                    
There being no further business to come before the committee,                                                                   
Chair Dunleavy adjourned the Senate State Affairs Standing                                                                      
Committee at 5:10 p.m.                                                                                                          

Document Name Date/Time Subjects
SB 21 Sponsor Statement.pdf SSTA 2/2/2017 3:30:00 PM
SB 21
SB 21 Sectional Analysis.pdf SSTA 2/2/2017 3:30:00 PM
SB 21
SB 21 - Fiscal Note DOR.pdf SSTA 2/2/2017 3:30:00 PM
SB 21
SB 21 - Fiscal Note DOC.pdf SSTA 2/2/2017 3:30:00 PM
SB 21
SB 21 - Fiscal Note DOA.pdf SSTA 2/2/2017 3:30:00 PM
SB 21
SB 21 Presentation Revised.pdf SSTA 2/2/2017 3:30:00 PM
SB 21