Legislature(2015 - 2016)HOUSE FINANCE 519
04/13/2016 08:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB170 | |
| HB194 | |
| HB311 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 311 | TELECONFERENCED | |
| + | SB 170 | TELECONFERENCED | |
| + | HB 194 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 311
"An Act requiring the governor's fiscal plan to
include certain information."
9:52:22 AM
9:52:50 AM
AT EASE
9:56:04 AM
RECONVENED
9:56:15 AM
REPRESENTATIVE CHARISSE MILLETT, SPONSOR, introduced
herself.
9:56:25 AM
REPRESENTATIVE CHARISSE MILLETT, SPONSOR, explained that
the bill was an additional tool to help the budgeting
process by calculating a sustainable amount that the state
can reasonably spend on funding government each year. The
bill would accentuate a sustainable budget plan and not
compete against one. The legislation took into
consideration all of the budgetary mechanisms the state
already employed to calculate a "sustainable spend." She
believed that the bill was a "fiscal planning tool" and was
"relevant" to the budget crisis. She shared that she had
worked extensively with Dr. Scott Goldsmith, Institute of
Social and Economic Research, University of Alaska
Anchorage, (ISER) who currently retired. During the process
of crafting the bill the amount of $4.5 billion was
calculated as the sustainable budget amount. She felt that
by determining the state's capacity for spending each year
the bill was "generational". She believed the bill
complemented any fiscal plan implemented by the
legislature.
9:59:32 AM
Representative Gattis asked whether the bill would hold the
legislature accountable. She noted her frustration with
other fiscal plans was that they did not hold the
legislature or future legislatures accountable to a
spending limit and she would judge the legislation based on
accountability.
Representative Guttenberg voiced that he had seen similar
legislation over the years. He believed that it was very
difficult in the end to develop a "one page snapshot" so
that everyone could understand and base policy around the
information. He thought that the approach was important and
beneficial and should happen every year regardless of
passage of the bill.
Representative Gara appreciated the bill. He spoke to the
requirements mandating the governor to issue a report
regarding incoming revenue excluding the net present value
of oil reserves and wondered why. Representative Millett
replied that the answer would be forthcoming through the
slide presentation on how ISER set up the calculation.
Vice-Chair Saddler voiced that he did not see anything that
precluded including future oil reserves and did not find
the word sustainable in the legislation.
BRAD KEITHLY, PRESIDENT, KEITHLEY CONSULTING, LLC, provided
a PowerPoint presentation titled "HB 311: Sustainable
Budget Reporting" dated April 13, 2016 (copy on file). He
relayed that he would discuss the background, objective,
and implementation of the legislation. He moved to slide 3:
Background
· HB 136 (28thLegislature)
· Hearings on HB 136:
Apr. 5, 2013 (full Committee)
Jan. 9, 2014 (Fiscal Policy Subcommittee)
· HB 311 is the same bill
In preparation for the 2013 testimony Dr. Goldsmith
and I prepared a work draft that improved some
provisions.
We have included that work draft here as part of
this testimony.
Mr. Keithley relayed that the bill had originally been
introduced as HB 136 during the 28th legislature. The work
draft was included in the bill's backup file and could be
adopted as a Committee Substitute. He turned to slide 4
which contained a quote from Dr. Scott Goldsmith:
Objectives
· Requires the Administration to calculate and submit
each year as part of the December budget process a
long term sustainable budget number
"A spending level based on current financial
assets and the projected future petroleum revenue
stream which, if adopted now, could be maintained
consistently long into the future, adjusted for
inflation and population growth"
Mr. Keithley thought that the bill's objective to annually
calculate a long-term sustainable budget number was simple.
He noted that the methodology was considered the "Goldsmith
approach." He discussed the historical volatility of the
price of oil and the resulting revenue ups and downs as
well as spending highs and lows. He moved to slide 4 and
referred to the table depicting different sources of
revenue to the state in various colors. He listed the
income sources considered in the Goldsmith model;
Constitutional Budget Reserve (CBR), other taxes, current
oil sources, incremental oil revenues from new oil,
revenues from the AKLNG Project, divert earnings from the
Permanent Fund deposit, and Permanent Fund Dividend (PFD)
Earnings Reserve funds. He explained that the black line
was calculated by the model and depicted a steady budget
through periods of time when revenues were higher and
lower. He delineated that if the state saved money when
revenues were above the line sufficient funding would be
available when revenue dipped below the line. The goal of
the process was to treat all generations of Alaskans fairly
through a reliable spending stream.
10:10:56 AM
Mr. Keithley addressed the goal of the bill on slide 5:
Objectives
· Goal is to provide a number that "looks through" the
ups and downs of the commodity cycle and identifies a
stable, long term (i.e., "sustainable") budget number
· Not a spending cap, although it could be used for that
(as I and others have advocated)
· Not a fiscal plan, although it could be used for that
as well (as I and others have advocated)
· But in the form of HB 311 a guide to the spending
levels that help ride through the ups and downs of
commodity cycles
Mr. Keithley communicated that the bill was not a spending
cap or a fiscal plan. The bill merely provided information
and would "institutionalize" getting a number before the
legislature.
10:12:58 AM
AT EASE
10:13:07 AM
RECONVENED
Mr. Keithley presented slide 6:
Origin of the model
· A response to wide swings in spending levels (and
economy) based on revenue levels
"How much do we need to save during a high
revenue period in order to be prepared to offset
the effect during a low revenue period"
Mr. Keithley revealed that the plans inception came as a
question to Dr. Goldsmith from bankers at Northrim Bank who
asked him to develop a methodology to determine what the
state would have to save today in order to have income for
tomorrow in light of the revenue volatility the state
experiences. He noted the chart on the slide developed by
the Legislative Finance Division that depicted the high and
low revenue periods through the years. He turned to slide
7:
Creates focus on long-term outlook
If you assume future is always like the present:
• At high prices, too optimistic and current spending
overshoots the mark
• But pessimism is an equal problem - at low prices,
too pessimistic and policy makers pull tax/PFD levers
that unnecessarily penalize the current economy
HB311 creates a tool to help focus fiscal policy on
the long-term out look to look through high and low
cycles, which is critical in a commodity based economy
10:16:36 AM
Mr. Keithley remarked that the following slides were
directly from ISER. He highlighted slide 9:
RECOGNIZE AND MANAGE OUR PETROLEUM WEALTH (ENDOWMENT) LIKE
A DEPLETABLE ASSET
1. How much is it worth?2. How can we invest it for
maximum return? 3. How much of it can we spend
annually without depleting it?
Mr. Keithley moved to slide 10 titled "Petroleum Wealth of
the "Owner State." He reported that the chart showed ISER's
calculation of the state's wealth (Total: FY 2017 $125
billion) in the bank ($64 billion) and oil in the ground
($61 billion). He explained that oil in the ground was
defined as the estimated net present value of future
petroleum revenue based on a three year moving average to
account for volatility in the price of oil. He addressed
slide 11 titled: "How Much Can We Spend Today: GF Maximum
Sustainable Yield." He indicated that Mr. Goldsmith's
approach considered the state's fiscal assets and the net
present value of the oil assets equally and took 5 percent
of the total and subtracted 0.8 percent adjusted for
inflation and population growth, which kept the revenue
level per Alaskan the same in the future which equaled 4.2
percent. He calculated that 4.2 percent of $125 billion was
$5.2 billion minus the PFD maintained at the full amount
($1.3 billion) and added in non-petroleum revenue ($.5
billion) and came up with the GF maximum sustainable yield
in FY 17 totaling $4.4 billion. He observed that the
maximum sustainable yield was the number the state could
spend today from revenue and savings without adversely
impacting the future. When revenues were high the number
adjusted for inflation and population growth should remain
the same and the surplus deposited into savings. He
detailed that the savings needed to be replenished to repay
the withdrawal from savings when revenues were low and to
maintain spending through future periods of low revenues.
He reiterated that the number was not a spending cap.
10:22:33 AM
Mr. Keithley briefly examined slide 12 titled "What Should
We Sustain?" which contained a chart that portrayed the
results of maintaining a sustainable budget approach. He
summarized that overtime more money would be taken out of
earnings to supplement low oil reserves but the savings
would grow and be available for spending. He highlighted
slide 13: "Maximum Sustainable Yield: Implementation."
· Manage financial assets for maximum long term return
· Proactively participate in management of petroleum in
the ground for maximum return
· Establish monitoring system to track Nest Egg value,
set MSY target, and track progress towards
sustainability
· Gradually transition to GF Maximum Sustainable Yield
level
Mr. Keithley pointed out that the third bullet point was
the only one on the slide relevant to HB 311. He moved to
slide 14:
Other perspectives
"The State is spending money at an unsustainable rate.
If this is not checked, extreme measures such as
diverting all Permanent Fund Dividends and and/or
instituting state taxes could become necessary to
sustain spending on State programs ….
The State has an urgent need to develop the practice
of creating successive long-term strategic plans with
annual budgets based on maximum sustainable yield of
the State's primary assets."
-Commonwealth North (Feb. 2013)
Mr. Keithley informed the committee that The Alaska Chamber
had recommended Dr. Goldsmith's approach to the
legislature. In addition, Commonwealth North had looked at
the approach in detail in February, 2013. He read the two
quotes from the slide. He underlined slide 15:
HB 311 was a tool to help keep Alaska fiscal policy
focused on the long-term…
10:26:08 AM
Representative Gattis agreed that the state needed a
sustainable budget. She stated there were others who may
disagree and planned to "play devil's advocate" through her
questions. She wondered why the state would assume $125
billion and then exclude the major saving account from the
maximum sustainable yield formula. Mr. Keithley answered
that it had been a deficiency in the original bill. He
explained that when drafting the bill a long debate ensued
between Legislative Legal Services and the sponsor
regarding the language in the bill that did not capture Dr.
Goldsmith's intention. He related that the work draft for
HB 136 (Sustainable Budget) [introduced February 22, 2013]
more accurately reflected the approach he described.
Representative Gattis read the following: "the changes the
bill made to statute seemed to nullify the basis of a
maximum sustainable yield principal. Your maximum
sustainable yield calculation for FY 2017 was $4.4 billion
not including the dividend. She asked where the state would
"get the cash" if the approach excluded savings accounts.
Mr. Keithley replied that the language deficiency in the
current version was incorrect and the methodology did not
exclude anything. He recapped that the approach drew from
savings when in a low revenue cycle and adds to saving in a
high revenue cycle. Representative Gattis asked why the
state would be broke in FY 2022 if the maximum sustainable
yield plan worked. Mr. Keithley answered that if the plan
was used the state would not be broke in FY 22; application
would lead the state to be solvent in FY 22.
Representative Millett interjected that the bill could be
used with any of the fiscal plans that had been proposed.
She reiterated that the approach was a tool and was a
mechanism for determining a sustainable spend. She declared
that the legislation was not a panacea. The bill provided
the legislature with a guide. She maintained that the
sustainable yield was merely "an indicator of what the
state could spend based on assumptions that we use."
10:32:29 AM
Representative Wilson asked whether the $4.4 billion number
included capital and operating expenses. Mr. Keithley
answered in the affirmative. He elaborated that the formula
did not care what category the spending was. Representative
Wilson asked how the plan reconciled the accounting when
general fund spending was moved to "other funds." Mr.
Keithley responded that the tool did not delve into the
undesignated general fund versus designated general fund
monies; it offered a number that represented a "pot of
money" available for spending.
Co-Chair Neuman remarked on the $800 million in tax credits
that the state issued to incentivize production in Cook
Inlet. He asked whether the credits were included "in the
budget." Mr. Keithley answered that they were included in
the $4.4 billion; tax credits were taking money out of the
treasury and depleted the state's revenues like all other
spending. Co-Chair Neuman discussed the benefits of the oil
credits especially in the area of increased throughput. He
indicated that when the credits were offered there was more
oil in the pipeline and the price of oil was much higher.
He wondered whether the state had to spend extra dollars
now on tax credits above the $4.4 billion in order to
ensure that in the future there was more revenue coming in
through increased input in order to maintain the $4.4
billion. He wondered how the plan would "level that out."
Mr. Keithley answered that the methodology did "a very good
job of that" by projecting future oil production and
factored in the tax credits. The model included the
calculation of the value of what the tax incentives had
produced in the future. However, the model informed that
even with the additional future value from the tax credits
the spending level should still be maintained at $4.4
billion. He reiterated that the bill did not cap the
spending amount at $4.4 billion. Co-Chair Neuman stated
that in the last 3 years throughput in the pipeline had
increased 5 percent. He asked whether there was a mechanism
that averaged out investing now for increased future
throughput. He stated there were $800 million in credits
that were unexpected and he did not want to "touch" Prudhoe
Bay credits in order to maintain the viability of Alaska's
oil and gas industry. He reported that the budget was
roughly $4.3 billion or $4.4 billion in FY 17, which was
close to the sustainable number but the oil and gas credits
were currently "dogging" the state's budget. He wondered
whether there was a mechanism to average the spending on
credits now to maintain the $4.5 billion spend.
10:39:41 AM
Mr. Keithley returned to a graph on slide 7 that showed a
calculation of a long-term sustainable revenue number. The
green on the graph related to new oil created from credits
and incentives and depicted an estimate of the resulting
volume. He reiterated that even by taking the new oil into
account the calculation still brought the number to $4.4
billion. He deduced that spending any more than that amount
impaired the dollars available in the future. He suggested
that decisions about what to spend the money on was not
involved in the calculation. He remarked that the number
took into account the consequences of oil and gas tax
credits and projected out the future production levels. Co-
Chair Neuman noted that several years ago the legislature
used $3 billion from the Constitutional Budget Reserve
(CBR) to pay down Public Employees' Retirement System
(PERS) and Teachers' Retirement System (TRS) resulting in
over $1 billion less in actuarial payments. Mr. Keithley
responded that it had been a bit different scenario than
oil tax credits because the payment was used to lower the
operating costs going forward. He stressed that the number
that was calculated each year out of the methodology was
what the number should be. He related that in any given
year if the legislature determined that by spending more it
would lower future operating costs; the PERS/TRS payment
was an example, the judgement to spend more could be made.
He believed that the sustainable number would provoke deep
examination to understand the long-term impact in a
scenario where spending was above the sustainable number.
The bill would provide a long-term perspective.
10:43:30 AM
Co-Chair Neuman characterized the oil tax credits as
"somewhat out of the budgeting cycle" that were investments
for the future and not really part of the state's "day to
day" operating expenses. Mr. Keithley agreed, but felt that
oil tax credits were different than the PERS and TRS one-
time payment. He qualified that the oil and gas tax credits
were continuing and the sustainable number was the
"baseline" measured against what the legislature should
consider spending on credits.
Vice-Chair Saddler understood the maximum sustainable yield
concept and the "caution" it provided the legislature. He
wondered what tool was actually created by the bill. He
thought the legislation "did what the governor should do
anyway" and was puzzled that the bill language did not
address sustainability. Representative Millett reiterated
that the language in the current version was inadequate and
she recognized the flaw but introduced the legislation in
expediency. She shared that she had a fix and formula that
explained how the calculation worked and remarked that the
bill did a poor job and a new Committee Substitute (CS)
would be introduced. She directed an additional remark to
Co-Chair Neuman. She agreed that the decisions regarding
PERS and TRS were beneficial, carefully weighed, with known
fiscal impacts. She offered that the bill did not prohibit
any future spending above the sustainable number and it
informed the outcome of the spending above the number. She
felt that the calculation was "just a number in time and
how it would affect" the state's budget and was merely a
"mechanism" so that legislatures and the administration
would be aware of spending consequences in future years.
She thought that a transitional fund for the oil and gas
credits could work in concert with the maximum sustainable
yield.
10:48:13 AM
Co-Chair Thompson noted that the bill would be heard again
in committee with a new Committee Substitute.
Representative Munoz felt that the calculation was a very
important tool. She asked about the intangible aspects of
the net operating losses that were difficult to include in
a sustainable draw calculation and wondered how they were
accounted for. Mr. Keithley replied that the bill
represented a big picture tool. He mentioned that future
revenue was a prediction of revenue under the current tax
regime and the net operating losses factored into the
calculation of the net present value of the future oil
stream.
Co-Chair Thompson OPENED public testimony.
Co-Chair Thompson CLOSED public testimony.
HB 311 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson addressed the following meeting schedule.