Legislature(1999 - 2000)
05/10/1999 06:15 PM House FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 231
"An Act relating to income of the Alaska permanent
fund, to the Alaska Income Account, and to permanent
fund dividends; and providing for an effective date."
HOUSE BILL NO. 232
"An Act making a special appropriation from the budget
reserve fund under art. IX, sec. 17(c), Constitution of
the State of Alaska, to the Alaska Income Account; and
providing for an effective date."
Discussion occurred regarding the opportunity for the public
to have input on HB 231 and HB 232.
PHIL OKESON, FISCAL ANALYST, LEGISLATIVE FINANCE DIVISION
provided information on HB 231 and HB 232, The Healthy
Alaska Plan. He noted that the "Do Nothing" assumption is
built on the Department of Revenue's spring 1999 Forecast of
moderate new oil revenue. The average price per barrel would
go from $13.57 in the year 2000 to $27 dollars in 2020. The
Department of Revenue forecast only includes known wells. He
maintained that it is "probably not realistic to believe
that we won't have any new production, coming on line in the
future."
Mr. Okeson explained that the Do Nothing Plan estimates 25
percent of potential fields would come on line. Some
potential fields have a 100 percent probability of coming on
line. The bulk of fields are still speculative. There is no
new revenue included in the proposal for the first two
years. The third year includes $4.5 million dollars for new
revenue. New revenues rise to approximately $150 million in
2012 and drop back to $140 million dollars in the year 2020.
He maintained that this is a relatively conservative
assumption.
The permanent fund is estimated to earn 7.75 percent on its
total returns under the current asset allocation structure.
There is a 1.45-percent growth allocation for formula
education only. The formula education line is the only
aspect of state government that has a built in growth
factor. Permanent fund dividend recipients are anticipated
to grow at 1.1 percent.
Representative J. Davies maintained that the Do Nothing Plan
should assume the same equity limits as the Health Alaska
Plan. Co-Chair Mulder acknowledged that the Health Alaska
Plan includes increased equity limits and stated that the Do
Nothing Plan would be amended to contain the same equity
limits. Representative J. Davies pointed out that the
dividend rate has been growing at 1.6 percent over the last
5 years.
Mr. Okeson noted that the Do Nothing Plan averages earnings
over a 5-year period. He reviewed chart 2 on page 7 of
Attachment 1 (copy on file). He observed that the
Constitutional Budget Reserve would run out in the year 2002
or 2003 under the Do Nothing Plan. The earning reserves
would be used in the out years. Unrealized gains would be
used when the earning reserves run out. The permanent fund
dividend calculation is based on realized gains. Income from
stocks sold and interest income from bonds are included. As
unrealized gains are realized the dividend calculation would
increase. More would be paid out in dividends at the time
that savings accounts are running out due to the dividend
calculations. At this point unrealized gains would run out
and the only thing left in the savings account would be the
corpus of the permanent fund. The corpus of the permanent
fund cannot be used to pay dividends. Dividends would then
crash down. Managers would be forced to sell stock to get
cash value out of a realized gain in order to pay the
dividend. This can cause problems if it is not a good time
to sell the stock. There would still be a slight dividend to
pay for government if government goes not grow beyond the
base amount which only includes a 1.45 percent growth for
education. If government costs rise the dividend could be
lost.
Co-Chair Mulder asked how a stock market correction would
affect the plan. Mr. Okeson stated that a major correction
or crash would be detrimental to all of the plans. He
stressed that the question is what is the worst case
scenario. He stated that a sustained flat market could force
a situation where there is not enough earnings reserve to
pay the dividend.
Co-Chair Mulder asked how a one-year down turn in the stock
market would affect the plan. Mr. Okeson stated that if
there were a bad year without a correction the calculations
would be moved back.
In response to a question by Representative Foster, Mr.
Okeson explained that the dividend crash would occur because
of a depletion of the savings accounts. The only way to pay
for government would be to realize gains. When gains are
realized, the dividend calculation forces a higher and
higher dividend until the only thing that is left is the
amount that the corpus gains each year.
Vice-Chair Bunde pointed out that a tax could replace the
dividend. Mr. Okeson observed that it would take a one and a
half billion dollars in taxes to keep the dividend up.
Mr. Okeson emphasized that the decision to save must be made
by 2004. By 2011 unrealized gains will be gone. This causes
a spike in the dividend. The permanent fund corpus would
continue to grow due to inflation proofing and dedicated oil
revenues. All other savings accounts would be depleted.
Interest from the corpus would not be enough to fund
dividends, inflation proof the fund and pay for government.
Co-Chair Mulder pointed out that the nexus would occur
somewhere between the years 2006 and 2008. At this point the
Constitutional Budget Reserve and the Earnings Reserve
accounts would be depleted. Unrealized gains would be the
only remaining source for dividends.
Mr. Okeson demonstrated that the state's $28 billion dollar
savings account has to grow by 3 percent each year in order
to retain the same purchasing power. By the year 2020 the
permanent fund would have to be $52 billion dollars. He
maintained that this amounts to "robbing from your children
and your grandchildren." At this point the only option is to
take from the corpus.
Representative J. Davies pointed out that when the crash
point is reached the dividend would no longer exist.
Mr. Okeson noted that there would be a $10 to $12 billion
dollar difference.
Mr. Okeson noted that the deficit would be plugged by first
using the Constitutional Budget Reserve. Then the Earnings
Reserve Account would be used. After that realized gains
would be used and finally permanent fund dividends.
Vice-Chair Bunde pointed out that the dividend would reach a
point where it would be to small to be worth running the
program. Mr. Okeson agreed that the cost to administer the
program could be greater than the amount distributed.
Representative Williams asked how much the state would
receive from the corpus of the fund to run government. Mr.
Okeson noted that the corpus would earn approximately $1.5
billion dollars after inflation proofing.
Mr. Okeson discussed the Healthy Alaska Plan. The plan is
based on the Department of Revenue's spring revenue forecast
and an assumption that the permanent fund would earn 8.4
percent. The plan requires greater flexibility for the
fund's asset allocations. The plan requires continued
constraint on government spending, sustainable reductions of
$40 million dollars in the current year, one-time cuts of
$35 million dollars in the current year, and $30 million
dollars of sustainable cuts in the next year. Spending would
remain flat in the third years. After the third year a 1.45
percent increase would be allowed for education, the
University, public safety, transportation and maintenance.
These were considered to be essential services. In the year
2002, there would be an additional $50 million dollars for
capital spending. This would grow at 1.45 percent in
subsequent years. Population for dividend growth would
remain at 1.1 percent.
In response to a question by Representative Williams, Mr.
Okeson explained that the $50 million dollars for capital
spending would be in addition to the $85 million dollars
included in the primary years. Co-Chair Mulder acknowledged
that an excess of $200 million dollars is needed to maintain
the current infrastructure in the state.
Mr. Okeson further explained that the plan would have a
payout of 5.25 percent of the market value of the fund. This
would be based on a five-year period, after the transition
period. For example, the FY 2000 budget would be based on FY
98. This would also lower the payout percentage over years.
A $1 thousand dollar dividend would be guaranteed through FY
2001. Afterwards, 42 percent of the payout would be
dedicated to future dividends. Dividends would be inflation
proofed.
In response to a question by Vice-Chair Bunde, Mr. Okeson
explained that in the first couple years of the plan the $1
thousand dollar dividend would be guaranteed. Afterwards,
stabilization procedures would help reduce fluctuations.
Earnings in any given year can vary. If a percentage of
market value of assets are used the variation will be
smaller. It would float with the market. The market tends to
increase overtime.
Representative Grussendorf asked if there would be a minimum
of $52 million dollars in the corpus of the fund after 20
years. Mr. Okeson stressed that courage is needed to stay
the course in markets. Co-Chair Mulder pointed out that it
would be similar to the Teachers' Retirement System. Mr.
Okeson pointed out that the dividend would be endowed. The
dividend is not the shock absorber. The general fund
spending is the shock absorber.
Mr. Okeson emphasized that up turns in the market would help
weather the down turns. It would be unusual for the market
not to increase overtime. He explained that the deviations
over-time are smaller.
Representative Austerman observed that the Income Account
could be the buffer. Co-Chair Mulder agreed and added that
the corpus of the fund would never be jeopardized.
Representative Williams asked how a 42 percent payout was
derived. Mr. Okeson explained that 42 percent payout would
result in a $1,000 dollar dividend and is sustainable.
In response to a question by Representative G. Davis, Mr.
Okeson explained that an endowment is based on a payoff
percentage that does not exceed the long-term, real rate of
return.
Representative J. Davies referred to spreadsheets on the
Constitutional Budget Reserve yield. Mr. Okeson explained
that the Constitutional Budget Reserve is moved into the
Alaska Income Account. There are still monies that would be
deposited into the Constitutional Budget Reserve with the
assumption that the funds would be transferred into the
Alaska Income Account.
(Tape Change, HFC 99 - 123, Side 2)
REPRESENTATIVE ETHAN BERKOWITZ asked what the dividend
amount would be for the years 1999, 2000 and 2001, if it was
based on a 42 percent payout. Mr. Okeson thought that the
dividend would be would be just under $1 thousand dollars.
Mr. Okeson referred to graph 4, on page 1 of attachment 2
(Permanent Fund Dividend per Capita). He reiterated that the
dividend would be inflation proofed.
Mr. Okeson discussed graph 2 on page 1 of attachment 2
(Alaska's Savings Accounts). He observed that the permanent
fund corpus continues to grow, but at a smaller rate. The
inflation proofing would be kept in the Alaska Income
Account. He observed that this is because the corpus is
constitutionally protected. He pointed out that this would
allow a larger source of cash to ride out worst case
scenarios in the market or a natural disaster.
Vice-Chair Bunde noted that all of the accounts are invested
in the same manner.
Mr. Okeson reviewed graph 7 in attachment 1 (Comparison of
Savings Accounts, Health Alaska Plan Vs Do Nothing Plan. He
pointed out that there would be a greater growth under the
Healthy Alaska Plan. If there were no change there would
only be corpus without any ability to change. He discussed
graph 5 on page 1 in attachment 2. Projected savings would
grow. The deficit would be filed entirely by revenues
generated by non-petroleum and petroleum revenues and the
5.25 percent payoff on the earnings. Savings accounts would
not be affected. He observed that there is a slight rise in
education, university, and essential services. There would
also be a rise in the dividend and a flat general government
expenditure.
Mr. Okeson explained that there would be a smaller growth
under the 7.75 percent scenario.
Representative J. Davies asked if the management cost of the
fund was included. Mr. Okeson stated that it was included at
15 basis points. There are $30 to $50 million dollars
included for management costs.
Vice-Chair Bunde noted that if other revenue sources are
developed the funds could be used in any manner. Mr. Okeson
stated that the payoff percentage could be changed. There is
nothing that precludes new revenues from being used in any
manner. Vice-Chair Bunde stated that new revenues could be
used to support services.
Representative Austerman clarified that 50 percent of oil
revenues go to the permanent fund corpus.
Vice-Chair Bunde further explained that government would not
be restricted to $1.5 billion dollars for state government
support. There is a potential for additional revenues. Mr.
Okeson added that a possible gas pipeline was not included.
He stressed that there are a number of resource development
potentials.
Representative J. Davies noted that there is no mechanism
for tourism to contribute toward state government. He
questioned the source of new revenues included in the plan's
projections. Mr. Okeson clarified that new revenue sources
were not identified.
Representative J. Davies referred to graph 1 on page 1 in
attachment 2. Mr. Okeson explained that $285 million dollars
would be moved from general government expenditures to
essential services in 2002. The majority plan reduction is
also included.
Members provided suggestions for new scenarios. Under a
scenario by Co-Chair Therriault, an addition of $100 million
dollars under Healthy Alaska Plan in sustainable reductions
resulted in a growth of dividends to $1,800 in FY 2020. The
corpus also grew to $71 billion dollars.
Even a sustainable reduction of $500 million dollars without
any other change would result in a loss of dividends over
the long run. The Constitutional Budget Reserve would last
until 2004 or 2005. By 2017 all the savings accounts would
be gone. He added that a six million-dollar reduction could
be replaced with the same amount in taxes.
Representative J. Davies asked for a scenario that did not
include the reduction in government spending in the Healthy
Alaska Plan. Under this scenario there would be a $7 million
dollar loss in reserves. The dividend would rise to $1,400
instead of $1,600 dollars. He explained that even without
the $100 million in reductions they would be above where
they need to be.
Representative Berkowitz asked for a scenario that would
keep the Constitutional Budget Reserve separate. Mr. Okeson
explained that if the Constitutional Budget Reserve were
taken out of the scenario that the intergenerational graph
would go below the line. The dividend would drop to $800
dollars and would only rise to $1,200 dollars. The
Constitutional Budget Reserve would grow on the side. Co-
Chair Mulder noted that there would be a third savings
account that would generate interest, which could displace
general funds. There would be approximately $240 million
dollars generated. A higher amount could be taken for
dividends because less would be needed for general funds.
Mr. Okeson noted that if the dividend were increased to
$1,000 dollars to meet the statutory requirement then the
dividend would not raise as high.
Vice-Chair Bunde pointed out that the Constitutional Budget
Reserve would be earning at a lower interest rate if it were
held separate. Mr. Okeson stated that the Department of
Revenue might not agree. He stressed that the point is how
long there would be before it is tapped for investment.
Vice-Chair Bunde stressed that there would not be a comfort
level for investment. Mr. Okeson noted that every $100
million dollar change has a $8 million dollar change for
every subsequent year. The earning potential would be gone
forever. He stressed that a systematic approach is the right
way.
Co-Chair Mulder noted that the Constitutional Budget Reserve
is not inflation proofed. Representative Berkowitz stated
that if the Constitutional Budget Reserve were not rolled
into dividends there would be an additional 42 percent on
the rate of return. Mr. Okeson agreed but added that it
would occur as a result of lower dividends.
Representative J. Davies noted that the Constitutional
Budget Reserve would not have to be deposited into part of
the fund.
Co-Chair Mulder felt that multiple accounts are confusing to
the public. The perception is that there are dozens of
savings accounts that can be tapped. The plan would
consolidate existing savings accounts into two. Vice-Chair
Bunde added that there would have to be a strong level of
trust that the corpus of the Constitutional Budget Reserve
would not be available for appropriation, so that long term
investment can occur. Mr. Okeson observed that there would
not be as great a shock absorber in bad markets.
Representative J. Davies noted that changes to the
Constitutional Budget Reserve takes _ votes. The Alaska
Income Account would only need 21 votes.
Co-Chair Therriault stressed the need to keep an eye on the
intergenerational line. Mr. Okeson noted that purchasing
power could not be retained without a $600 to $700 million
dollar tax or cut. He pointed out that there would be
significant job loss with a reduction of $600 million
dollars.
Co-Chair Mulder recalled that under the status quo proposal
there would have to be $350 million dollars of new taxes,
$125 million dollars in additional cuts and a cap on the
dividend of $1400 hundred dollars to protect the purchasing
power.
Mr. Okeson stressed that the models can work in a variety of
ways. He emphasized that they are based on assumptions that
the legislature provides as reasonable and can be lived with
over the long term.
(Tape Change, HFC 99 -124, Side 1)
In response to a question by Representative J. Davies, Mr.
Okeson stated that a little more than half of the purchasing
power would be lost over 20 years if the money is not
inflation proofed.
Mr. Okeson emphasized that the Healthy Alaska Plan does not
take anything off the table for future use. Representative
Austerman stressed that the dividend would be reinvested not
eliminated.
Representative G. Davis stated that the public perception is
that the dividend would be used to increase government. He
clarified that it would be used to maintain the status quo
with a slight reduction.
Mr. Okeson reiterated that under the Do Nothing Plan the
Constitutional Budget Reserve is eliminated and the earnings
reserve would be used up. When the earnings reserve is
eliminated unrealized gains would be used. This would force
up the dividend as they are sold. When all the unrealized
gains are sold the dividend would crash because the corpus
is all that would be left. He emphasized that the
administrative cost would be the same for a $100 dollar
check. He maintained that the goose that lays the golden egg
would be killed. He stressed that Alaska is in a unique
position. He stressed that it is a questioned of providing a
systematic approach for a long-term solution. He concluded
that a systematic approach for a long-term solution would
take courage and discipline.
Co-Chair Mulder observed that the legislation is fairly
simple. The funding is based on market value to add
stability. There is no major fluctuation to the dividend.
There would be greater certainty to the future of the
dividend.
Representative G. Davis observed that the average permanent
fund dividend over past years is approximately $800 dollars.
Representative Foster pointed out that it would be another
25 years before the dividend doubles. Mr. Okeson explained
that the last 20 years has been one of the best bull
markets. The assumptions are based on a lower average of
8.25 percent under the Healthy Alaska Plan. Some of the
weaknesses of the old system have been hidden by the fact
that there have been exceptional bull markets during the
life of the plan.
Co-Chair Mulder added that the legislature has never spent
any of the earnings of the fund. The excess earnings have
been deposited back into the corpus.
Representative Grussendorf expressed concern that there
would be cuts to areas that affect the private sector and
the economy. He noted that the plan protects government
service but does not emphasize areas that help to develop
the private economy in the state of Alaska.
Co-Chair Mulder emphasized that future legislatures cannot
be bound. He stressed that there would be on going
discussion. There would be a certain amount of flexibility.
The goal was to allow an intergenerational gap to allow for
an increase in spending without jeopardizing the plan.
Representative J. Davies echoed concerns by Representative
Grussendorf, but added that the legislation is a good first
step. He referred to page 1, line 13 and questioned if there
is a better way to maximize the earnings. Co-Chair Mulder
explained that the true potential would not be earned if the
entire amount were deposited into the general fund.
Mr. Okeson stated that the intent is to allow the deposit
after the date. It could be done overtime. It could be kept
in the fund earning interest. He noted that draws on
accounts tend to come early. However, the dividends come out
at the end of the year.
Representative J. Davies agreed with Mr. Okeson's
interpretation.
Vice-Chair Bunde maintained that the public has bound
legislatures.
Discussion occurred regarding the public comment process.
Co-Chair Mulder provided members with a sectional analysis
on HB HB 231 and HB 232(copy on file).
Representative Kohring maintained that the plan would not
eliminate the incentive to continue with sizable reductions
and reforms for government.
Co-Chair Mulder discussed proposed public hearings regarding
the Healthy Alaska Plan.
HB 231 and HB 232 were HELD in Committee for further
consideration.
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