Legislature(2017 - 2018)SENATE FINANCE 532
03/06/2017 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB26 | |
| SB21 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 21 | TELECONFERENCED | |
| *+ | SB 26 | TELECONFERENCED | |
| += | SB 70 | TELECONFERENCED | |
SENATE BILL NO. 21
"An Act relating to appropriations from the income of
the Alaska permanent fund; relating to the calculation
of permanent fund dividends; and providing for an
effective date."
9:46:24 AM
SENATOR BERT STEDMAN, SPONSOR, introduced himself and
stated he would be presenting a bill he was very proud of.
He asked for the committee's support. He thought the
committee would observe that there had been no other bill
on the topic of the Permanent Fund with the same unique
aspects. He relayed that he would be giving a short
presentation, after which he would invite Legislative
Finance Division (LFD) staff to display some different data
inputs to further illustrate the provisions of the bill. He
stated that the bill had a basic structure and was a
starting point. He emphasized that the bill was not an all-
inclusive solution, and did not endeavor to solve the
fiscal gap.
Senator Stedman thought that members could recognize that
forecasts were not correct and with luck could provide
direction and magnitude. He referenced the pension
obligations of the state, and the recession of 2008-2009 as
examples. He noted that the focus of the bill was much
shorter; and was a different way of approaching the fiscal
issue at hand, rather than looking at filling the deficit
as quickly as possible.
Senator Stedman remarked that the state was very fortunate
to have a large savings account in the Permanent Fund. He
thought that it was important to take affirmative action to
protect the fund for future generations. He stated that the
approach of the bill considered what the Permanent Fund
could reasonably do to aid in the problem of the deficit,
and how to eliminate the structural deficit.
9:50:13 AM
Senator Stedman discussed the presentation, "SB 21 (2017)
"'GUARD and GROW' THE ALASKA PERMANENT FUND," (copy on
file). He showed slide 2:
Issue:
Structuring the Permanent Fund to Guard It from Being
Raided.
Opportunity:
Build a New Fiscal Framework
• Continues the Proper Management of the Fund,
• Provides a Fair Dividend,
• Allows for Transfers Back to Principle of Fund, and
• Limits Use For Public Services.
Senator Stedman commented that the Permanent Fund was a
sensitive subject; and thought the risk to the fund lie
with the legislature that had the power of appropriation to
destroy, hinder, protect or build the fund. He commented
onthe cartoon depicted on the slide, which depicted the
legislature as a wolf that would devour the earnings
capability and erode the purchasing power of the fund (or
not). He commented on the successful track record of the
Permanent Fund, and posited that the bill would leave the
important pieces intact.
Senator Stedman noted that the people of the state owned
the subsurface rights, unlike other states. He made a
special note that there were multiple generations
represented at the table. He emphasized that future
Alaskans had just as much right to the Permanent Fund as
people already in the state.
9:54:15 AM
Senator Stedman stated that the bill would allow fair
dividends to the owners of the resource. The bill would
also allow (in the case of additional income) back to the
Permanent Fund for future growth, to be added back to the
dividend, or used for public services. He thought everyone
recognized that it was not possible to solve the fiscal
problem without the help of the Permanent Fund. He thought
that looking forward to increased oil production, the state
would be in the position to add money back to help the
Permanent Fund grow at a faster rate.
Senator Stedman discussed slide 3, "CURRENT PRINCIPLES FOR
THE PERMANENT FUND":
· A "Permanent" Savings Account: The fund should
conserve part of the state's revenue from resources to
benefit all generations. AS 37.13.020(1)
· The Fund's Principle Should Be Protected While
Prudently Invested The fund should be managed to
protect the principal while maximizing total return.
AS 37.13.020(2)
· The Fund's Purchasing Power Over Time Should Be
Preserved While Maximizing Return AS 37.13.120(a)
Senator Steadman discussed the history of the Permanent
Fund. He cautioned against discussing the concept of an
"average dividend," which was contingent upon the size of
the fund.
Senator Stedman showed slide 4, "CURRENT PRINCIPLES WORK -
8.66% ANNUALIZED RETURNS FOR LAST 32.5 YEARS ($734,000 IN
1977 TO $57,304,500,000 2/21/17)," which showed a bar graph
entitled 'Fund's Long-Term Investment Performance." He
reiterated that the bill would not solve the state's entire
fiscal problem. He thought the safety of the fund should
come before solving the state's fiscal problem.
9:58:04 AM
Senator Stedman showed slide 5, "SB 21 (2017) PROTECTS THE
PERMANENT FUND UNDER CURRENT PRINCIPLES: INVEST PRUDENTLY,
PROVIDES A FAIR DIVIDEND, ALLOWS FOR REINVESTMENT, AND
LIMITS THE AMOUNT FOR GOVERNMENT!":
· Sets up a 4.5% payout based on a rolling 5 year
average. (Uses first 5 of the last 6 fiscal years)
· Splits the 4.5% payout and sets a minimum 2.25%
allocation for dividends
· The remaining 2.25% of the payout can be allocated
towards increased dividends, returned to the
permanent fund for investment, or to the general
fund for state services.
· Sets a maximum of 2.25% on the amount of the payout
that can be used for government services.
Senator Stedman reiterated that the bill was not a holy
grail of bill solutions, and was targeted to protect the
Permanent Fund. He discussed the closures of pulp mills and
saw mills in Sitka, Wrangell, and Ketchikan. He recounted
that at the time of the closure Sitka had a fund that was
all bonds. In the late 1980s he had a discussion with the
administrator in city hall about converting the fund to a
balanced approach of stocks and bonds with a POMV. The
community had converted the fund to a POMV with a payout
rate of 6 percent, and the configuration had been running
for over 20 years. He drew parallels between the
generations of Sitkans that had an interest in Sitka's fund
and the many generations of Alaskans who deserved benefits
from the Permanent Fund. He stated that the city was
considering lowering the payout rate of the fund.
Senator Stedman continued discussing the fund of the city
of Sitka, which had experienced a slight erosion of
purchasing power over the previous two decades. He thought
the bill was not dissimilar to how the community of Sitka
had dealt with its fiscal impact. He stated that the bill
was set with a 4.5 percent payout and had a smoothing
mechanism much like the other bills of the same topic. He
thought it was wrong to set the payout by considering the
size of the deficit rather than what could be borne by the
fund portfolio. He hoped to engage in discussion about the
4.5 percent rate of payout and examine stress points. He
considered that a 6 percent payout would erode future
purchasing power over time.
10:03:15 AM
Senator von Imhof looked at slide 5, and addressed the last
bullet point, which showed a maximum of 2.25 percent for
the amount the payout could be used for government
services. She noted that the bullet above showed there was
flexibility for the 2.25 percent portion that could be used
for dividends, returning to the fund, or for state
services. She wondered how to reconcile the extra
flexibility with the language in the bill that had a
maximum payout for government services.
Senator stated that the 4.5 percent payout was split with
one half for dividends (for the owners of the asset); and
the state had the ability to use one half of the payout
rate to help with the state's fiscal situation. He
explained that if there were strong fiscal returns, the
remaining 2.25 percent could be used in the ways
illustrated on the slide. He argued that the best course of
action would be to put the funds back to the corpus of the
fund for future generations.
Sentator Stedman thought that if there was less than a 50
percent split to the public, it would erode public support.
He thought going above 50 percent for the dividend would be
a fiscal strain. He observed that taking the entire 4.5
percent of the draw would solve the fiscal problem, but
would create a political problem. If the entire payout went
to dividends, the state would not be able to fix the
deficit. He thought a balance was necessary, and noted that
the bill was not prescriptive with regard to dispersal of
the payout. He thought it was important to give policy-
makers the ability to make the necessary decisions to
increase the dividend or route the funds back to the
Permanent Fund. He thought that the provision, in
combination with a spending limit that had been discussed,
was an attractive solution to help control government.
10:06:55 AM
Senator Stedman showed slide 6, "SB 21 (2017) - PROJECTED
4.5% DRAW, DIVIDEND AMOUNTS, AND OTHER FUNDS," which showed
a table. He pointed out that the dividend amount for 2018
would be roughly $1700 (for approximately 650,000
dividends) under the proposed plan in the bill. He thought
some might consider it to be an excessively large dividend;
and reminded that the size of the dividend was dependent
upon the size of the Permanent Fund. He thought flexibility
would be needed from the public to solve the fiscal crisis.
He wanted to see the payout set at 50/50, which could be
adjusted up or down if the need arose. In using the two
combinations, in conjunction with spending restraints and
possible revenue enhancements, it was possible to eliminate
the structural deficit without hindering the earnings
capability of the Permanent Fund in perpetuity.
10:09:23 AM
Senator Stedman turned to slide 7, "SB 21 (2017) -
SAFEGUARDS THE FUND SO IT CAN GROW AND LAST FOR
GENERATIONS":
· SB 21 (2017) is not intended to fill the entire
fiscal gap. It's primary focus is guarding the
permanent fund so it can grow for future generations
while keeping downward pressure on government
spending.
· Other pieces that address the fiscal gap, like
budget reductions, efficiencies, and revenue
enhancements may be bolted onto the fiscal framework
in the near future.
Senator Stedman reiterated that SB 21 was straightforward
and simple. He commented that the bill had taken two months
to draft, as earlier versions had been too complicated. He
thought that the public would be in support if the changes
to the Permanent Fund were transparent. He commented that
the primary goal of the bill was to protect the Permanent
Fund for future generations of Alaskans. He thought it was
possible for the current generation to address the
problems.
Senator Stedman thought the politics of the bill might beg
the question as to why there was a statutory change rather
than a constitutional amendment. He thought the bill would
show that the POMV worked, and enshrine it in the
constitution with a requirement for public support. He did
not think there was sufficient time for a constitutional
amendment. He asked the committee to look at the statutory
framework for a POMV, and work with the levers to payout
the dividend split for two years, ending with a 50-50
split. He wanted to confine the ERA and require the
legislature to deal with the issue of the deficit.
10:13:38 AM
Co-Chair Hoffman thought the people of Alaska were looking
toward the legislature to come up with financial solutions
to address the deficit. He stated that SB 70 accomplished
the task in the out years. He thought the dilemma was how
to address the deficit, while Senator Stedman was
addressing how to protect the Permanent Fund and the
dividend. He thought the dividend was protected by SB 70.
He thought that Senator Stedman asserted there could be
some form of SB 70 for ten years, during which the dividend
would be static. He wondered if Senator Stedman had
considered how such a change might work towards a fiscal
solution.
Senator Stedman commented that the members in the Senate
did not always agree. He did not necessarily agree that it
was fair to the people of Alaska to use the average to
conclude a dividend rate. He thought the dividend outflow
should be tied to the size of the fund.
10:16:51 AM
Senator Stedman addressed Co-Chair Hoffman's question
regarding freezing the dividend for ten years. He noted
that there would be five different legislative groups over
the period of time being discussed, with varied agendas and
opinions. His thought that the problem could be fixed at a
more rapid rate. He thought the focus should be on
solutions for the next three to five years. He commented on
the unpredictability of fiscal projections, and used the
example of the state retirement system.
Co-Chair MacKinnon asked if the legislature had statutorily
contributed about $24 billion of additional funds to the
Permanent Fund.
Senator Stedman was not aware of the precise amount that
had been contributed, but he knew that from time to time
the legislature had appropriated earnings reserves to
protect the corpus of the Permanent Fund. He emphasized
that he would be shocked if the legislature let the ERA
continually grow. He had seen projections in which the ERA
was $20 billion to $30 billion.
Co-Chair MacKinnon stated that the legislature had
contributed $17 billion and inflation proofing.
Co-Chair MacKinnon asked if Senator Stedman was prepared to
give an overview of the bill.
Senator Stedman stated that there was only one paragraph in
the bill.
Co-Chair MacKinnon observed that the bill was three pages.
10:19:58 AM
Senator Stedman read from the Sectional Analysis (copy on
file):
SECTION 1
Deletes language from AS 37.13.140 related to income
available for distribution.
SECTION 2
Deletes references in AS 37.13.145(d) to AS
37.13.145(b) and (c), which are repealed by section 5.
SECTION 3
Adds a new subsection to AS 37.13.145 that authorizes
the legislature use 4.5% of the average fiscal-year-
end market value of the balance of the fund for the
first five of the last six fiscal years, including any
unrealized gains and losses. The legislature must
allocate a minimum of 2.25% for dividends. The other
2.25% of the payout can be appropriated towards
increased dividends, reinvested into the Permanent
Fund, or to the General Fund for public services. A
maximum of 2.25% can be used for public services.
SECTION 4
Makes conforming amendment to AS 43.23.025(a) to
change a reference from AS 37.13.145(b) to AS
37.13.145(e)(1).
SECTION 5
Repeals AS 37.13.145(b) and AS 37.13.145(c).
SECTION 6
Provides an effective date of July 1, 2017.
Senator Stedman added that the bill was structurally so
basic that implementation would necessitate additions for
several items.
10:21:53 AM
AT EASE
10:23:46 AM
RECONVENED
Senator Stedman wanted to review interactive scenarios with
the assistance of LFD to illustrate the dynamics of SB 21.
He wanted to change variables and discuss deficit issues.
He addressed the spreadsheet "LFD Fiscal Model," which was
previously used in committee to discuss SB 70 [copy on file
under Senate Finance meeting 2/27/17].
Co-Chair MacKinnon commented that the committee had
previously modelled and tested fiscal plans through an
interactive graph from LFD. When reviewing different bills
and fiscal models, the committee first considered the
Undesignated General Fund (UGF). She referred to Designated
General Funds (DGF), and used the example of University
receipts and tuition, which were designated to go back to
the University. The committee would not want to hamper the
University from being able to take care of itself through
revenues of its own. She used the example the Department of
Fish and Game's designated funds that went toward managing
resources. She discussed federal funds and perceived budget
growth. She relayed that the state had used limited UGF
dollars to leverage as many federal dollars as possible to
fight the recession.
10:26:22 AM
Co-Chair MacKinnon detailed that the previous year's
capital budget had approximately $115 million to $117
million used to leverage approximately $1 billion in
federal funds to invest across the state to care for ports,
roads, and airports. She looked at the graph on the top
left of the fiscal model and pointed out that the blue
represented projected revenue from FY 16 to FY 26, and the
green represented anticipated draws from state savings. She
noted that the orange color on the graph denoted a CBR
draw, or a Statutory Budget Reserve (SBR) draw. She
specified that there was approximately $288 million
remaining in the SBR. The red on the chart represented
unanticipated draws. If the ERA was depleted (where the
current dividend calculation was from) the dividend would
be at risk. She communicated that when the committee
considered the dividend it had to consider it in balance
with funding services provided to communities.
Co-Chair MacKinnon recalled that the Senate Labor and
Commerce Committee had reviewed economic research that
alledged one in three dollars in local spending came from
the state. She observed that under SB 21, state reserves
were moving in a downward pattern. She reiterated that
Senator Stedman's plan was not to close the fiscal gap but
rather protect the corpus of the Permanent Fund and the
dividend. She noted that there were two additional graphs
on the model pertaining to the Permanent Fund, and there
was a table depicting payout dollars as well as fund
growth. In the middle of the fiscal model there was a table
of scenarios and assumptions being considered. She reviewed
the assumptions considered by the provisions of SB 21.
10:29:42 AM
Senator Stedman directed attention to the graph on the
upper left, "UGF Revenue/Budget," and thought it
demonstrated that the state would be using the ERA, which
he thought was indicative of a structural deficit. He
reviewed the lower left-hand graph "Budget Reserves," and
observed the diminishment of the SBR and the CBR. He argued
that the Permanent Fund could produce revenues of 4.5
percent annually, which would not solve the fiscal problem.
He thought additional measures were needed.
Senator Stedman changed variable assumptions on the fiscal
model, including a POMV payout of 4.75 percent, and
observed that with the structural deficit appeared again in
2023. He discussed different payout rates and considered
the lower right-hand graph, which showed the payout for
dividends. He thought there would need to be discussion
with the public. He considered the fiscal model with a
combination of $300 million in reductions and tax changes;
and observed the CBR extending to 2025. He thought it was
important to continually work so that the structural
deficit would not re-appear in the future.
Senator Stedman emphasized that the Permanent FUnd could
aid in getting out of the budget deficit. He thought that
if the public gave the legislature some flexibility, it
could be done with minimum disruption. He thought it was
possible to do more revenue enhancements, but that it would
necessitate political discussion. He considered options
such as flattening the dividend for four years or six
years. He stressed that the Permanent Fund should not be
subordinate to the budget deficit.
10:34:59 AM
Senator von Imhof referred to the rate of Permanent Fund
investment return. She pointed out that there were two
funds (the ERA and the corpus of the fund), which had been
invested in the same manner. She thought it was arguable
that if the state started taking predictable draws from the
ERA, its investment mix would need to be reviewed. She
observed that the CBR growth earnings were 2.89 percent,
and reminded that the CBR had to be kept relatively liquid
to enable access to the funds. She thought it was arguable
that the ERA as well had to be kept more liquid. She
thought increased liquidity would not enable the ERA to
reach the proposed 6.95 percent rate of return. She asked
if the sponsor could look at the fiscal model with a 6.25
percent rate of return for the Permanent Fund.
Senator Stedman thought Senator von Imhof had made a good
point. He remarked at the diminishment of the CBR. He noted
that the model did not take into account a constitutional
amendment for a POMV, and a shutdown of the ERA. He
reminded that the fiscal model was not all-encompassing,
but would provide an idea of magnitude when considering
some of the fiscal provisions being proposed. He added that
the bill would not require a structural change to the
permanent fund, but would try to keep the legislature out
of the ERA so that the Permanent Fund would not have to
diminish its risk tolerances.
10:37:40 AM
Senator von Imhof observed that with the change to the
fiscal model, it was possible to see the CBR maintain its
value over time, even when the Permanent Fund returns were
slightly less.
Senator Micciche asked if the model was flat.
ALEXEI PAINTER, ANALYST, LEGISLATIVE FINANCE DIVISION,
explained that the model currently showed a flat budget,
but could be changed to show other scenarios.
Senator Micciche commented that all the changes made to the
fiscal model moved the bill closer to SB 70 and SB 26. He
discussed modelling various assumptions for SB 70, and the
effect on the state reserves. He thought all the proposed
plans ensured the health of the corpus of the Permanent
Fund. He pointed out that some plans preserved savings in
perpetuity. He considered that SB 70 (as opposed to SB 21)
allowed response time if there was a dramatic increase or
decrease in the price of oil in accordance with the fall
revenue forecast. He was uncomfortable with the amount of
reserves, and thought that SB 21 did not have a structural
comprehensive solution that provided a level of comfort;
and thought the state would quickly need to look at either
dramatic cuts or new revenue measures. He wondered how the
sponsor felt about the health of the state's reserves.
10:42:19 AM
Senator Stedman strongly disagreed with Senator Micciche,
and thought the other plans put too much reliance and
pressure on the Permanent Fund. He noted that SB 70 would
take $4.9 billion from the ERA. He discussed other bills
and provisions to take funds from the ERA. He thought it
was unsustainable to rely overmuch on the portfolio. He
thought the Permanent Fund should be isolated before the
legislature dealt with other fiscal issues. He was
concerned that the easiest of all the legislative options
would be to loot the Permanent Fund. He thought there was a
management problem when 9 percent of the fund was taken out
in one year. He agreed that SB 21 left more work to do in
the future. He was adamantly opposed to taking out billions
from the Permanent Fund just because the legislature could
not make hard decisions as a group.
Senator Micciche pointed out that experts from the
Permanent Fund had testified in committee to ensure that
the payout of 5.25 percent did not compromise the corpus or
health of the fund. He agreed that it was not acceptable to
risk the corpus of the fund, but thought that experts had
concurred that an effective draw rate of 4.56 percent draw
rate the following year was extremely unlikely to find a
failure rate over time. He thought Senator Stedman might be
more conservative in his analysis.
Senator Stedman commented that the current year's dividend
in combination with draws from the ERA was significant. He
informed that the 4.5 percent in the bill was
coincidentally at the same rate that Callan and Associates
had considered a reasonable draw rate. He urged members to
look at the numbers and consider what was sustainable for
the Permanent Fund. He thought there was a better solution
that included action to isolate the Permanent Fund. He
stated that he would support SB 21 as a draft for the
committee to consider changes.
SB 21 was HEARD and HELD in committee for further
consideration.
Co-Chair MacKinnon discussed the agenda for later in the
day.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 21 PP Edited.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 21 |
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - Sectional Analysis (03.06.17).pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - DOR White Paper 1.30.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |
| SB26 Supporting Document - SFIN Permanent Fund Protection Act - 3.6.17.pdf |
SFIN 3/6/2017 9:00:00 AM |
SB 26 |