Legislature(1999 - 2000)
04/22/1999 06:45 PM House FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
LOG
SPEAKER
DISCUSSION
TAPE HFC 99 - 100
SIDE 1
000
CO-CHAIR MULDER
Convened the House Finance Committee
meeting at 6:45 P.M.
104
CO-CHAIR MULDER
Stated that each approach has merit.
Each approach has excellent points. He
introduced Representative Hudson,
Representative Lisa Murkowski,
Representative Carl Morgan and
Representative Gail Phillips
194
REPRESENTATIVE BILL
HUDSON
Introduced the All Alaska Working Plan.
He spoke to the packet of material
distributed to Committee members. [Copy
on File]. Additionally, a copy of HB 156
was distributed. [See Attachment #1].
324
Representative
Hudson
Spoke to the presentation provided by the
All Alaskan Plan. He noted that R.
Phillips would review the assumptions of
how the plans work. Additionally, R.
Murkowski will explain how it would work
on the dividend fund and the impact to
that fund.
425
Representative
Hudson
Stated that the plan was formed by 12
members of the House and represents a
wide variety of areas, both rural and
urban areas of the State.
477
Representative
Hudson
Explained the process of the group and
how the plan came into being. Initially,
was functional research for the plan.
Then the research began for the plan.
The plan borrowed ideas from all research
in the State. In the beginning looked at
the Governor's plan. The governor
proposed the personal income tax. Also,
the groups looked at Dave Rose's plan.
The group looked at the Minorities
suggestions.
656
Representative
Hudson
Continued explaining the Alaskan Plan.
Also, the treaties of HB 126 were
included. The bill must be passed this
session. The flexibility of achieving
the full merits will bring billions of
dollars of income. There has been
wonderful cooperation with Jim Kelly of
the PFD.
749
Representative
Hudson
Stated that Legislative Finance helped
with the formation of this plan. This
plan is an endowment plan. It was agreed
that there would be no more overriding to
reach the shortfall. There needs to be a
revenue stream for the people at large
and a plan that will sustain and grow our
assets.
822
Representative
Hudson
There is a need for a long-term plan.
The graph shows an improvement. The plan
is needed because not one general funds
budget has stayed on its own since 1972.
With continued budget cuts it will
require $1.2 billion from the savings
account. At this pace, we will exhaust
the PFD by 2003. Action needs to be
taken now. If no action is taken the PFD
will decrease and disappear.
935
Representative
Hudson
Spoke to the possibility of an income
tax. A 5% income tax would leave the
state short. The majority of the public
rejects all these measures. The
Legislature must devise a new plan this
session. [Read from attachment].
990
REPRESENTATIVE GAIL
PHILLIPS
Spoke to the plan. All the various plans
and the endowment mechanism will fare
well. The All Alaskan Plan is an
endowment plan. Read from attachment
statements. [See Attachment #2].
1521
REPRESENTATIVE LISA
MURKOWSKI
Spoke to the All-Alaska Plan-Using Spring
forecast for oil prices. [See attachment
for full testimony]. She referenced the
handout in Members packet. [See
Attachment #3].
1622
Representative
Murkowski
The continued pay out of the dividend is
not certain under the current system.
The possible reversible of the fund could
impact the future dividend.
1713
Representative
Murkowski
Constitutional Budget Reserve will be
exhausted without a plan there will no
longer be a dividend.
1748
Representative G.
Phillips
The Plan closes the fiscal gap and will
provide sustained funding for Alaska's
needs. The legislation has been provided
to the House Finance committee in hopes
of creating a final proposal to bring to
the people.
1806
Representative
Hudson
Noted that the two bills have been
distributed to committee members. The
Plan members offered to overview the
bills.
1846
Vice-Chair Bunde
Is the Plan have a savings account,
earnings from the permanent fund go into
that, the entire Constitutional Budget
Reserve goes into that account.
1874
REPRESENTATIVE GAIL
PHILLIPS
The Constitutional Budget Reserve will
grow by $100 million dollars every year
from settlements and it can grow or it
can be shut down.
1902
Vice-Chair Bunde
How will the bill pass
1909
Representative G.
Phillips
It will take 30 votes.
1919
Representative
Hudson
This would be a bipartisan measure.
1930
Representative
Hudson
Recommend that the legislature would
disband the constitutional budget reserve
to retain a higher level of return into
the savings.
1961
Representative G.
Phillips
Stated that the charts show how the gap
would be filled.
1974
Representative
Hudson
Explained the larger the corpus the more
stable the account will be over time.
1988
Co-Chair Mulder
Agreed from previous testimony. Return
would 8.7% return.
2003
Representative
Foster
Thanked the group and their effort.
2013
Representative J.
Davies
Spoke to the endowment concept. He asked
if the 8% were applied to the total
savings account. He asked what it would
be called another account.
2045
Representative G.
Phillips
Stated that from an historic perception
it would be cleaner to establish a new
endowment account. Total disclosure.
2070
Representative
Hudson
Using the PFD for the original intention.
2081
Representative J.
Davies
It is essentially the same as the
Earnings reserve Account.
2097
Representative
Hudson
By keeping it in the ERA it would
essentially stay in the corpus of the
PFD. The PFC but outside would manage
it.
2124
Representative J.
Davies
Suggested that it could be Constitutional
Budget Reserve could stay and commingled
and achieve and receive the same results.
2151
Representative
Austerman
Reason to put everything into one account
would keep it so that it could be
invested as one unit. It would be
invested so that the cash can grow.
2180
Representative J.
Davies
It could be invested long term and
technically it would be available by 21
votes rather than 30 votes.
2199
Representative G.
Phillips
The public can understand it more
clearly.
TAPE CHANGE HFC 99-
100, Side 2
000
Representative G.
Davis
The dividend can not be guaranteed
forever.
024
Co-Chair Mulder
Why the assumption of the price of oil
044
Representative G.
Phillips
Agreed that it was a conservation figure,
and the group believes that the oil price
will stay that low within the near
future. Making the plan work at a low
price and continue to pay for state
services and the continued Permanent
Fund.
121
Co-Chair Mulder
Did he understand correctly that the
dividend would stay at $1000 in the
future.
165
Representative
Hudson
That is correct. If there is not change
in the State's fiscal policies, financial
assets will disappear entirely by the
year 2011.
209
Representative
Austerman
Explained that it would be better to have
a program that works, even though the
dividend will go down, eventually it will
go up. The same scenario will happen
with a flat funding and will include cuts
for the next five years. In the next
five years, the plan will hold inflation.
It will allow the endowment plan to have
a solid start. The plan will take
dedicated work.
345
Vice-Chair Bunde
Acknowledged the work put into the plan.
He voiced appreciation of the conserve
estimate price of oil. He listed the
highest preference of his district. One
area that was not conservation was the
amount of cuts for the next five years.
507
Representative G.
Phillips
Responded to comments on cuts to the
dividend. If the price of oil goes up,
the Legislature will have the flexibility
to increase the dividends. The general
public has forgotten the days when our
checks were $400 to $500 dollars.
567
Representative J.
Davies
Noted that his constituents have asked
that there not be any more cuts. He
summarized that the majority of people
feel that the State has cut enough human
services. People want the curve to be
turned. The Fairbanks Assembly has asked
that capping occur and specifically that
there needs to be an income tax
implemented. Long stability should add
more revenue and that could happen
through a income tax. There needs to be
more revenue up front.
745
Representative G.
Phillips
Acknowledged that the group has gotten
that feedback from residents throughout
the state. She emphasized that this is a
long-term plan.
791
Representative
Hudson
Followed up that the final curve does not
include the tobacco tax settlement, the
annual cig. Tax increase and the rental
car tax increase. These are potential
enhancements. He stated that it will be
difficult to make these proposed
reductions.
854
Representative
Austerman
Voiced concern that the last seven years
the State has been spending the savings
account. Had the proposed approach been
taken in the last five years, this would
not have occurred. This plan is a
working document. It is not set in
concrete. Each year it needs to be
addressed piece by piece.
944
Representative G.
Davis
Noted that his involvement in the group
always included flexibility. This plan
could be implemented and things can be
reduced and cut. That is where the
flexibility of the plan happens. The
revenues should be increased. The public
always comes back to the dividend. Keep
a sharp eye on spending and new revenue
sources. This would diversify the
economy.
1059
Representative
Grussendorf
He stated that there has not been a
budget that has stood on its own since
1992. He spoke to the Constitutional
Budget Reserve, which is meant to be used
that way. He spoke to the enhancements
that had been included. He asked if the
cuts would be to the general funds or
other funding sources.
1146
Representative
Hudson
Replied that would be to the general
funds. There has not been increased to
business license since 1949. When a plan
is developed, one includes as many
thoughts as possible to consider. There
needs to be lost of flexibility.
1204
Representative
Grussendorf
Asked if the legislation was a serious
draft.
1217
Representative G.
Phillips
Stated that they only wanted to put a
plan together for the finance Committee
to consider.
1241
Representative
Williams
Suggested that the plan was good
1253
Representative J.
Davies
Referenced the Capital Budget. He stated
that there were aggressive projects in
the Capital budget. He thought with
those projects, there would not be a lot
of headway on the plan.
1297
Representative G.
Phillips
Stated that the State needs to take a
long-range goal. A goal must be
established so as to make a long-term
commitment. That will take a different
philosophy of how to do government. [See
Attachment #4].
1352
Representative J.
Davies
Appreciated that concept and asked that
there be consensus in that direction.
The practical problem is how to reduce
the budget. Even with privatization,
there is little possibility of reducing
the budget. All the fat has been
squeezed out of the system. Setting
priorities requires that less should be
done.
1442
Representative
Hudson
Need to establish a sustainable source of
money. He suggested the bond board. The
entire general obligation bonds are
tools.
1529
WILSON CONDON,
COMMISSIONER,
DEPARTMENT OF
REVENUE
Provided a handout on the Balanced Budget
Plan for Alaska. [Copy on File]. He
introduced Chris Phillips, Investment
Officer, Department of Revenue.
1722
Commissioner Condon
Agreed that there needs to be a plan for
Alaska's future. He spoke to the current
oil prices, which closed at $16.50/bbl
today. Even with higher oil prices, the
Constitutional Budget Reserve will go
into a deficit in the future.
Commissioner Condon provided an overview
of the handout and how holding the line
would affect the State's long term
economical future. He stated that the
oil price projected by the State is $1 a
barrel more than that projected by the
All Alaska Plan.
1835
Commissioner Condon
The state has gone from 2 million barrels
a day in 1988; now at 1 million barrels a
day at this time. There will be four or
five years at the 1 million barrels a
day.
1921
Commissioner Condon
Explained that even if they have mis-
guessed on oil prices and they are higher
action still needs to be taken now.
1945
Commissioner Condon
Reviewed five principles that should be
included in restructuring state finance,
as contained in page 7.
2002
Commissioner Condon
Reviewed page 8, concluded that a broad-
based tax is needed to preserve a healthy
dividend.
2036
Vice-Chair Bunde
Noted that many of his constituents are
not highly impacted by the dividend, but
would be impacted by an income tax. He
questioned why the government would give
out money on one hand and take it back
with the other.
2104
Commissioner Condon
Observed that there are individuals that
feel strongly about both the dividend and
the tax. He noted that the permanent fund
dividend
(TAPE CHANGE, HFC 99
- 101, Side 1).
000
Commissioner Condon
Noted that total use of the permanent
fund dividend would mean that non-
residents would not contribute anything
on money made in Alaska
103
Vice-Chair Bunde
Asked the percentage of people would fall
into this category.
135
Commissioner Condon
Noted that 10 to 11 percent of Alaska's
workforce would fall into this category.
165
Commissioner Condon
Discussed page 9, use of permanent fund
earnings (PFE). The Governor's plan
recommends a transfer of $4 billion in
PFE to a separate fund CBRF. He noted
that the Governor favors a broad general
tax. He added that the Governor
recognizes the need for responsible
budget cuts.
340
Commissioner Condon
Reviewed page 10. Noted that there are
other approaches that could be used to
balance the budget. Emphasized that only
a balanced approach that includes PFE, a
broad-based tax, and budget cuts would
preserve a sizable permanent fund
dividend.
492
Commissioner Condon
Further discussed the need for a broad-
based tax.
533
Commissioner Condon
Discussed page 11, principles on which
the Governor is weighing balanced budgets
plans.
668
Co-Chair Mulder
Observed that he is opposed to an income
tax, but appreciates the Governor's
putting it on the table.
721
Co-Chair Mulder
Noted that 10 to 12 percent of the
workforce is from out of state. He asked
if it the data is broken down by
industry.
753
Commissioner Condon
Responded that an estimation could be
made from Department of Labor data.
788
Representative
Austerman
Stressed that assumptions need to be
agreed on.
868
Vice-Chair Bunde
Spoke to the unfair depiction of the
Legislature costing the hundreds of
millions of dollars.
932
CHRIS PHILLIPS,
SENIOR INVESTMENT
OFFICIER, DEPARTMENT
OF REVENUE
Refuted that information. The
Constitutional Budget Reserve and cash
flow needs are evaluated often. Assets
in equities were pulled in December and
were placed into the bond fund and the
cash fund. Those assets were moved
because there was not a five-year
horizon.
1005
Vice-Chair Bunde
That action was based on cash flow.
1027
Representative J.
Davies
Stated that it all started seven years
ago. He was speaking of the equity
allocation in statute.
1071
Representative G.
Davis
Asked if there was a cap on a sizable
PERMANENT FUND DIVIDEND.
1083
Commissioner Condon
A sizeable dividend will be a political
decision.
1098
Representative J.
Davies
Noted that in the plan, the dividend
would be $1200 dollars and then growing.
He asked if that was correct.
1122
Commissioner Condon
Agreed that would be in the medium case.
1133
Ms. Phillips
Stated that would tend to be depending on
how it was calculated. It would
naturally fall and would be around $1400
dollars.
1170
Representative
Austerman
Spoke to the endowment concept and asked
if it was acceptable to the Governor.
1207
Commissioner Condon
Stated that it was. He commented that
the Governor would look closely at the
plan and conclude that a rolling average
of the market value would be used to
establish the pay off. Otherwise, there
will be volatility and that is
attractive. Additionally, the Committee
should think about the comfort with the
implied equity allocation in the high 5%.
That will place the State in the high 60%
equity percentile. The Board of Trustees
University would find itself in a
different situation. The potential
volatility to reach that return.
1346
Representative
Austerman
Mentioned the concern regarding the
assumptions.
1363
Representative
Williams
Broad general tax for enhanced revenue
sources. Would the out of state people
would that be constitutional.
1418
Commissioner Condon
Did not know until that would go to
court. The tax was set a few years ago.
Alaskans who receive the dividend pay
nothing. In order to raise the revenue
needed, there is no way to structure
that.
1494
Vice-Chair Bunde
Like to have defined quantities.
Sizeable dividends. Reasonable
deductions can be defined in many ways.
A dollar figure needs to be placed on
reductions.
1531
Representative
Grussendorf
Spoke to the assumptions that are crucial
to the Alaska Plan. He asked if
Commissioner Condon agreed with some of
those assumptions that the Department
agreed with the cost of oil.
1570
Commissioner Condon
Yes agreed hesitantly with the
assumptions. He stated that they are
more conservative than the Governor has
been on the oil price. Additionally,
that plan is more aggressive in terms of
the financial returns. All projections
done by Department of Revenue have been
7.4%. The All Alaska plan was based on a
8% projection. Some of the is a
judgement call. He acknowledged that
this would be worked through.
1693
Representative J.
Davies
Echoed the comments to make an apples to
apples comparison between these two plans
and as the have evolved.
1732
Representative J.
Davies
Key assumption is growth and relates to
budget cuts. Responsible plan relates to
cuts in the last five years.
1768
Commissioner Condon
A flat budget discussion. Over the
longer term there will be a need to find
a way to be more efficient so that the
total expenditure can stay level. He
stated that he believes that making
investment in kids is a lot less
expensive than taking care of prisons.
1844
Representative J.
Davies
Could a flat budget take care of U of A.
1872
Representative J.
Davies
Asked about the capital budget for the
Governor.
1883
Commissioner Condon
Stated that it was the same as the last
number of years.
1898
Representative
Foster
Thanked the Commissioner.
1920
Representative Moses
Spoke to the work force of the state and
how it is different that other states.
There are many people in the State that
are only seasonal workers. He pointed
out the transient workers. People do not
want to pay taxes and want to keep having
their dividends. Many people plan to
leave the State when they get their "nest
egg". They do not care about the future
of Alaska.
2006
Vice-Chair Bunde
Spoke to residency time requirement.
2016
Representative Moses
Change the name to the Real Alaska Plan.
2057
Representative
Austerman
Referenced the letter he distributed
regarding an endowment possibility.
2100
FRANK DILLION,
(TESTIFIED VIA
TELECONFERENCE),
ALASKA TRUCKING
ASSOCIATION,
ANCHORAGE
Provided recommendations made by the
Alaska Trucking Association. Board
members have reviewed the basic fiscal
gap allocations. The focus of the review
was on what the plans focus was. The
most acceptable plan was the All Alaska
Plan.
TAPE CHANGE, HFC 99-
101, Side 2
000
Mr. Dillon
Continued that the ATA endorses the All
Alaskan Plan. This will make state
government more efficient. The plan
could several years to implement. This
would put the State on a reasonable path
to addressing the economic problems.
Does not support putting this to a vote
of the public.
143
RALPH SAMUELS,
(TESTIFIED VIA
TELECONFERENCE),
CHAIRMAN, ANCHORAGE
CHAMBER OF COMMERCE,
ANCHORAGE
Asked that a plan be implemented this
session. Reduce state spending based on
a model that produces results.
Privatization should be examined
everywhere. The state needs to get the
confidence of the Alaskan people. Some
programs must be phased out. Public
sector versus private sector wages should
be comparable. Revenue equation revenues
between PERMANENT FUND DIVIDEND and
Earnings reserve. Should continue to use
the Constitutional Budget Reserve. The
use of GO debts carefully considered.
Lastly consider a broad-based tax.
623
Representative
Foster
Thanked the speaker. It is not as simple
as it looks. In the village area
essentials are different in each election
district (40) that is related to health
and safety.
675
Vice-Chair Bunde
Commented on the impact of taxes. There
are constitutional mandate places on the
state.
760
Co-Chair Mulder
Delicate economy and is not broad based.
The economy will be in a turmoil for the
next year.
817
Mr. Samuels
Commented on previous comments. No one
wants to be cuts. Everyone wants to make
sure that they are getting something for
their dollar. Need to establish a goal.
Across the board cuts does not work well.
965
Co-Chair Mulder
Stated that it is a delicate decision in
making reductions.
984
KEN FREEMAN,
(TESTIFIED VIA
TELECONFERENCE),
EXECUTIVE DIRECTOR,
RESOURCE DEVLEOPMENT
COUNCIL, ANCHORAGE
Gave a brief overview of the Resource
Development Council (RDC).
1051
Mr. Freeman
Expressed support for a long-term
solution.
1105
Mr. Freeman
Noted that there are a lot of good plans.
RDC supports the following steps in the
order that they are provided, responsible
reductions in state government
(performance standards, alternative ways
of delivery such as privatization);
diversification through the use of PFE;
and implementation of a broad based tax.
There is more support for a sales tax
than an income tax. Emphasized that a
combination of tools is needed to solve
the problem.
1261
CHERYL FRASCA,
(TESTIFIED VIA
TELECONFERENCE),
FISCAL POLICY
COUNCIL, ANCHORAGE
She gave a brief overview of the Fiscal
Policy Council. She emphasized that it is
important that any plan retains the value
of the financial assets. She provide
members with a copy of their plan
(attachment 1)
1395
Ms. Frasca
Discussed page 4.
1434
Ms. Frasca
Stressed that the Council is ready to
help.
1451
Representative J.
Davies
Asked if there is data on the All Alaskan
Plan.
1466
Ms. Frasca
Explained that the value in 2010 would be
the same as it is today.
1479
Representative J.
Davies
Stressed that there is a shock absorber.
1494
Co-Chair Mulder
Agreed.
1499
Representative
Grussendorf
Referred to page 2. He asked if the group
has ranked taxes.
1524
Ms. Frasca
Stated that the Council acknowledged that
the All Alaska Plan proposes some new
taxes. She noted that it reimposes the
school tax.
1553
Co-Chair Mulder
Stated that if the permanent fund
dividend was used as a shock absorber
there would be a correlation between the
size of the dividend.
1607
Ms. Frasca
Noted that it is new economic activity
that does not bring a return to the state
treasury with out a broad base or income
tax.
1634
Vice-Chair Bunde
Noted that the availability of additional
state land would result in the need for
additional services.
1688
ARLISS STURGELEWSKI,
(TESTIFIED VIA
TELECONFERENCE),
ANCHORAGE
Noted her appreciation of all of those
involved.
1706
Representative
Foster
Expressed frustration that in his six
terms he has seen numerous legislators
come and go. During this time there has
been little agreement on any plan. He
noted the instability of the system. He
questioned if the ability to design a
long-range plan exists. He maintained
that he spends his time defending himself
and his people.
1799
Co-Chair Mulder
ADJOURNMENT
The meeting adjourned at 9:44 p.m.
* [ATTACHMENT #1].
All-Alaskan Plan Finance Committee Presentation
Today we have provided you with the following materials:
1. Sponsor statement
2. The All-Alaskan Plan with color copies of the plan's revised
spreadsheets
The next 3 documents have been previously presented to the committee,
and you may already have these:
3. "The Case for Increased Flexibility: HB156"
4. "Alaska Permanent Fund"
5. "Alaska's Public Finances"
Over the next 45 minutes we will make the following presentation:
? Hudson Presentation: how the working group began, how the
concept of an endowment was adopted, how the plan works in
general terms, the need for action now, etc.
? Phillips Presentation: review the major assumptions used in
our endowment model, and a more specific explanation on how
the endowment works.
? Murkowski: Explain to you the effects on the dividend under
three different scenarios.
? Questions from Committee members
The All-Alaskan Plan is the product of 10-12 deeply concerned House
members who believe we must act this year. These members broadly
represent all regions of Alaska- Hence: "All-Alaskan"
The process was mostly kitchen-table discussions and dividing up the
research.
5-6 worked on functional research identifying the essential
services of government
5-6 worked on the revenue side
The plan didn't hesitate to borrow other ideas. Looked at:
? Governors $4 billion-unrealized & personal income tax
? Dave Rose's-Rose Plan
? Minority and Majority thoughts
? Cremo Plan
Took 2 months to reach our groups approval or comfort level.
The plan drew upon several documents-
? Alaska Public Finances (prepared and presented by Commissioner of
Revenue, Will Condon)
? Alaska Permanent Fund (a treatise on what elements and general
history of the PF was and is)
? APFC case for increasing investment flexibility-HB 156 (which
formed the basis for my vote to amend HB 156 to the 10% increased
asset allocation.) This is a must pass bill!!!
Our team conferred with Jim Kelly of the PF Corp. and our own finance
analysts-Phil Oakuson and David Teal as well as Legislative Legal
Tamara Cook.
Our adopted concept was finally- an endowment plan.
We agreed:
? No more overriding reliance on macro cutting to meet the $1 billion
shortfall!
? Need to find a plan that would sustain and grow our financial
assets
? The need to develop a sustainable, reliable flow of income from our
financial assets: PF, CBR and ERA
? A plan that looks long-term and puts all options on the table,
including potential enhancements for the future.
? A plan that would be based on conservative figures
WHY DO WE NEED A PLAN?
? Because not one GF budget has stood on it's own since 1992. Over
$4.3 billion has had to be borrowed from our savings account, the
CBR, to balance those annual budgets despite over $275 million in
spending cuts, plus eating inflation over these same years.
? Because even with continued budget cuts, we will have to withdraw
another $1.2 billion from our savings account this year and $1.0
billion each year thereafter to balance our operating and capital
budgets. At this pace we will completely exhaust our CBR by 2003
and will be forced to turn to our Permanent Fund Reserves and major
new taxes, including both a Personal Income Tax and probably a
Statewide Sales Tax, to balance our budget.
? Since PFD's are based upon P.F. earnings, if we take no action, we
can expect the PFD's to decrease and eventually disappear as we are
forced to turn to PF earnings once we have exhausted the CBR. Rep.
Murkowski will speak in more detail on this later in our
presentation.
? Adoption of an Income Tax, as some have suggested, cannot bridge
the gap. An income tax is estimated to generate a maximum of $350
million per year. That still leaves almost $850 million short!
? A 5% statewide sales tax would produce only $300 million, still
leaving us $900 million short.
? Since a majority of the public appears to reject either of these
tax measures and it would be impossible to reduce the budget by
even $100 million, let alone $1 billion, we believe the legislature
must devise and implement a new plan, and implement it this
session.
I'm going to turn this over to Representative Phillips, who will
explain the endowment plan and the assumptions we used in our model.
*ATTACHMENT #2-REPRESENTATIVE GAIL PHILLIPS
Brief Introduction and Comments
? Thank you for inviting us to present our plan
? My part of the presentation today is to go over the major
assumptions contained in the All-Alaskan Plan.
? Phil Okeson from Legislative Finance is also here if there are
questions requiring his expertise.
? We know that in the end, you will examine all the various plans
under study to a standard set of assumptions so you can compare
them and see how reasonable and sustainable they are.
? We believe the All-Alaskan Plan, with its endowment mechanism, will
fare well in that process - even if you run it over 20 years and I
encourage you to do so.
THE ALL-ALASKAN PLAN IS AN ENDOWMENT PLAN
? Our plan stops the raid on Alaska's SAVINGS accounts and begins
funding part of government as well as ongoing Permanent Fund
Dividends from our endowment payout of our considerable savings
accounts.
? The plan does not take one dime from the corpus of the Permanent
Fund
? The plan would legislatively create the Alaska Income Account,
which will replace and receive the balance in the Earning Reserve
and the Constitutional Budget Reserve. The Alaska Income Account
will be managed as an endowment fund by the Permanent Fund and will
start out at $5.9 billion.
? Net income from the Permanent Fund will accrue to this account as
well.
? The endowment works because we never "eat" the principle of our
accounts. In fact we build both over time and that growth produces
a steady growth in income revenues to fill our $ billion dollar gap
and maintain a healthy Permanent Fund Dividend for years to come.
? If members will please turn to "revised" color spreadsheet in your
packet.
First - Revenue Assumptions
? Oil Prices - the working group wanted to take a very conservative
stand when it came to oil prices in this plan and therefore we used
$13.50 per barrel for oil for the entire 10 years. If member look
across the spreadsheet you will see that the Spring Forecast is
shown right above our models price of $13.50 and you can get an
idea of the differences each year. It is substantial - varying
from just 7 cents a barrel in FT00 to $7.41 cents a barrel in FY11.
? If oil prices increase above the model projections of $13.50 per
barrel, or if Alaska brings on a new gas line or an increase in
crude oil production, our plan could fulfill Alaska's fiscal needs,
including the dividend, forever.
? Production Volume - while we did not adopt the spring forecast as
far as prices, we did use the lower production numbers contained in
the Spring Forecast - so we have a common element here.
Turning to Market Assumptions
? Permanent Fund total return - we use 8.25% return for all assets of
the All-Alaskan Plan which includes, the CBR, the new Alaska Income
Account and the Corpus of the Permanent Fund itself. In our
initial discussions with Permanent Fund management they feel
comfortable with this rate of return.
Also, as Rep. Hudson noted, and as the materials you have before
you suggest, this return would likely increase if we grant the
Permanent Fund Corporation the flexibility they have requested in
HB156 - they estimate 8.69% could be returned.
Inflation Assumptions
? General Inflation is 3% for all years
? Agency expenditures, Formula Programs, School Expenditures, and the
Capital Budget are held "flat" for five years and then increase by
2% each year thereafter.
Population Growth Assumptions
? We also increase School Expenditures by 2.65% in FY00 and then by
1.5% each year thereafter to account for growth.
? And, the population receiving dividends is increased by 1.6% a year
? Inflation Proofing Assumptions - this area shows 0 because our
endowment payout method automatically inflation proofs.
Endowment Assumptions
? The payout from the endowment begins at 5.55% in FY00, goes to
5.69% in FY01, and then is set at 5.75% until FY11 at which time it
stabilizes at 5.25%. We believe that this is a sustainable amount.
? In our initial discussions with Permanent Fund management they feel
comfortable with this rate of payout - particularly if they get the
flexibility requested in HB 156.
? As you know, the difference between this endowment payout and the
earnings of our savings accounts described earlier (8.25%) is left
in our savings accounts for inflation proofing.
? As stated in the handout before you "The Case for Increased
Flexibility" an income distribution using POMV or "percent of
market value" like the All-Alaskan Plan has many advantages. It
provides more predictability and stability. It helps disconnect
investment decisions from short-term expenditure considerations.
The Permanent Fund folks can speak to additional advantages using a
POMV distribution.
? Turning to the Spreadsheet itself on the next page . . . . . .
? We show the new revenues mentioned earlier (school tax, rental car,
etc) = flexible, anything other new revenues could be place in this
fund as well.
? We (under expenditures - budget cuts) show the continuation of
general fund spending beginning with $50 million in FY00 and
dropping to $10 million in FY04
? Finally - I would like to end by drawing your attention back to the
color charts at the start of this packet.
? Let's look at "Alaska's Savings Accounts" to see what they look
like at the end of ten years of the All-Alaskan Plan.
? The corpus of the Permanent Fund grows from $18.9 billion to over
$20.6 billion!
? Unrealized gains grow from $3.6 billion to over $6.5 billion!
? The earning's reserve, now the Alaska Income Account when combined
with the Constitutional Budget Reserve - grows from $5.3 billion to
over $14.1 billion!
In total, over ten years the All-Alaska Plan grows these savings
accounts from around $28 Billion dollars to over $40 billion dollars!
I would like to end with a few comments from Mr. Scott Goldsmith's
(ISER) who has been kind enough to do an initial, independent review
of the All-Alaskan Plan:
? "Using the base case scenario, it does a good job of sustaining the
value of financial assets. This is due to the fact that all
financial assets are automatically inflation proofed."
? "Recognizes the need to use all tools."
? "Retains flexibility in the use of earnings."
? "Including market value of all financial assets in the base for
withdrawal formula contributes to sustainability."
? "Endowment rule creates potential for the Permanent Fund to earn
maximum return consistent with the risk target by adopting a
prudent man rule for the portfolio."
? "Dividend and GF spending compete directly for available revenues
and this leads to accountability and public involvement in the
allocations of scarce public resources."
? The other color graph we would like to highlight for you this
evening is the one on "Dividends Per Capita" and Rep. Murkowski
will be speaking about that shortly.
*ATTACHMENT #3 - REPRESENTATIVE LISA MURKOWSKI
Permanent Fund Dividends Per Capita - Four Scenarios
As was mentioned earlier, the original spreadsheet included in the
All-Alaskan Plan booklet contained an error.
? If we look at the revised spreadsheet, (base case) and under the
assumptions that were detailed to you earlier, the permanent fund
dividend is projected to hold at $1000 for nine years and then fall
off due mostly to lower oil production.
For the Committee, we also had Legislative Finance run three
additional different scenarios:
1) The first one is using the Governor's Spring Forecast - as you
can see moving to the higher oil prices secures a dividend at
$1000 for the first ten years of this plan.
2) The second scenario is run with Permanent Fund Earnings adjusted
up to 8.69% to reflect passage of HB156 - which gives them
additional flexibility. The Dividend under this scenario is
projected to stay at $1000 for almost seven years and then drop
off to around $800 on year 10.
3) The third scenario is with both of the above, that is using the
Spring Forecast for oil prices and higher Permanent Fund
earnings. This scenario also shows the dividend staying at $1000
for length of this plan.
We think it is important to remind everyone, that even under our
current system, the continued payout of dividends is not certain. We
have been blessed with a bull equities market for many years. The
possible reversal of this market trend, combined with the required
statutory inflation proofing of the fund and increased population
growth could also severely impact our future dividends.
Also, as you all know, if some plan is not adopted, we will continue
to spend the Constitutional Budget Reserve (CBR), and then most likely
turn to the only other pot of money readily available for
appropriation, the Earnings Reserve.
Using over one billion dollars a year to fill the deficit, the CBR
will be exhausted in less than three years and the Earnings Reserve
itself in about two years.
It is reasonable to say that without a plan that within five years,
the dividend will no longer exist and have no reasonable chance of
ever being resurrected.
*ATTACHMENT #4
CLOSING COMMENTS - REPRESENTATIVE GAIL PHILLIPS
? The All-Alaskan Plan closes the fiscal gap, is conservative in its
estimation, and will provide sustained funding for Alaska's
essential needs.
? The time to act is now. We must stop "eating our seed corn".
? We have included a number of bill drafts in the green book before
you. We looked at a number of ways to establish this endowment
account. With great respect for the House Finance Committee, we
have not, ourselves, introduced any of this legislation. Instead
we offer this legislation to this Committee in hopes that it aids
you in your efforts.
? Members of the All-Alaskan Plan Working Group are more than willing
to work with all of you to finalize a proposal to bring to the
public.
? Once again, thank you for you time and interest.
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