Legislature(2017 - 2018)BUTROVICH 205
02/16/2017 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| SB26 | |
| Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation | |
| 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 | |
| + | TELECONFERENCED |
SB 26-PERMANENT FUND: DEPOSITS; DIVIDEND; EARNINGS
3:59:06 PM
CHAIR DUNLEAVY called the committee back to order and announced
the consideration of SB 26.
3:59:27 PM
RANDALL HOFFBECK, Commissioner, Alaska Department of Revenue,
Juneau, Alaska, addressed the comparison between SB 26, the
Permanent Fund Protection Act (PFPA), and SB 21 as follows:
· Rule-based:
ƒPFPA: yes;
ƒSB 21: yes.
· Stabilizing-investment income:
ƒPFPA: partial, 5-year averaging in
percentage of market value (POMV);
ƒSB 21: Partial, 5-year averaging in POMV.
· Stabilizing-total revenue:
ƒPFPA: partial, addressed in a mid-range of
oil prices;
ƒSB 21: no defined plan.
· Sustainable-protect the dividend:
ƒPFPA: yes;
ƒSB 21: yes.
· Sustainable-protect the fund's total and corpus:
ƒPFPA: yes, maintains value of the fund and corpus
over the long term;
ƒSB 21: partial, the total fund value is
maintained but the growth is not protected in the
corpus.
· Maximize the earnings reserve account (ERA) use:
ƒPFPA: yes, withdrawing less when oil
revenues are high allows higher draws when
oil revenues are low;
ƒSB 21: partial, withdraws same percent each
year regardless of budget need.
COMMISSIONER HOFFBECK said the state is facing a fiscal crisis
that requires steps to be taken that are not comfortable but are
necessary in order to actually resolve the fiscal situation that
the state is in. He emphasized that the permanent fund is the
state's largest tool for solving the fiscal crisis and its use
maximized. He disclosed that the Department of Revenue did the
modeling on what the largest-sustainable draw would be for the
permanent fund that would:
· Not put the fund's corpus in jeopardy;
· Allow the fund to grow with inflation over time;
· Allow the fund to maintain its real purchasing power;
· Allow as much money as possible to be used for paying
both the dividend and for providing money for funding
government services.
He set forth that the Department of Revenue determined that a
5.25 percent draw was aggressive with probabilistic modeling
that takes into account anomalies and down markets showed the
percentage still survived. He added that McKinsey and Company
reviewed the department's modeling and concurred that 5.25
percent was a realistic goal. He disclosed that McKinsey and
Company is internationally known on Wall Street and with
sovereign wealth funds all over the world.
4:02:00 PM
At ease.
4:02:45 PM
CHAIR DUNLEAVY called the committee back to order.
COMMISSIONER HOFFBECK explained that important components were
needed to be met when putting together the bill's structure. He
set forth that using the permanent fund's earnings must be rules
based to avoid overdrawing the fund as well as a draw that could
stabilize revenues for the state of Alaska. He noted that the
bill introduced in the previous session originally had a fixed
draw, but was rejected as being too constrained, so a POMV
approach was adopted which the Senate approved last year. He
added that other important components include protecting the
dividend and the fund's corpus, and maximizing the use of the
fund to generate as much revenue as possible for solving the
fiscal problem.
CHAIR DUNLEAVY asked Commissioner Hoffbeck to clarify that when
he said "stabilize revenues" he meant stabilizing the revenue
stream coming out of the fund, not stabilizing the entire
revenue stream.
4:04:31 PM
COMMISSIONER HOFFBECK replied that the PFPA does more by tying
to oil-price revenues that acts as a shutoff valve as oil prices
recover and the state gets more revenue from oil rather than the
permanent fund. He said PFPA stabilizes the state's major
revenue streams. He admitted that annual fluctuations will
occur, but five-year averaging will take a lot of the
fluctuations out of the equation. He concurred with Chair
Dunleavy and Senator Stedman that SB 21 and SB 26 do not get the
state to the finish line by itself.
CHAIR DUNLEAVY asked what Commissioner Hoffbeck meant by saying,
"Stabilizing the permanent fund."
4:06:27 PM
COMMISSIONER HOFFBECK clarified that he said, "Protecting the
dividend." He explained that the dividend has become a very
important part of Alaska's economic base and the administration
felt it needed to be protected, but not at the rate over $2000 a
year because it took too much and left the state too far away at
closing the gap. He continued as follows:
Essentially the size of the dividend at $60 oil
equates to the size of the deficit and it's not that
the dividend creates a deficit, it gives us kind of a
way to think in our mind just how big the deficit is
with various sizes of dividends. So if you pay a $2000
dividend, you have about a $1.3 billion deficit using
the 5.25 percent draw. If you pay a $1000 dividend,
you've got about a $700 million deficit and the
difficulty in closing $700 million is tremendous, but
to close $1.3 billion becomes almost insurmountable;
essentially that would require the entire $750 million
in cuts that the Senate has discussed and a full
broad-based tax to close that in order to pay the
$2000 dividend.
4:08:03 PM
CHAIR DUNLEAVY pointed out that the decades-old calculation for
the dividend was determined without interference from government
whereas the dividend in the PFPA is determined by the government
based upon the deficit or how much the state needs.
COMMISSIONER HOFFBECK confirmed that the entire 5.25 percent
draw from the permanent fund goes into the general fund. He
explained the formula for the dividend as follows:
Twenty percent of the draw, the 5.25 percent draw,
goes to pay the dividend as well as 20 percent of the
non-constitutionally deposited mineral royalties,
those two together create the dividend; so it's still
formula driven, but it goes directly through the
general fund and comes out of the general fund. If
that becomes a sticking point to getting this to the
finish line, we have no problem of just dumping it
into a dividend fund similar to how it is done now. We
just felt that it was cleaner to run it through the
general fund since it's flowing through there anyway,
but that is not a critical piece to the plan.
4:10:01 PM
SENATOR WILSON pointed out that Commissioner Hoffbeck keeps
saying, "Protecting the dividend." He asked what the purpose is
of protecting the dividend.
COMMISSIONER HOFFBECK replied that that the PFPA protects the
earning reserve from being drawn to the point where the state
won't be able to pay the dividend. He specified that the idea is
to protect the entirety of the permanent fund including the
portion that goes to pay the dividend.
SENATOR WILSON said he constantly hears from a lot of bills
similar to SB 21 and SB 26 that the permanent fund has to be
protected. He asked if the protection was needed because
government does not have the discipline to find another solution
other than to go the route of SB 26.
4:11:47 PM
COMMISSIONER HOFFBECK concurred with Senator Stedman when he
talked about "wolves." He commented as follows:
It's just kind of the reality of what we face when we
bump up against these decisions. If you are sitting
there with a $500 million hole that you need to fill
in the budget and that means either you put in a
broad-based tax and that fills the committee rooms
with angry people, or you put in $500 million worth of
expenditure cuts and that fills the rooms with angry
people, or $500 million you can just take it out of
your savings. There's a lot of incentive to just go
take it out of your savings and that's why we think
that structure needs to be there so that if you go to
take it out of your savings, you have to answer to the
public why you didn't follow the rules that you set
up, it's exactly what the administration is facing
right now because of the governor's veto. We believe
that the governor had all of the rights and authority
to make the veto or he wouldn't have done it; that
being said, the people stood up and said why didn't
you follow the rules, you've been following that same
rule for 30-plus years, why didn't you follow it this
time. I think by putting a structure around any
restructuring of how we use the dividend and a real
framework, we put ourselves in the position that any
time that we don't follow the rule, we have to answer
to the public why didn't we follow it.
4:13:27 PM
SENATOR WILSON asked why the government should get more than 50
percent than the people get in terms of the payout from the
dividend.
COMMISSIONER HOFFBECK opined that a 50-50 split is easy to
explain. He asserted that there is nothing structurally
significant about a 50-50 split. He explained that the current
dividend formula was the product of political compromise and
there was nothing magical with the calculation. He emphasized
that a 50-50 split does not get the government to the finish
line. He remarked that the administration did not say, "Let's go
grab some money from the citizens of the state of Alaska." He
asserted that the PFPA squeezes as much out for the dividend
while still having a reasonable expectation to be able to close
the rest of the fiscal gap.
4:15:16 PM
CHAIR DUNLEAVY referenced an earlier discussion with Senator
Stedman on constitutionalizing SB 21. He admitted that no matter
how much the legislation is ring-fenced in statute, the governor
is able to veto or one could change the statute in one session.
COMMISSIONER HOFFBECK replied that Chair Dunleavy's point is
well taken and agreed that not only could the administration
veto it, but the Legislature could just choose not to
appropriate a dividend in any given year as well under the
formula. He said the assumption is people are going to follow
the rules. He addressed the concern with constitutionalizing the
legislation as follows:
The concern with putting in the "constitutional" is
exactly what the founders, the ones who wrote the
constitution about this whole idea of "siloing"
revenues for set expenditures, they prohibited the
dedicated funds within the statutory language
specifically in the constitution because they saw the
issues that are associated with putting your money in
silos that can't be broken and when you put them in
silos that can't be broken, now you end up in
situations where often times you could have money
sitting here that you didn't need that you need to
spend over here, but you would have no access to it.
So that's the real danger you have by putting it in
the constitution is that you would tie it up to say
this is exactly where it's going to have to go, you
could be in a situation where you couldn't pay your
general obligation debt or you couldn't make payroll
or some other thing and you would not have access to
those funds. So it really ties, not so much the
administration's hands, it's the Legislature's hands,
you're taking away your own appropriation authority by
putting it into the constitution. The administration
can't spend what you don't appropriate, so it really
is an issue of some of your flexibility, your
appropriation authority that would be tied up by
moving it into the constitution; but, just as a
general statement, it's not good public policy to silo
your revenues and lock them up where they can only be
spent in a certain fashion and not have the
flexibility to move the money around if you need to.
4:18:00 PM
CHAIR DUNLEAVY pointed out that the state had a rules-based
system for decades that changed because it was statutory. He
reiterated that the PFPA does not provide protection, it just
changes the way the permanent fund is dealt with.
COMMISSIONER HOFFBECK clarified that the PFPA changes the
formula and provides no more or no less protection that the old
formula had.
CHAIR DUNLEAVY reiterated that the PFPA is still statutory and
amounts could be vetoed, and the Legislature could change it in
a 90-day session. He commented as follows:
What we are lacking right now from my perspective,
just from the feedback I'm getting, is a confidence in
the public that we are going to deal with this in a
manner that they thoroughly understand and potentially
could accept, but they are wading through the terms,
the terminology, the nuances, and some of this stuff
they are questioning.
4:19:25 PM
COMMISSIONER HOFFBECK summarized the plans to draw from the
permanent fund by addressing the current status quo option,
drawing from the permanent-fund-only option, and the differences
in using either SB 21 or SB 26 as follows:
· Status quo will eventually deplete the earnings reserve and
there won't be a dividend or money for government
expenditures.
· Permanent-fund-only plan has the same problems as status
quo if there is not a full-fiscal solution. The earnings
reserve will eventually be depleted and you won't have
money for government services.
· Whatever plan is selected needs the rest of the pieces to
solidify either of the plans.
· Both SB 21 and SB 26 are rules based.
· Both SB 21 and SB 26 stabilize the investment-income piece
by using the five-year-averaging strategy that will take
the wild swings out of it.
· SB 21 does not have the shut-off valve on the percentage of
market value (POMV) draw and potentially may result in
super-heated spending if oil production or oil prices
rebound.
· Total revenue is addressed more within SB 26, but only mid-
range oil prices is addressed. Once oil prices move past
the mid-range, oil-price volatility could still be present.
Other revenues that are part of the total fiscal package
would not be addressed in SB 26, the bill only addresses
the tie between oil and the permanent fund.
· Both plans are statutory.
· Both plans protect the dividend.
· Both plans have a formula-driven approach for the dividend.
· Both plans protect the fund by at least growing at the rate
of inflation.
· Both plans project the fund to have similar balances 24-
years out at approximately $104 billion to $105 billion.
· SB 21 will have more money in the earnings reserve and SB
26 will have more money in the fund's corpus.
· With money in the corpus at a 5.25 percent draw, SB 26 will
generate more revenue for funding government services than
the 4.5 percent draw under SB 21.
COMMISSIONER HOFFBECK addressed a final comparison between SB 21
and SB 26 that referenced FY2018 as follows:
· FY2018 unrestricted general fund (UGF): $4.2 billion;
· FY2018 existing UGF revenues: $1.4 billion;
· Planned earnings reserve account draws for UGF:
ƒStatus quo: not available,
ƒSB 21: $1.2 billion,
ƒSB 26: $2.0 billion;
· Additional measures required for a full-fiscal plan:
ƒStatus quo: $2.8 billion,
ƒSB 21: $1.6 billion,
ƒSB 26: $0.8 billion.
4:25:40 PM
SENATOR WILSON addressed the $1.4 billion in existing UGF
revenues in FY2018 and asked Commissioner Hoffbeck to provide
additional details.
COMMISSIONER HOFFBECK replied that he believes the $1.4 billion
includes the revenues that the governor proposed from the motor-
fuel tax. He opined that the motor-fuel tax is only $40 million
in the first year, so whether the tax is included or not does
not change the discussion.
COMMISSIONER HOFFBECK set forth that the $800 million "hole"
that needs to be filled under SB 26 will be a heavy lift;
however, the administration does not see a path to fill the $1.6
billion from SB 21. He opined that an unfunded liability is a
larger threat than a too large of a draw. He said a draw can be
turned down, but an unfunded liability creates the incentive for
unplanned draws. He asserted that unplanned draws really put the
risk and the volatility into the stability of any of the plans.
4:27:58 PM
SENATOR WILSON pointed out that Commissioner Hoffbeck stated
that he did not see another means to "fill the hole." He asked
if he thought about "making the hole smaller" by making the size
of government smaller instead of looking for revenues to fill
the hole.
COMMISSIONER HOFFBECK answered yes. He explained that the
governor intentionally did not "fill the hole" when he presented
his budget because he thought a discussion was needed regarding
how much is going to be revenue and how much is going to be
expenditure reductions. He asserted that "everything is on the
table." He opined that the $1.6 billion in additional measures
required for a full-fiscal plan from SB 21 would require massive
expenditure cuts and massive taxes. He admitted that the $800
million left from SB 26 is going to be a pretty big task in
itself.
CHAIR DUNLEAVY remarked that now is not the time to engage
Commissioner Hoffbeck on the philosophy of reductions and the
size of government. He opined that continued government spending
will be above the $600 million that is projected in additional
measures from SB 26.
COMMISSIONER HOFFBECK said he had no further comment.
4:29:36 PM
CHAIR DUNLEAVY thanked Commissioner Hoffbeck, and held SB 26 in
committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB26 Supporting Document - APFPA Modeling Presentation 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Backup - Questions from 2.2.2017 - Inflation Proofing of the PF Corpus.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Back Up - Questions for SSTA for SB 21, SB 26, & SJR 1.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 - Letters of Opposition.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 26 Backup - DOR Response Letter to Senate State Affairs Committee - 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 26 |