Legislature(2023 - 2024)DAVIS 106
04/18/2023 06:00 PM House WAYS & MEANS
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB160 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 160 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 160-PERMANENT FUND CALCULATION
6:03:32 PM
CHAIR CARPENTER announced that the only order of business would
be HOUSE BILL NO. 160, "An Act relating to the calculation of
the amount available for appropriation from the Alaska permanent
fund; and providing for an effective date."
[Contains discussion of HJR 9]
6:04:00 PM
ED KING, Staff, Representative Tom McKay, Alaska State
Legislature, on behalf of the sponsor, the House Special
Committee on Ways and Means, presented the PowerPoint, titled
"HB 160 - REAL POMV" [hard copy included in the committee
packet.] He introduced himself for the record and referred to
Chair Carpenter's staff for the sectional analysis.
6:04:15 PM
KENDRA BROUSSARD, Staff, Representative Ben Carpenter, Alaska
State Legislature, on behalf of the sponsor, the House Special
Committee on Ways and Means, of which Representative Carpenter
serves as chair, presented the sectional analysis of HB 160
[copy included in the committee packet], which read as follows
[original punctuation provided]:
Section 1: Changes the POMV draw rate from 5% of the
5-year average market value to the real rate of return
times the balance.
Section 2: Changes "market value" to "balance" to
conform with the changes in section 1.
Section 3: Makes language changes to conform with the
changes in section 1.
Section 4: Provides an effective date so that the
changes are in place next fiscal year.
6:05:00 PM
MR. KING stated that the Alaska Permanent Fund Corporation
reached out with proposed changes for HB 160, including the use
of the language "market value" instead of "balance". He began
the presentation, explaining the purpose of the bill would be to
change the current percent of market value (POMV) from a fixed 5
percent to a variable number which could track market
conditions. Providing a brief overview of the need for the
change, he stated that the stability of the current draw does
not allow for drastic changes in the market, and a variable POMV
would base the amount drawn directly on the fund's increases or
decreases in a particular fiscal year. He defined the word
"real" in the context of HB 160 to mean an "inflation adjusted
number."
6:06:34 PM
MR. KING moved to slide 3, which listed the main problems with a
fixed POMV. He first addressed that with a fixed POMV the draw
rate is less than stated, as it is not based on actual
performance, and this exposes the state to risks in both
directions. Concerning the draw rate, he pointed to the graphic
on slide 4, which showed that the current draw has been less
than the 5 percent written in statute. He stated that any time
the Permanent Fund has grown the draw will continue to be less
than 5 percent because of the mathematical nature of averaging
an amount in a state of growth. He pointed out a visual on
slide 5 which showed the difference in draw size in past years
compared to using a variable POMV and reiterated that the amount
of the draw was less than 5 percent because the Permanent Fund
has been growing.
6:08:36 PM
MR. KING posed the question of what would happen if the POMV was
actually drawn at 5 percent and pointed to slide 6, which showed
two graphs comparing the rolling average versus the current
value of the fund. The graphs showed that if the draw was based
on the current value of the fund rather than the five-year
rolling average, it would create a higher allowable draw and
could cause the earnings reserve account (ERA) to cease growth
but remain stable. He added that inflation proofing was already
accounted for in the graphs on the slide, and ERA would no
longer be growing because the Permanent Fund would be reaching
the goal of a 5 percent draw.
6:09:47 PM
MR. KING stated that drawing less is a problem and pointed to
slide 7. He explained that the issue is growing ERA while in a
deficit. He added that the term "deficit" here describes the
state's fiscal situation, in that investors and credit raters in
the national market are assuming the funds being withdrawn are
from the savings account, when actually the state was using the
revenues from the Permanent Fund. He explained that the POMV
draw has been below the Permanent Fund's actual performance,
therefore forcing ERA to grow.
6:10:48 PM
MR. KING, on slide 8, pointed out that the second issue with a
fixed POMV is that it does not track performance. He explained
that the graph shows what the allowable draws would have been in
years past if the POMV had been based on the actual returns. He
pointed out that the allowable and sustainable draw would have
been above 5 percent. He stated that this would have been the
case in most recent history, until the start of the economic
decline in 2018. He said the green line is the average nominal
return, or the actual return. He clarified that the type of
means shown on the graph were chosen because of simplicity, but
in the fiscal note the Permanent Fund Corporation has mentioned
the "more appropriate" geometrical mean. The green line at the
top of the graph is the "average nominal return" which is not
adjusted for inflation. He stated that the returns are
consistently over 8 percent. He contributed some of the recent
loss of the nominal return to heightened inflation and
reiterated that the real return was already adjusted for
inflation.
6:12:42 PM
MR. KING compared the current formula to the proposed
legislation on slide 9. He pointed out that the graph on the
left shows how much money is allowed to be drawn from ERA into
the general fund, while the graph on the right shows the effect
on the balance. He explained that the numbers reflect an
assumed forecast return of 7 percent, which would force lower
draws from ERA because of the low performance of the Permanent
Fund.
6:13:47 PM
MR. KING expressed the opinion that the current POMV has exposed
the state to several risks, listed on slides 10 and 11. He said
the first risk is the overperformance of the Permanent Fund, as
the current POMV would not allow a higher draw even though it
would be sustainable. He explained the consequences of several
years at a high rate of return, and he informed the committee
that the policy decision which needs to be made is whether to
increase the savings account or satisfy current budgetary needs.
During high performance, he identified the risk as being the
inability to draw from the various revenues available because of
the fixed POMV, and this forces the legislature to look at
cutting the budget or raising taxes instead of utilizing the
revenue Alaska already has.
6:15:54 PM
MR. KING pointed out another risk of a fixed POMV is that the 5
percent might end up being too high. On slide 12 he showed that
if the Permanent Fund consistently produced low returns, ERA
would be driven to a zero balance. He said it is incorrect to
say that once ERA's balance goes to zero, there cannot be a
draw. He argued that a draw could still be made, but only to
the amount of the actual returns from the Permanent Fund.
6:18:05 PM
MR. KING pointed out that ERA was only driven to zero in this
hypothetical because the general fund draw was not the only draw
on ERA. He pointed to slide 14 and explained that draws to the
principal account were made to help adjust for inflation, and
this means that there are two forms of inflation proofing in
current law. He suggested that if the legislature decides to
rely on only the inflation proofing within POMV, the additional
draws on ERA could be eliminated, and the balance would not be
driven to zero.
6:19:26 PM
MR. KING addressed what an appropriate draw would be. On slide
14, he pointed out the results if inflation proofing were
completely removed. He said that because ERA is earnings off
the Permanent Fund, the legislature would have full access to
the account. He implied that the purpose of ERA is to help
"smooth" the account. He suggested that this would mean if the
state's savings were not inflation proofed, and the legislature
wanted to fully fund services, like education and the Alaska
State Troopers, it could draw from ERA to do so. He concluded
on slide 15 that the legislature could draw the complete nominal
return while still being sustainable.
6:20:47 PM
REPRESENTATIVE GROH asked why the members from the Permanent
Fund Corporation Board of Trustees were not present at the
meeting.
CHAIR CARPENTER responded that he had not invited them.
REPRESENTATIVE GROH, considering the importance of stability in
the permanent fund dividend (PFD) for the public and state
spending, he asked for a comparison between the volatility of
the current fixed POMV and the proposed variable POMV.
MR. KING replied that the volatility in current law is absorbed
in the fund balance, so this fluctuates as opposed to the draw
amount. He expressed the assumption that the trade off with a
variable rate would be choosing either a "tracking" or a
"smoothing" approach. He categorized the 20-year plan as having
a smoothing effect, but trying to use ERA to completely remove
volatility would be improbable because of the volatility
introduced through the oil market. He said a better solution
does exist, but when speaking strictly about the POMV, as long
as reserves are maintained, a variable POMV would not add to the
volatility.
REPRESENTATIVE GROH sought a list of pros and cons in
consideration of passing HJR 9 instead of HB 160.
MR. KING explained that the two pieces of legislation are not
substitutes for each other. He stated that HJR 9 would put the
5 percent POMV draw into the state's constitution. He expressed
the opinion that this would not get rid of any of the previously
discussed issues, but rather increase the risk to the state. He
explained that this is because in a situation where the draw is
below 5 percent, the draw would start to dig into the principal
fund. He opined that it would be best in this hypothetical
situation to have a variable POMV which tracks returns. He
explained that the main difference would be the draws would come
straight out of the fund and not washed through ERA, and this
would remove the possibility of draining the ERA balance to
zero. In this case, he inferred that the state would have to
maintain cash reserves in a different savings account in order
to stabilize the volatility. He expressed the opinion that this
savings account would be the constitutional budget reserve
(CBR).
6:24:59 PM
CHAIR CARPENTER argued that the risks associated with
constitutionalizing a specific number, in particular the
potential for future circumstances, would mean eroding the
corpus in order to pay PFDs and pay for state government. He
suggested that this is not a future Alaskans would want.
6:25:31 PM
MR. KING, in response to a question from Representative Groh,
stated that he did the modeling included in the presentation.
In response to a follow-up question, he stated that the
Department of Revenue (DOR) and the Permanent Fund Corporation
both were contacted for comment; however, no response was
received. He stated that the intent of the presentation is to
include the topic of a variable POMV in the fiscal conversation;
therefore, the modeling provided at this time does not represent
a full analysis but is primarily illustrative. In response to a
follow-up question, he stated the Legislative Finance Division
had not been contacted.
REPRESENTATIVE GROH requested further modeling from DOR, the
Permanent Fund Corporation, and the Legislative Finance
Division.
CHAIR CARPENTER replied that he would follow up on this request.
REPRESENTATIVE GROH asked for a summary of how this proposal
arose and where the idea originated.
CHAIR CARPENTER interjected that Mr. King should step back from
the technical aspects of the presentation and "address the why."
6:27:40 PM
MR. KING pointed out that there is a fiscal note from the
Permanent Fund Corporation which may help answer the previous
questions. He mentioned that he was working for the Department
of Natural Resources at the time the current POMV statue was
passed, and many conversations had revolved around the amount of
the draw. As a professional economist, he expressed the belief
that it would be more appropriate to have a number which adjusts
to actual conditions, especially when considering a
constitutional amendment. He suggested that an alternative
would be for the legislature to react when the draw is too high
or too low; however, he argued that this would be too late.
6:28:56 PM
REPRESENTATIVE GRAY referred to the graph on slide 8 and
reasoned that with the proposed formulation, the state would
typically end up with more money. He questioned why this was
not the case for 2021.
MR. KING explained that there is a 20-year rolling average and
in 2021 there was a low Permanent Fund performance and high
inflation. He added that the state probably overdrew ERA in
2021 because the draw rate did not react to the poor performance
of the fund.
REPRESENTATIVE GRAY requested a further explanation of the
effects of the 20-year average. He expressed the assumption
that it would be more stable, yet the red line on the graph
indicates the POMV was flat. He asked why [the proposed average
rate of return] was more volatile than the POMV.
MR. KING responded that a fixed-POMV draw fluctuates based on
the balance of the fund, which goes through multiple "smoothing"
measures and ends up having less volatility. He explained that
the proposed average rate of return would react directly to the
volatile oil market; therefore, even with a 20-year smoothing,
there will be volatility. He said that the legislature will
have to decide for either a fixed number which could be
incorrect or a dynamic system which requires the state to absorb
some of the volatility.
REPRESENTATIVE GRAY expressed appreciation for HB 160 because it
appears the state would have more money to spend; however, in
reference to oil-based revenues, he expressed comfort in the
[fixed POMV] formula, as it appears more stable. He inferred
that the state has been more fiscally conservative in recent
years by drawing from the fund less than necessary. He
expressed surprise that legislation was being proposed which
would allow the state to spend more.
MR. KING explained that the state would not necessarily get
access to more money. He referred to slide 9 and explained that
the returns have been higher than predicted in recent years;
therefore, the draws were higher as well. Looking at the future
of the fund, he suggested there will be a smaller draw in
[fiscal year 2025] because of high inflation and the zero to
negative return of the current year. He reiterated that the
draw amount is projected to be less because the variable POMV
would adjust to the returns in real time. He implied that the
proposed draw would function as a warning for the state to spend
less in years with low returns.
REPRESENTATIVE GRAY inquired about the difference between using
the current five-year average and the proposed twenty-year
average. He assumed that a five-year average would show more
influence from poor market performance over two years than the
twenty-year model. He asked for a very simplified explanation
of the impact the two bad years had on the model.
MR. KING confirmed that Representative Gray was talking about
the "five years" in current law. He explained that the current
law actually takes five percent of the average market value of
the funds. The proposal in HB 160 would change POMV to a
twenty-year average of the returns of the fund, which he said is
not an apples-to-apples comparison.
REPRESENTATIVE GRAY shared his understanding that the proposed
draw was based on the Permanent Fund's value and not on the
strength of the market. He sought to confirm that even when the
market is "bad," the recommended draw would only change when the
fund's value did.
MR. KING replied that this is correct and added that if the POMV
was drawing the entirety of the return, the number would be
static.
REPRESENTATIVE GRAY expressed understanding to the point in
slide 9; however, he expressed the belief that slide 8, which
applies the average real return to the past, shows the state
would have taken a bigger draw most of the years. If the market
was performing well, he questioned whether there would be a draw
much larger than the current law allows.
MR. KING replied that if the future performance of the fund
mimicked the performance of the past, and the returns remained
above 5 percent, then the sustainable draw would also be more,
and this would be correct.
REPRESENTATIVE GRAY expressed satisfaction with the answer.
MR. KING continued addressing the risks of having a fixed draw.
He reiterated that a fixed draw could lead to a number too high
or too low, depending on the activity of the market, and this
would force the legislature to make a policy decision on whether
to grow savings or spend on government programs.
6:38:56 PM
MR. KING, in response to a question from Representative McKay,
answered that Senate Bill 26 [passed during the Thirty-First
Alaska State Legislature] took effect in 2018. In response to a
follow-up question, stated that the 5 percent POMV draws began
in 2018, with no draws prior to this time.
REPRESENTATIVE MCKAY stated that the conversation about a POMV
started around 2018 when Senate Bill 26 was being discussed. He
questioned whether there had been a decision between a fixed and
variable rate.
MR. KING agreed that there was a lot of discourse on the proper
draw rate; however, the conversation revolved around what an
appropriate fixed rate would be. He expressed the understanding
that at the time there had been no talk about a dynamic rate.
REPRESENTATIVE MCKAY stated that the two main components of
Senate Bill 26 were the five percent fixed rate draw and the
five-year average for "softening" the funds. He expressed the
opinion that the Senate Bill 26 plan had been the more
conservative approach, resulting in lower draws and more
inflation proofing. He recalled that the conservative choice
was made because this had to do with typical endowment funds
management.
MR. KING expressed uncertainty because there have been
endowments which draw based on need. He added that spending
rules for endowments vary widely across the world. He added
that for the international standard, 7 percent is the maximum
sustainable draw.
REPRESENTATIVE MCKAY asked whether there would be less of a
deficit if HB 160 were passed. If so, he questioned how much
less the deficit would be.
MR. KING answered that yes, there would be a $500 million to
$600 million draw this fiscal year which could be added to the
budget. However, he explained that the market's performance for
the remainder of the year would inform the amount of the draw
next year and poor performance could result in an increase in
the deficit in the future. He noted that a complication with a
variable POMV would be if the draw amount for the PFD were to be
set at half of the POMV value, and a high POMV would lead to a
high PFD as well, which would not "close the gap completely."
REPRESENTATIVE MCKAY hypothesized that the possible $500 million
to $600 million return for the current fiscal year would clear
the budget deficit.
MR. KING reminded the committee that the figure is not "a hard
number."
REPRESENTATIVE MCKAY posited that [the state's] "pain is self-
inflicted" because of the policies set forth in Senate Bill 26.
MR. KING confirmed that this opinion is fair.
6:45:10 PM
REPRESENTATIVE GRAY concurred with Representative McKay;
however, he expressed trepidation in reference to Mr. King's
statement that next year may be very different. He expressed
appreciation for the possible "extra $600 million right now,"
but he expressed fear that a variable POMV could remove the
certainty of the current POMV and create "chaos that might rival
what [the state] has with oil revenues."
MR. KING addressed the concern by stating that the additional
revenue coming from ERA, in his analysis, would essentially be
moving money from CBR. He suggested that this would not add to
the problem but change the way it would be solved. He added
that the volatility in the modeling "is the price we pay" with a
variable POMV. He said that the most prudent way to manage the
volatility would be through a stabilization fund, and a
mechanism which would prevent spending when revenues are high,
so savings would be available when revenues are low. He
suggested that this structure would not be difficult to design,
but he advised that it would need to be applied to both the fund
and oil revenues.
MR. KING, in response to Chair Carpenter, confirmed that he was
implying CBR is a stabilization fund.
6:47:47 PM
REPRESENTATIVE MCKAY, in recalling a conversation with Mr. King
about inflation proofing, reminded the committee that the state
has voluntarily deposited almost $9 billion into the corpus over
the last two years. He expressed the understanding that this
was to be for inflation proofing; however, inflation proofing is
already built into the fund. He requested a simplified
explanation of this topic.
MR. KING explained that because ERA contains earnings from the
Permanent Fund, all of this is constitutionally accessible by
the legislature. He said that if the market conditions
deteriorate the legislature could put money from ERA into the
principal account to keep it from being spent. In terms of
maintaining volatility stabilization, he explained that there
must be money in the accessible fund for when the stock market
and the oil market perform poorly, as these two volatile revenue
streams usually offset each other. He said that if the state's
portfolio is managed as a whole, more revenue could be taken
from the better performing market, and the state could move away
from using ERA. He suggested that a mechanism could be
implemented which would force the state to save while returns
are high. He referenced the proposal in HJR 2 as an example.
He pointed out that moving money from ERA to the principal
account is not actually inflation proofing, even though it is
referred to as such. In the past, he said, ERA was primarily
used for the PFD.
MR. KING, in response to Representative McKay, confirmed that in
the original PFD statue, ERA was the source of the PFD. He
explained that because ERA was intended to be distributed in the
future and used to save money, there had been a separate
mechanism in place to inflation proof the principal. He stated
that now the state employs a POMV draw of ERA, and the 5 percent
draw was chosen assuming there would be 7.5 percent growth and
2.5 percent inflation, so the draw amount itself was already
accounting for inflation. He suggested that the principal
account and ERA be thought of as one fund. He explained that
because the 2.5 percent was not drawn, it forced inflation
proofing of the entire fund, but this amount must also stay
within ERA. He said that transfers between the principal and
ERA for additional inflation proofing were voluntary because of
the proofing within the POMV structure. When making these
transfers, he suggested that the legislature consider whether
this money should be accessed.
REPRESENTATIVE MCKAY remarked that in the past Alaskans had
agreed on inflation proofing in anticipation of needing it
someday, and this had been done without realizing the state was
"double dipping" on inflation proofing.
6:53:10 PM
CHAIR CARPENTER stated that the committee should look at the
statute which required inflation proofing before Senate Bill 26
was in place.
MR. KING pointed out the statute in question is AS 37.17.145(c).
He continued that when the conversations around inflation
proofing began in the 80s and 90s, there was the understanding
that Alaska still had high levels of oil production in its
future. Now the state is facing less oil production, he opined
that there needs to be a transition from growing the fund to
using it. He stated that the policy call in front of the
legislature now is how to structure the funding for the
government. He remarked that a [broad-based] tax may need to be
involved as well, but whether it is put in place now or later
depends on the legislature's plan for the Permanent Fund.
6:54:34 PM
REPRESENTATIVE GRAY shared the understanding that HB 160 would
allow the state to draw more money from the fund, but there
would be a spending cap to prevent its use in the same fiscal
year. If it allows there to be more money for the state to use,
he stated that he could support HB 160; however, he expressed
the understanding that the spending cap in the bill would mean
the state would be "moving money around" rather than having more
funds to spend.
MR. KING stated that the legislature could implement a spending
limit for when the fund or oil returns were especially high,
which would require the state to save any extra revenue rather
than spend it. He explained that if the limit were followed the
state would not need a POMV.
6:56:41 PM
REPRESENTATIVE MCKAY expressed the understanding that the 5
percent POMV would exceed the spending cap.
MR. KING explained that if a spending cap was introduced and the
5 percent POMV were to stay in effect, the state could run into
problems during low-oil revenue years. He posited that in these
years, CBR would not have enough to balance the budget while ERA
would, but the state would not be able to access the excess
funds in ERA. He stated that this would create an artificial
spending problem. He suggested that if the legislature were to
pass an effective spending limit, the proposed legislation would
not be needed and POMV would be repealed.
6:57:24 PM
MR. KING, in response to a question from Chair Carpenter,
explained that the POMV was in place to limit the amount the
legislature could spend from the Permanent Fund earnings. If a
[total] spending limit were put into statute [instead of a
POMV], then this would serve as the POMV draw and allow excess
earnings [from the fund] to support the state in low-oil years.
He surmised that it would be unusual to have both a spending and
POMV limit because the constitution prevents the principal
account from being "invaded." In response to a follow-up
comment, he stated that the stabilization fund would be either
ERA or CBR.
6:58:26 PM
REPRESENTATIVE GRAY expressed appreciation for the explanation,
as he had heard the POMV was a spending limit, and he expressed
the understanding that HB 160 would be raising this limit during
high performing years, which was an idea he supported.
6:58:56 PM
REPRESENTATIVE MCKAY referred to previous conversations with Mr.
King about the possible negative effects of an overly large
corpus on the development of the private sector. He posited
that spending more of the Permanent Fund during [low revenue]
years would be beneficial towards creating a "healthy capitalist
economy" with a vibrant private sector. He asked Mr. King to
provide his thoughts on this idea.
MR. KING addressed the fact that in previous years there was a
great surplus of funds, and it made sense to grow savings in the
fund rather than spend it. He posited that from an economist's
viewpoint, it makes sense to save money when the fund is in
surplus but does not make sense to grow the savings account when
the money is coming from the private sector economy. He pointed
out two possible futures the legislature would need to consider
when deciding fund policy. In one future, he stated that there
would be a Permanent Fund large enough to fully fund the
government, which would necessitate a smaller private sector.
He deduced that this would put the public and private sectors at
odds with each other. In the other possibility, he described a
future where the fund provides for the "baseline" government
services, and the private sector contributes the rest [through a
tax], which would allow the two sectors to work in tandem. He
emphasized that, when considering the two futures, there needs
to be the consideration that sacrifices are often required. He
suggested that the sacrifice for supporting the government with
the Permanent Fund would be taxing and injuring the current
economy in order to avoid future taxes. He posited that this
would be as generationally inequitable as doing the opposite and
"recklessly draining the fund" to leave future generations to
fend for themselves. He stated that balancing this "give and
take" is at the crux of the legislature's fiscal plan decisions.
REPRESENTATIVE MCKAY referenced several different tax proposals
before the current legislature and posited that if the state
were to implement all of these, while also not drawing enough
from the fund, then the state would be hurting the private
sector to keep the Permanent Fund higher than needed.
MR. KING replied that this point is valid, in that if the
legislature decides to continue growing the fund, it will also
need to ask, "At what cost?" He said a good long-term plan
would balance the fiscal impacts, including taxation, between
the current and future generations. He described the balancing
act of protecting the current economy while also insuring a
prosperous future as "tenuous." He attributed the difficulty of
these fiscal decisions in part to not knowing the future. He
argued that this is why the [fiscal] structure should
automatically adjust to the markets.
7:05:10 PM
CHAIR CARPENTER discussed the history of the PFD, explaining
that the PFD program was not created at the inception of the
Permanent Fund, as the [original] sole purpose was to grow the
fund. The PFD was created to increase the public's stake in the
growth of the fund. He expressed the belief that this also
created inflation proofing of the principal. He continued that
the purpose for the change in the dividend formula with Senate
Bill 26 was to create a stabilized revenue for the state
government. Returning to the conversation about the balance of
paying dividends and funding services through a more stable
source of revenue, he stated that part of this would be to use
taxation as a way to balance spending and allow for money to be
removed from the fund to further its growth. He questioned
whether the current purpose is to continue to grow the fund, and
if so, he questioned when "enough is enough." He stated that if
the purpose is instead to provide revenue for the state, the
appropriate amount which allows the fund to be a sustainable
revenue source needs to be determined. He said that in order to
establish a fiscal structure the question of the fund's purpose
needs to be decided by the legislature. He stated that this
answer will dictate whether Alaska needs support from the
private sector to pay for state government. He expressed
agreement with Representative McKay's statement, which related
that requiring residents to pay taxes while still focusing on
the growth of the fund would be "the wrong thing to do."
7:08:38 PM
REPRESENTATIVE GRAY expressed the opinion that one of the most
difficult things is for people to take action in order to
benefit future generations, instead of the current one. He
shared his understanding that Alaska will run out of oil revenue
eventually, and the importance of keeping the fund growing would
be to provide the state with a stable form of revenue. If one
or more of the proposed taxes passes in the current legislature,
he pointed out that Alaska would still be the lowest taxed state
in the nation because of the Permanent Fund. He referenced a
statement made by a fellow member that the state could "spend
the whole Permanent Fund, and then figure it out." He feared
that if this happens, Alaska would be forced to become one of
the highest taxed states, with no revenue from oil or the
Permanent Fund. He expressed appreciation for past decisions of
the legislature to put money away without being required to do
so, and he expressed the sentiment that he would not want to
increase the POMV draw at the expense of future Alaskans.
REPRESENTATIVE MCKAY argued that the state may be forced to
[raise the POMV] in a couple of years because CBR will be empty.
REPRESENTATIVE GRAY countered by expressing the hope that the
state will still have over $80 billion.
REPRESENTATIVE MCKAY responded that there would be an issue if
CBR is drawn to zero and the budget is still in a deficit.
7:11:38 PM
CHAIR CARPENTER remarked that if the state draws all reserves to
zero, the state is constitutionally obligated to provide for the
current generation and will have to go after other sources of
funding to do so. He named these sources as the education fund,
corporations the state has funded, and the Permanent Fund
corpus.
7:12:22 PM
REPRESENTATIVE GROH pointed out the progress the committee has
shown on the topic. He expressed appreciation of the
acknowledgement that Alaska is the lowest taxed state.
Continuing the discussion of Alaska's many eras of fiscal
policy, he shared that he had been born in Alaska when it was
still a territory. Before the oil market was developed, he
recalled that Alaska used an income tax as its main form of
revenue. He also recalled that in 2015 it became obvious to
[the public] that the system of living off the oil tax was
broken. He stated that it was not until 2018 this problem was
acknowledged by the state with the creation of the POMV draw.
REPRESENTATIVE MCKAY asked whether the action was prompted by
the [Alaska] Supreme Court case in 2016 pertaining to Governor
Bill Walker's PFD veto.
REPRESENTATIVE GROH expressed disagreement and argued that the
general thinking around how to fund the state started to change
in 2015. He continued that this was when residents realized
that using oil money exclusively to fund the government and the
PFD no longer worked.
7:14:38 PM
CHAIR CARPENTER replied that a decision had been made [by the
governor].
7:14:53 PM
REPRESENTATIVE GROH shared that in his previous line of work he
would give many presentations on the topic, where the same two
questions were asked. He stated that the first question was,
"What is the Permanent Fund for?" He acknowledged that this
echoes Chair Carpenter's statement. He said that the second
question about Alaska's fiscal future was, "How long do you plan
to stay in Alaska?" He opined that one of the biggest issues
facing Alaska is how many people plan to leave the state at some
point. He expressed the belief that this question has
contributed to the reluctance to make a sacrifice now, as
residents may plan to move. He expressed the belief that the
reality of outmigration needs to be confronted and considered as
a large factor in Alaska's fiscal plan.
7:17:07 PM
REPRESENTATIVE MCKAY requested that Mr. King describe what would
happen if CBR became empty. He referenced the legislature's
ability to move money from ERA.
MR. KING responded that there are two clauses in the
constitution which allow for a draw from CBR. One of the
clauses allows the legislature to make a CBR draw through a
three-quarter vote. He reported that the other clause has never
actually been used because it only gets triggered if the state
does not have the revenues to fund the budget from the prior
year. He stated that this clause only requires a simple
majority vote to pass.
REPRESENTATIVE MCKAY restated for the record that a mechanism
existed which could be triggered during a budget deficit, with a
zero balance in CBR, allowing the legislature to refill CBR
[from ERA] through a majority vote to balance the budget.
MR. KING replied that Representative McKay was correct and
further explained that the introduction of these two clauses
into the constitution acted as a spending limit for the
legislature. He referenced the idea of putting a spending cap
into law and said that CBR already naturally restricts spending.
If funds are to be kept in CBR, rather than ERA, for the sake of
stabilization, he pointed out that these mechanisms already
exist, and there is no need for further legislation. He pointed
out the common misuse of vernacular surrounding ERA, which
refers to draws from this account as "drawing from our savings".
All funds within ERA are earnings already accessible to the
legislature as part of the general fund, and he emphasized that
the POMV law does not give the state permission to access ERA,
but rather limits how much can be drawn. He described the
public discourse around ERA and PFD as misleading because the
principal of the PFD cannot be invaded unless there is a change
to the constitution. He inferred that the current policy
question is not whether to draw from the principal, but whether
the legislature wants to give protections to the balance of ERA
or use this balance for government spending.
REPRESENTATIVE MCKAY referenced the situation in Norway, where
they have a $1 trillion sovereign wealth fund, but no dividend.
He stated that the country has a high tax rate, while continuing
to grow its fund from oil and gas revenues. He inquired about
Norway's fiscal plan in comparison to Alaska's. He asked
whether Norway no longer funds its government entirely on gas
and oil, and whether it is looking to implement a draw from its
fund. He additionally questioned the similar wealth fund in
Alberta, positing that Alaska is not like other states, but
rather like other countries.
7:22:46 PM
CHAIR CARPENTER informed Mr. King that he would not be required
to address the situation in Norway, as this is not his field of
expertise.
7:22:59 PM
REPRESENTATIVE GROH pointed out several differences between
Norway and Alaska, including higher taxes and a higher
government take of oil revenues. He opined that Norway's
government takes on more risk with operations, such as a
government run oil company. He expressed support for this
strategy in Alaska.
7:24:12 PM
CHAIR CARPENTER said the point being made is that Norway does
things very differently than Alaska.
7:24:18 PM
REPRESENTATIVE GROH touched on Representative McKay's inquiry
about Alberta's wealth fund and opined that there have been
social investments made with this fund which created substantial
trouble for the province. He expressed the opinion that Alaska
has worked hard to avoid this.
7:24:42 PM
CHAIR CARPENTER commented that the committee conversation is
challenging the current paradigm. He posited that the main
question being discussed is how the legislature can solve a
deficit in the current year, while taking into account the
fiscal security of future generations. He questioned whether
the 5 percent POMV is serving the right purpose in the current
fiscal choices. He listed additional financial levers to
consider for reducing the deficit, such as implementing a tax
and reducing spending. Additionally, he considered the
possibility of drawing money from the Permanent Fund and whether
its use should be solely for government services, or also for
growing businesses and promoting private sector investment. He
stated that the current models being proposed include a 50/50 or
75/25 split, but the underlying question of the purpose of the
fund must be answered in either case. He reiterated that the
state needs to make the choice between a future where the
Permanent Fund fully funds the government or a future where the
private sector economy is tied to the state's economy. He
suggested that there is value in the private sector tax revenue,
beyond just funds. He continued that job growth and creating
buy-ins from the private sector would bring economic growth. He
opined that Alaska could choose the path of economic growth and
fund government services this way, or fund government services
fully from the Permanent Fund, as in Norway.
7:27:41 PM
REPRESENTATIVE GROH clarified that Norway has many taxes and
does not fully fund the government through its sovereign wealth
fund.
CHAIR CARPENTER agreed with Representative Groh's point and
stated that he was referring to Norway's lack of a dividend and
that it uses both the wealth fund and tax revenue for government
services.
7:28:07 PM
MR. KING commented on Representative Gray's concern for saving
the money for the future by stating that the state has already
done this, as there is $60 billion protected within the
principal for future generations. He added that the original
growth of the fund was intended to make temporary oil wealth
last forever. Continuing to save some of the royalties into
perpetuity made sense, but he argued that now the state was
considering saving earnings rather than oil wealth. He
concluded by stating that the policy call in front of the
legislature is whether to save oil wealth or Permanent Fund
earnings for the future.
[HB 160 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB0160A.PDF |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |
| HB 160 Sponsor Statement.pdf |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |
| HB 160 Sectional Analysis.pdf |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |
| HB 160-DOR-ASD-04-17-23.pdf |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |
| HB 160-DOR-APFC-04-17-23.pdf |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |
| HB 160 Presentation.pdf |
HW&M 4/18/2023 6:00:00 PM |
HB 160 |