Legislature(2017 - 2018)HOUSE FINANCE 519
02/03/2017 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB61 | |
| HB95 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 61 | TELECONFERENCED | |
| *+ | HB 95 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE BILL NO. 61
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted
state revenue available for appropriation; and
providing for an effective date."
1:37:19 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation titled "PFPA
MODELING" (copy on file). He commented that on the previous
day the committee had covered a lot of ground on the
Permanent Fund Protection Act (PFPA). There had been
significant concern whether the 5.25 percent draw was
sustainable and durable. He indicated he would be walking
through some of the modeling that had been done to
determine the durability of the proposed draw amount. He
would also be discussing the impacts of some of the
decisions about other fiscal issues surrounding the PFPA
and their impacts on the durability of a restructured
Permanent Fund.
Commissioner Hoffbeck turned to slide 2: "Scenarios
Modeled":
1. Status Quo: ad hoc use of permanent fund earnings to
fill budget deficit
2. PFPA with $2.4 billion transfer to the CBR
• With Full Fiscal Solution
• With No Fiscal Solution for remaining budget
deficit.
3. PFPA without transfer to the CBR
• With Full Fiscal Solution
• With No Fiscal Solution for remaining budget
deficit.
Commissioner Hoffbeck explained that the committee would be
looking at three different modeling scenarios. The first
model reflected the status quo where no changes would be
made. The state would continue to spend the Constitutional
Budget Reserve (CBR), and when it was gone, begin to spend
from the Permanent Fund (PF) earnings reserve account
(ERA). The second scenario reflected the PFPA proposed in
the governor's bill, HB 61. A proposed effective date of FY
17, as proposed in the budget, would create a draw for FY
17 and replace the CBR draw using PF earnings to fund the
current year's budget. The committee would look at the
second scenario in two ways: One would reflect a full
fiscal solution closing the remainder of the budget gap,
and another would show a budget gap. The third scenario
reflected an effective date of July 1, 2018. The draws
would start for the FY 18 budget.
Representative Wilson had heard frequently that the
legislature was doing nothing. She opined that the
legislature had made several reductions and put two bills
forward in the prior year to help save the state money. She
did not think it was appropriate to tell the public that it
appeared the legislature would do the usual. She argued
that the legislature had taken significant steps to reach a
sustainable level of spending. Although the legislature
might not have made enough changes, it had worked
diligently to reduce costs.
1:41:01 PM
Vice-Chair Gara asked if the legislature had burned through
close to $6.5 billion or $7 billion in savings in the
previous 2 years. Commissioner Hoffbeck responded, "That is
correct."
Vice-Chair Gara asked what would be left in the CBR if the
legislature did nothing to address the revenue issue in the
current year. He asked for a number. Commissioner Hoffbeck
responded that the presentation did not contain many
numbers but there were some numbers on the charts.
Vice-Chair Gara asked what would be left in the CBR after
FY 18, under the governor's proposed budget, if the
legislature failed to adopt revenue measures in the current
year and had to use the CBR to pay the budget gap.
Commissioner Hoffbeck reported that it was about $2.1
billion.
Commissioner Hoffbeck continued to discuss slide 2. He
noted the critical test when looking at the modeling was to
maximize the use of the asset. The department wanted to be
able to extract as much revenue from the PF without putting
the corpus of the fund at risk. He suggested that leaving
any money on the table had the effect of limiting future
options for solving the fiscal crisis. He continued that
the idea was to find the "sweet spot" extracting as much as
possible while maintaining a durable fund into the future.
Commissioner Hoffbeck continued to slide 3: "Model
Sophistication and Vetting." He reviewed some of the key
aspects of the model. The model was probabilistic, as it
looked at a range of potential scenarios that could occur
over time rather than deterministic. Deterministic meant
choosing a single scenario and extrapolating it over time.
The model used thousands of iterations of multiple
scenarios and produced a range of potential outcomes. The
department looked at the median within the range. He
thought the modeling had been a robust process. The focus
was on how the money flowed between the PF, the general
fund, and the dividend to identify any potential failures
in the modeling. The modeling addressed questions such as
whether there was enough money to fund government services
and the dividend, whether the corpus of the fund would be
impacted, or whether there was enough money in the ERA to
make the annual payment. He reported using as many
objective resources as possible in calibrating the model to
remove any concern about the model being skewed. Later he
would be discussing some of the data the sources used in
the model.
Commissioner Hoffbeck reported that the department used
Monte Carlo simulations to get a range of results. In the
previous year there were multiple hearings in which the
modeling process was discussed. The department had been
asked to bring back a tremendous number of variations on
that modeling. The department hired the McKinsey and
Company, an international consulting firm that has worked
with all the sovereign wealth funds around the world, to
ensure that the modeling was robust. The company was asked
to review the department's modeling process for
reasonableness and accuracy. The company found that there
were no mechanical errors in the state's modeling and that
the assumptions were reasonable. The company approved the
Monte Carlos process and suggested some improvements to the
modeling, which the Department of Revenue had incorporated.
1:46:10 PM
Commissioner Hoffbeck reviewed the graph on slide 4 titled
"Budget Assumptions." He highlighted the yellow line at the
bottom that represented the fall forecasted revenues from
the 2006 Revenue Sources Book less unrestricted royalties
and production tax. Royalties and production taxes were
taken out because they were estimated within the modeling.
He further explained that they were removed from the
baseline numbers because they became a critical component
in the modeling. He pointed to the blue line which
represented the Office of Management and Budget's 10-year
budget plan. In the plan, the budget held flat for several
years, then increased with inflation going out in time.
Commissioner Hoffbeck scrolled to slide 5: "Status Quo:
Method, Inputs, And Assumptions" The slide showed how the
PF earnings performed overtime without changing the budget
or increasing revenues. The slide showed the list of
assumptions used in the process. The assumptions included a
PF starting balance of $54.9 billion (reflective of the
anticipated amount at the end of 2017), a 6.95 percent
geometric return with a 12.32 percent standard deviation
(the return could be 6.95 percent, as high as 19.3 percent,
or as low as -5.5 percent), and an inflation rate of 2.25
percent. He explained that about 90 percent of the
investment returns were realized within the statutory net
income payout.
Vice-Chair Gara referred to slide 5. He asked about the
6.95 percent return assumption on the PF and the 50 percent
probable 6.24 percent. Commissioner Hoffbeck responded that
the second line represented the realized returns - the
statutory net income. He further explained that of the 6.95
percent total fund return, 6.24 percent would be realized,
a 90 percent realization.
Commissioner Hoffbeck discussed slide 6: "Status Quo:
Method, Inputs, And Assumptions." He explained that
probabilistic modeling (used in generating the revenue
sources book) was applied to oil price production. Deposits
to the fund consisted of 31 percent of royalties, the
weighted average of the deposit that occurred. There was no
planned payout from [to] the general fund from the ERA, but
unplanned payouts would occur after the depletion of the
CBR. The balance of the CBR would be $4.4 billion at the
beginning of 2018 with a 2.25 percent rate of return
projected.
1:50:00 PM
Representative Pruitt referred to slide 6. He recalled that
in a meeting in the prior year the CBR was expected to have
a balance of $3.5 billion in 2018. He asked about the shift
to $4.4 billion.
Commissioner Hoffbeck answered that the original number was
$3.2 billion, but multiple things had happened. He
elaborated that the $4.4 billion number was a cash versus
accrual accounting number - the cash that would be in the
fund. There were some items such as capital projects that
had been approved but not funded that would show as a
decrement on an accrual basis. He continued that the $3.2
billion number was an accrual number rather than a cash
number. He continued that much of the shift was being
driven by the fact that in FY 16 the state had $100 million
less in draws than anticipated. Also, in FY 16 and FY 17
the state had received more revenues than anticipated. It
was a combination of some accounting issues and better-
than-projected returns from the time the number was
published in the previous year.
Representative Pruitt asked about the balance on an accrual
basis to compare apples-to-apples. He wondered if the
number would be $4.4 billion. He suspected it would not be
as low as $3.2 billion. Commissioner Hoffbeck would get
back to him with an answer.
Representative Pruitt asked about the statutory budget
reserve (SBR) balance. Commissioner Hoffbeck responded that
it was $200 million. He added that the $4.4 billion
included the balances of both the CBR and the SBR.
Commissioner Hoffbeck continued to slide 7: "Status Quo:
Method, Inputs, And Assumptions":
STATUS QUO: METHOD, INPUTS, AND ASSUMPTIONS
Dividend Calculation:
• Total distributed is equal to half of the sum of
the last 5 years' statutory net income multiplied
by 0.21 or half of the ERA, whichever is less
Inflation Proofing:
• The fund's principal is inflation proofed at the
predicted inflation rate.
Commissioner Hoffbeck reported the dividend calculation was
the last 21 percent of the previous 5 years' earnings -
essentially the average of the previous 5 years, just
slightly more. Inflation proofing was a direct
appropriation based on the measured inflation of the prior
year. He reiterated he was speaking of the status quo. He
noted that the dividend calculation was 21 percent of the
prior 5 years or half of the remaining ERA, which ever was
less. In other words, when the state started to deplete the
ERA the dividend would decrease because it could never be
more than half of the ERA balance.
Vice-Chair Gara did not agree with the term "status quo"
because in the previous year the legislature did not fund
inflation proofing. He asked if he was correct.
Commissioner Hoffbeck confirmed Vice-Chair Gara was
correct. The commissioner was explaining the statutory
status quo.
Representative Wilson had heard about a 50/50 plan. She
asked about what would have been left in the ERA had the
state paid the full dividend amount of approximately $1.2
billion. She wanted to know the figure for realized
earnings. Commissioner Hoffbeck asked her to repeat her
question.
Representative Wilson thought that the state would have
paid out about $1.2 billion in dividends had the amount not
been reduced. She surmised that there would have been
another $1.2 billion left to put in the ERA and utilized
with a 21 vote. Commissioner Hoffbeck indicated she was
correct. He furthered that the portion that had
historically been used for inflation proofing could have
been used in the previous year. He noted that the state
could have used any amount that was in the ERA balance,
about $8.0 billion, with a simple majority vote.
1:54:33 PM
Commissioner Hoffbeck advanced to the chart on slide 8:
"Status Quo, No Fiscal Plan: Dividend paid per Person." He
indicated that the slide showed the dividend that would be
paid per person under the status quo plan. He noted that
the 2018 value would be about $2400 based on the forecasted
PF returns. He reported that the 2041 median value, the end
of the modeling period, would be zero. He emphasized that
there would be no dividend. He explained that the yellow
bar represented between the median and a factor of 75
percent. The blue bar represented the median to a factor of
25 percent. The median fell between the yellow and blue
lines on the chart. The whiskers represented the total
range of the forecast. The chart showed how far the total
range could deviate over time. It fell off precipitously
after only a few years. He added that the status quo
without a fiscal plan would result in a median value of $67
billion in 2041. The real value would be $39.563 billion.
He redirected members' attention to the first slide of the
presentation that showed a real fund balance of $54.9
billion.
Commissioner Hoffbeck turned to the chart on slide 9:
"Status Quo, No Fiscal Plan: Nominal Fund Size." He
reported that the value of the fund would be significantly
degraded under the status quo. The ERA failure rate over 24
years was 98.24 percent. There was absolute surety that the
ERA would run out of money during the forecast period.
Commissioner Hoffbeck spoke to the chart on slide 10:
"Status Quo, No Fiscal Plan: Cumulative ERA Failure Rate."
He thought the graph provided a good visual of the ERA
failure rate. He stressed that the dividend was paid from
the ERA. Therefore, when the ERA failed, the dividend would
likely be reduced to zero. He highlighted that by 2023 or
2024 there would be a 50/50 chance of having no money in
the ERA and no dividend without a different plan in place.
It was clear that the status quo plan would lead to the
depletion and failure of the fund.
Commissioner Hoffbeck reviewed slide 11: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
APFPA WITH CBR TRANSFER: METHOD, INPUTS, AND
ASSUMPTIONS
• Permanent Fund Starting Value: $53.4 billion
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $6.3 billion
• Unrealized earnings held by the fund: $6.3
billion
• Starting value was estimated based on the
following:
• $54.9 billion estimated EOY 2017 balance
of PF under status quo
• Plus $0.8 billion from the difference in
the calendar year (CY) 2017 dividend
calculation
• Less $2.4 billon transfer to CBR (repaying
for last year's withdrawal as if we
started PFPA a year earlier)
• Investment Return: Callan Associate's 10-year
forecast
• Total return: 6.95 percent geometric,
12.32 percent standard deviation
• Statutory return: P10 = 3.70 percent, P50
= 6.24 percent, P90 = 8.14 percent
• Inflation rate: 2.25 percent
Commissioner Hoffbeck clarified that the Alaska Permanent
Fund Protection Act (APFPA) had a 2017 effective date,
essentially creating a transfer to the CBR. The
constitutional Budget Reserve draw would be replaced with
PF earnings. The Permanent Fund starting value would be
about $53.4 billion. He pointed to the middle of the slide
which showed the calculation of how to go down from $54.9
to $53.4. The investment returns were the same.
1:58:19 PM
Commissioner Hoffbeck spoke to slide 12: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
• Petroleum Revenues:
• Oil price: Probabilistic analysis of ANS oil
prices using a PERT distribution from the fall
2016 price forecasting session.
• Production: Probabilistic analysis of ANS oil
prices using a PERT distribution from the DNR
provided Fall 2016 RSB
• Deposits: 25% of royalties deposited into the
permanent fund.
• Payout Calculation: 5.25% of the average of first 5 of
the last 6 years' total fund size. This value can then
be decreased if the combined royalty and production
tax revenues for the year are above $1.2 billion, by
the amount over $1.2 billion. This can not reduce the
payout amount by more than 80%.
• Unplanned Payouts: After depleting the CBR, budget
deficits are filled from the ERA.
• CBR: $6.8 billion BOY 2018 balance with Rate of Return
of 2.25%
• Initial Balance of $6.8 billion is estimated
based on a forecasted balance of $4.4 billion and
a $2.4 billion transfer from the ERA
Commissioner Hoffbeck reported that the petroleum revenue
calculations would be the same. However, the percentage of
royalties being deposited would be reduced to 25 percent
from 31 percent. He detailed that the only deposit that
would be made in the APFPA would be the constitutionally
required deposit. The plan did not include the additional
statutory deposit. He detailed the payout calculation which
would be 5.25 percent of the average of the first 5 years
of the previous 6 years. There was a $1.2 billion draw
limit. Once the state reached $1.2 billion in oil and gas
severance tax and royalties, the payout of the dividend
would be reduced dollar for dollar. He observed that
everything that had been discussed in the prior year would
be imbedded within the calculation. He continued that
unplanned payouts would come out of the ERA after the CBR
was entirely depleted. Although, under the scenario where a
full fiscal plan would be in place, it was anticipated that
the budget gap would be closed and, therefore, would not
require additional draws. He clarified that if additional
draws were necessary, the money would come out of the ERA.
He added that the CBR would begin with a higher balance of
$6.8 billion because the $2.4 billion draw from the CBR
would be replaced with a $2.4 billion draw from the ERA.
Commissioner Hoffbeck discussed slide 13: "APFPA with CBR
Transfer: Method, Inputs, And Assumptions":
• Dividend Calculation:
• The sum of:
• 20% of the POMV payout before any reduction, and
• 20% of the unrestricted royalties (about 15% of
total royalties) from the most recent FY ended
• Overwriting the above calculation there is a
fixed dividend of $1,000 per person for CY 2018.
• Inflation Proofing:
• If four times the 5.25% POMV payout (21% of the total
fund value) remains in the ERA after the POMV transfer,
the amount over the four times the POMV is transferred
into the corpus.
Commissioner Hoffbeck reviewed the dividend calculation
under the new 20/20 formula. It equaled 20 percent of the
percent of market value (POMV) payment and 20 percent of
unrestricted royalties. Inflation proofing would be tied to
the 4-times draw (once the ERA had 4-times the annual draw
money would flow back into the corpus of the PF). He noted
that the structure when doing the modeling had been
discussed in the previous day.
Co-Chair Seaton asked about the calculation. He reiterated
that if the POMV percentage was fixed and after it flowed
in, 20 percent of the POMV deposit would go out. He
wondered if it would go out prior to the money flowing back
to inflation proofing or whether the POMV draw would be
reduced. Commissioner Hoffbeck responded that the 20
percent of 5.25 percent would always be calculated against
the maximum draw. He continued that as the actual draw
started to be reduced, the dividend would not be reduced.
The dividend would always be calculated on the maximum draw
amount rather than the actual draw.
Vice-Chair Gara referred to slide 13 and asked about the 20
percent of unrestricted royalties. He wondered if the
amount would come out of the POMV or out of royalties.
Commissioner Hoffbeck responded that it would come directly
from royalties, the portion of the royalties not dedicated
in the constitution to the corpus of the fund (the other 75
percent).
Vice-Chair Gara stated that if the state had a deficit and
20 percent was taken from royalties instead of from the
ERA, it would come out of the CBR. It would not be
additional money until there was no deficit left. He asked
if he was accurate. Commissioner Hoffbeck did not
understand the representative's question.
Vice-Chair Gara restated his question. He suggested that if
the state was in a position where revenues did not approach
expenditures and the state wanted to take 20 percent of
royalties to pay for part of the PF, it would mean 20
percent less for general fund spending. It would require a
larger CBR draw. He continued that instead of taking money
from the ERA the money would be taken out of the CBR. He
asked if he was accurate. Commissioner Hoffbeck answered,
"yes." He added that the intent was for the monies to come
out of royalties first. The net effect was if there was not
enough in the general fund, a larger CBR draw would have to
be made. It did not make any mathematical difference
whether the money was used for the dividend or for covering
the remaining general fund expenditures.
2:03:06 PM
Commissioner Hoffbeck detailed slide 14: "APFPA with
Transfer, Full Fiscal Plan: Dividend paid per Person." He
reported that the plan had a guaranteed dividend of $1000
until 2041 when it would increase to $1416. Essentially,
the dividend amount would be about $1000 for the 24-year
life of the forecast.
Commissioner Hoffbeck advanced to slide 15: "APFPA with
Transfer, Full Fiscal Plan: Nominal Fund Size." He detailed
that the 2041 value of the PF would be $99.254 billion,
which would start at $53.4 billion. The real value of $99
billion would equal $58.188 million. The fund would be
growing at a rate greater than inflation. It would not only
protect the fund but would allow the fund to grow slightly
over time. The earnings reserve account failure rate would
be 1.2 percent. There would be very little chance of the
ERA being depleted to the point where the annual payment
would not be viable. The failure rate was reflected in the
following slide.
Commissioner Hoffbeck continued to slide 16: "APFPA with
Transfer, Full Fiscal Plan: Cumulative ERA Failure Rate."
He made the point that the chart did not show much because
the failure rate followed the same line as the base line.
Representative Ortiz returned to slide 14 that showed the
projected dividends until 2041. He asked about the factors
in play that would prevent the dividend from increasing in
value with at least inflation. He thought the commissioner
was saying that it would remain around $1000 into 2041. The
value would consistently go down. He wondered what was in
the formula that would prevent the dividend from keeping
pace with inflation. Commissioner Hoffbeck answered that it
was primarily the production forecast. The royalty side of
the equation was based on price and production. He
indicated the state did not see large price increases and
saw falling production over time. He commented, "That piece
is going to drop."
Commissioner Hoffbeck detailed slide 17: "APFPA with
Transfer, No Fiscal Plan: Dividend paid per Person." The
slide assumed that the current structural deficit would
remain in the budget. Once the CBR was depleted the state
would turn to the ERA to continue to fill the gap. He posed
the question about what impact it would have on the
durability of the PF and the size of the dividend. The
dividend would start out at $1000 and would grow to $1,239
over the 24-year projection which was about $200 less than
under a full fiscal plan. The real value was less than the
$1000.
2:07:03 PM
Commissioner Hoffbeck advanced to slide 18: "APFPA with
Transfer, No Fiscal Plan: Nominal Fund Size." In 2041 the
median value of the fund would be $76 billion which
provided a nominal value of $44.6 billion. The start value
was $53.4 billion. In the current scenario there would be
degradation of the fund itself over the period. There would
be an ERA failure rate of 45.38 percent. There was a very
good chance that at some point there would not be money in
the ERA to make the dividend payment or for funding
government expenditures.
Vice-Chair Gara commented that he had heard Commissioner
Hoffbeck state that without a fiscal plan the state would
run out of savings and earnings reserve money to pay a
dividend. He thought the commissioner was saying that with
no fiscal plan the state would still have a dividend. He
asked for clarity about the chart. Commissioner Hoffbeck
indicated that the chart reflected a permanent fund only
solution. All that would be done would be to restructure
the PF without any other changes.
Representative Wilson asked about the amount of the budget
and about the growth rate. She wondered about the starting
number without a fiscal plan. She wondered about the growth
rate and a percentage decrement. Commissioner Hoffbeck
directed members to slide 4 which showed the budget numbers
in a graph. The budget stayed flat through FY 20 and then
started to grow with inflation.
Representative Wilson clarified that flat meant no gain
whatsoever and no new contracts. She asked if he was
talking about the same amount until FY 20 at which time
inflation would be included. Commissioner Hoffbeck
responded that he could not drill down specifically, but
confirmed that the budget amount of
$4.2 billion would essentially be what it was currently
through 2020.
Representative Wilson thought it would be very helpful to
get further clarification about how the numbers worked.
Commissioner Hoffbeck commented that there was no dollar
growth in the budget through 2020. If there were contract
increases, they would be absorbed in other parts of the
budget. After 2020, growth would be seen at the rate of
inflation.
Commissioner Hoffbeck continued to slide 19: "APFPA with
Transfer, No Fiscal Plan: Cumulative ERA Failure Rate." The
chart showed when the state would start seeing the
potential for failure in the ERA without a fiscal plan. The
earnings reserve account would stay stable up to the late
2020s. The chance of failure would grow dramatically after
that time.
Commissioner Hoffbeck continued to slide 20 "APFPA with
Transfer, No Fiscal Plan: Median UGF Revenue/Budget." He
explained that the reason the chance of failure would grow
dramatically after 2028 was because, under the APFPA only
solution with the FY 17 transfer, there would be CBR money
available to fill the void until 2028, after which the ERA
would be tapped.
Co-Chair Seaton asked if "Other revenue Draws" included
only the CBR. He wondered if it included drawing from the
higher education fund or the Power Cost Equalization fund.
Commissioner Hoffbeck responded, "That's only the CBR."
Commissioner Hoffbeck relayed slide 21: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
Permanent Fund Starting Value: $55.8 billion (See
estimate below)
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $8.7 billion
• Unrealized earnings held by the fund: $6.3 billion
• Starting value was estimated based on the following:
• $54.9 billion estimated EOY 2017 balance of PF under
status quo
• Plus $0.8 billion from the difference in the CY 2017
dividend calculation
Investment Return: Callan Associate's 10-year forecast
• Total return: 6.95% geometric, 12.32% standard
deviation
• Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =
8.14%
• Inflation rate: 2.25%
Commissioner Hoffbeck indicated the slide reflected an FY
18 start. He reported that the scenario was very similar to
the previous two scenarios he had just discussed. The
difference was that there would not be an FY 17 draw. A
draw would begin in FY 18. The scenario would include a
full plan to fix everything as well as implementing the
APFPA. The Permanent Fund starting value would be higher
because of a lack of an FY 17 draw. The other significant
difference could be found on the following slide.
Commissioner Hoffbeck relayed slide 22: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
Permanent Fund Starting Value: $55.8 billion (See
estimate below)
• Realized portion of corpus: $40.7 billion
• Realized portion of ERA: $8.7 billion
• Unrealized earnings held by the fund: $6.3 billion
• Starting value was estimated based on the following:
• $54.9 billion estimated EOY 2017 balance of PF under
status quo
• Plus $0.8 billion from the difference in the CY 2017
dividend calculation
Investment Return: Callan Associate's 10-year forecast
• Total return: 6.95% geometric, 12.32% standard
deviation
• Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =
8.14%
• Inflation rate: 2.25%
Commissioner Hoffbeck explained that the CBR would be lower
because of not including the payback to the CBR.
Commissioner Hoffbeck relayed slide 23: "APFPA without CBRF
Transfer: Method, Inputs, And Assumptions":
• Dividend Calculation:
• The sum of:
• 20% of the POMV payout before reductions, and
• 20% of the unrestricted royalties (about 15% of
total royalties) from the most recent FY ended
• Overwriting the above calculation, the dividend for
CY2018 is $1,000/person.
• Inflation Proofing:
• If four times the 5.25% POMV payout remains in the ERA
after the POMV transfer, the amount over the four
times the POMV is transferred into the corpus.
Commissioner Hoffbeck reported that the dividend
calculation would be the same as previously calculated.
2:12:31 PM
Commissioner Hoffbeck detailed slide 24: "APFPA without
Transfer, Full Fiscal Plan: Dividend paid per Person." He
detailed the impact on the dividend. He relayed that, with
a FY 18 starting date and a full fiscal plan, the dividend
would start at $1000 and grow to $1468. He added that with
an FY 17 draw it would equal $1416 - a difference of about
$50 without a FY 17 draw.
Co-Chair Seaton asked about slide 22. He was looking at the
CBR value of $4.4 billion. On slide 6 the CBR value was
listed at $4.4 billion. However, he thought that the
commissioner had stated that if the draw did not occur the
CBR would be higher. Commissioner Hoffbeck suggested that
rather than looking at slide 6, Co-Chair Seaton should look
at slide 12. It showed the CBR listed at $6.8 billion.
Slide 12 reflected an effective date of FY 17.
Commissioner Hoffbeck advanced to slide 25: "APFPA without
Transfer, Full Fiscal Plan: Nominal Fund Size." He reported
that the slide showed the effect on the PF with a FY 18
effective date. The fund would grow to $104,079 billion in
a 24-year period. The fund would have a real value of $61
billion. The fund would start out at $55.8 billion and
would grow to $61 billion. In the scenario with a full
fiscal plan the fund would grow at a rate greater than
inflation. The earnings rate estimated failure rate would
be 0.18 percent or less than one-fifth of 1 percent.
Commissioner Hoffbeck continued to slide 26: "APFPA without
Transfer, Full Fiscal Plan: Cumulative ERA Failure Rate."
He remarked that there would be little chance of failure
under the scenario.
Commissioner Hoffbeck detailed slide 27: "APFPA without
Transfer, No Fiscal Plan: Dividend paid per Person." He
explained that the slide reflected a scenario in FY 18
without solving any of the fiscal issues. The Permanent
Fund Dividend would go from $1468 under the full plan down
to $1271 over the life of the 24-year projection.
Commissioner Hoffbeck advanced to slide 28: "APFPA without
Transfer, No Fiscal Plan: Nominal Fund Size." He reported
that the nominal value of the fund would drop to $46.3
billion down from $55.8 billion. There would be a
degradation of the fund without fixing the remainder of the
fiscal problem as well as implementing the APFPA. The
failure rate of the ERA would be 44.61 percent.
Commissioner Hoffbeck continued to slide 29: "APFPA without
Transfer, No Fiscal Plan: Cumulative ERA Failure Rate." He
highlighted that the failure rate would start to climb in
the late 2020s.
Commissioner Hoffbeck continued to slide 30: "APFPA without
Transfer, No Fiscal Plan: Median UGF Revenue/Budget. He
emphasized that the CBR would start to run out in the late
2020s at which time the state would have to tap into the
ERA to fill the void.
2:16:36 PM
Commissioner Hoffbeck presented the conclusions listed on
slide 31 "Conclusions":
Status quo situation:
• Dividend will collapse
• Permanent Fund will be used to fill budget deficits,
depleting value
Permanent Fund Protection Act:
• Stabilizes the dividend and budget with or without CBR
transfer
• However, additional revenue measures or budget cuts
are required to protect the fund. Otherwise, the
remaining budget gap will lead to unplanned
withdrawals from the permanent fund that will degrade
its value.
Commissioner Hoffbeck concluded that there was very little
difference in durability with or without the FY 17 draw.
The fund would be slightly more durable, as it would grow
larger and the dividend would be slightly larger with a
start date in FY 18. He suggested that the 5.25 percent
draw worked under the modeling - it was durable and
sustainable. All models containing a full fiscal solution
worked. However, models without a full fiscal solution were
not sustainable. Stand-Alone models were not durable or
sustainable. A broader plan was necessary.
Co-Chair Foster would be passing the gavel to Co-Chair
Seaton to discuss the supplemental budget. He asked for
questions from the committee.
Commissioner Hoffbeck indicated Emma Pokon, Special
Assistant, Office of the Attorney General, Department of
Law, was available for anyone wanting more detail or to
walk through the various forecasts. She was happy to meet
with anyone one-on-one that wanted more information
regarding the modeling.
Co-Chair Seaton asked about the transfer of the PFD for
prisoners. He thought it was calculated based on the full
dividend. He wondered if there was a necessity for a
transfer from another account to fund the amount. He asked
how the amount was accounted. He wanted to get it on record
that there was a calculation or a fund transfer that the
legislature wanted to see.
Commissioner Hoffbeck would have to get back to Co-Chair
Seaton.
HB 61 was HEARD and HELD in committee for further
consideration.
2:19:15 PM
AT EASE
2:25:13 PM
RECONVENED