02/04/2016 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB128 | |
| Presentation: "accessing Permanent Fund Earnings to Reduce the Fiscal Gap." | |
| Presentation: "a Way Forward on the Alaska Budget" | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SB 128 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 4, 2016
9:03 a.m.
MEMBERS PRESENT
Senator Bill Stoltze, Chair
Senator John Coghill, Vice Chair
Senator Charlie Huggins
Senator Lesil McGuire
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 128
"An Act relating to the Alaska permanent fund; relating to
appropriations to the dividend fund; relating to income of the
Alaska permanent fund; relating to the earnings reserve account;
relating to the Alaska permanent fund dividend; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
SENATE BILL NO. 114
"An Act relating to deposits into the dividend fund; and
relating to the Alaska permanent fund."
- SCHEDULED BUT NOT HEARD
PRESENTATION: "ACCESSING PERMANENT FUND EARNINGS TO REDUCE THE
FISCAL GAP."
- HEARD
PRESENTATION: "A WAY FORWARD ON THE ALASKA BUDGET"
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB 128
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, FIN
01/26/16 (S) STA AT 9:00 AM BUTROVICH 205
01/26/16 (S) Heard & Held
01/26/16 (S) MINUTE(STA)
01/28/16 (S) STA AT 9:00 AM BUTROVICH 205
01/28/16 (S) Heard & Held
01/28/16 (S) MINUTE(STA)
02/02/16 (S) STA AT 9:00 AM BUTROVICH 205
02/02/16 (S) Heard & Held
02/02/16 (S) MINUTE(STA)
02/04/16 (S) STA AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
RANDALL HOFFBECK, Commissioner
Alaska Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Reviewed SB 128.
WILLIAM MILKS, Assistant Attorney General
Alaska Department of Law
Juneau, Alaska
POSITION STATEMENT: Discussed constitutional implications of SB
128.
SCOTT GOLDSMITH, Professor Emeritus of Economics
Institute of Social and Economic Research
University of Alaska-Anchorage
Anchorage, Alaska
POSITION STATEMENT: Presented "Accessing Permanent Fund Earnings
to Reduce the Fiscal Gap."
BRAD KEITHLEY, President
Keithley Consulting, LLC
Anchorage, Alaska
POSITION STATEMENT: Presented "A Way Forward on the Alaska
Budget."
ACTION NARRATIVE
9:03:11 AM
CHAIR BILL STOLTZE called the Senate State Affairs Standing
Committee meeting to order at 9:03 a.m. Present at the call to
order were Senators Wielechowski, Coghill, Huggins, McGuire, and
Chair Stoltze.
CHAIR STOLTZE announced that SB 114 would be heard on Tuesday
instead of in today's meeting.
SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
9:08:26 AM
CHAIR STOLTZE announced the consideration of SB 128.
9:08:54 AM
RANDALL HOFFBECK, Commissioner, Alaska Department of Revenue,
stated that he appreciated the fact there were many versions of
Permanent Fund legislation as a solution for the fiscal crisis.
He reviewed his presentation on best practices on sovereign-
wealth funds around the world, ways the Permanent Fund relates
to other wealth funds, and ways it can be used to stabilize and
fund government. He reported that he and Attorney General
Richards also provided information on the governor's approach
and how it fits into the governor's total fiscal plan.
He related that SB 128 is one of three pieces that includes
using the state's wealth, a tax component, and a budget-cut
piece. He said SB 128, The Alaska Permanent Fund Protection Act,
is a way to achieve a $3.3 billion endowment-type draw from the
state's earnings by putting 100 percent of oil and gas tax
revenue and other mineral revenue into the Permanent Fund
itself. He detailed that SB 128 would allow the Permanent Fund
account to generate $3.3 billion on a sustainable basis moving
forward. He specified that the dividend would be tied to 50
percent of royalties received on an annual basis. He concluded
that SB 128 is a plan that works and provides a solution to a
very difficult problem.
9:11:52 AM
CHAIR STOLTZE suggested committee members request information on
the constitutionality of SB 128.
SENATOR MCGUIRE stated that her two main concerns are related to
the structure. She disclosed that in SB 114 the General Fund
(GF) is retained, but SB 128 purports to create a new GF in the
Earnings Reserve Account (ERA). The Constitutional Budget
Reserve (CBR) remains the same in SB 114, but in SB 128 the
three-quarters vote to access funds is removed. She inquired how
certain the administration is regarding legal challenges to her
two concerns.
9:13:55 AM
WILLIAM MILKS, Assistant Attorney General, Alaska Department of
Law, asked Senator McGuire to restate her concern about the CBR
and the GF.
SENATOR MCGUIRE specified that the GF is statutorily created
with a minimum-balance threshold to move money in and out. She
detailed that the ERA is statutorily created as an overlay to
the constitutional creation of the Permanent Fund and that money
can move in and out only for inflation proofing and to pay
dividends. She opined that the bill's proposal to statutorily
change the ERA is legally sound. She questioned how vulnerable
the GF would be if the ERA was made a part of it and how
vulnerable it would become because of pulling in royalties and
production taxes, etc., and then paying out for government
expenses. She noted that Senator Wielechowski shares her
concerns.
9:15:51 AM
COMMISSIONER HOFFBECK asked if she meant "vulnerable to the
sweep."
SENATOR MCGUIRE answered yes.
9:17:04 AM
CHAIR STOLTZE held SB 128 in committee.
9:18:19 AM
At ease.
^Presentation: "Accessing Permanent Fund Earnings to Reduce the
Fiscal Gap."
Presentation: "Accessing Permanent Fund Earnings to Reduce the
Fiscal Gap"
9:20:08 AM
CHAIR STOLTZE announced a presentation titled "Accessing
Permanent Fund Earnings to Reduce the Fiscal Gap."
9:20:38 AM
SCOTT GOLDSMITH, Professor Emeritus of Economics, Institute of
Social and Economic Research (ISER), University of Alaska-
Anchorage, Anchorage, Alaska, disclosed that he has been
studying the state's unique fiscal structure for many years. He
reviewed the evolution of the state's recent fiscal challenge by
showing a slide that indicated less revenue for a longer period
of time.
9:24:19 AM
DR. GOLDSMITH noted bogus solutions for the fiscal gap such as:
higher oil prices, status quo, the gas line, and "silver
bullets." He asserted that revenue from the bogus solutions
would be insufficient.
9:27:46 AM
He turned to three "real tools" to solve the fiscal gap: more
budget cuts, income/sales tax/PFD reduction, and using earnings
from state assets. He maintained that none of the tools were
individually big enough to solve the problem, but noted that
solving the problem would take all three.
He suggested using Permanent Fund earnings after cutting the
budget as much as possible because the Permanent Fund is the
biggest single tool and there will be no solution toward closing
the $4 billion gap without it. He set forth that the Permanent
Fund can be the centerpiece of a workable game plan and will
have no immediate negative economic impact; in fact, it would
have a positive impact by giving the business community a
confidence boost. He said using the Permanent Fund earnings will
be relatively easy to implement and would buy time to prepare
for the inevitable and prolonged tug-of-war over the need for an
income or sales tax.
9:31:41 AM
He reviewed the proposals for accessing the earnings of the
Permanent Fund. He pointed out that all three proposals are in
process and two are mechanisms with slightly different
motivations. He pointed out that SB 128 proposes to stabilize
the fiscal structure by dumping oil and gas revenues and
royalties into the Permanent Fund while drawing $3.3 billion
from the Permanent Fund earnings reserve, an inflation-adjusted
amount that sustains the value of the Permanent Fund. He
detailed that the draw would fund the GF and the PFD would be
paid out of 50 percent of royalties.
He explained that SB 114 is a statutory "percent of market
value" (POMV) draw and is an immediate solution to plugging the
hole in the budget. He said the POMV draw would pull a
percentage of the Permanent Fund's value from the earnings
reserve, an inflation adjusted amount that sustains the value of
the Permanent Fund. He added that the draw would also pay the
PFD from 50 percent of royalties in a separate account.
9:34:38 AM
SENATOR MCGUIRE corrected that the percent of royalties in SB
114 is 74.5 percent. She specified the royalties' percentage in
SB 114 is a swap between the current royalties' percentage that
goes into the GF versus the Permanent Fund. She agreed that
using the Permanent Fund is an immediate plug while allowing for
a restructuring and assessment of the Permanent Fund's role. She
recalled the history of the Permanent Fund and said the
appropriate use of the Permanent Fund is in question today. She
specified that SB 114 is meant to be a permanent change to the
use of the Permanent Fund and to stabilize the volatility of
oil. She concluded that the draw is meant to plug the hole, but
also force the conversation about the appropriate size and cost
of government.
DR. GOLDSMITH continued with the third proposal, the "Goldsmith
Model," is a calculation of a targeted, sustainable draw from
assets, including the Permanent Fund. He detailed that the
"Goldsmith Model" would involve dumping all petroleum revenues
into the Permanent Fund and drawing an amount from the Permanent
Fund earnings and earnings reserve that can be sustained and
would allow the Permanent Fund to continue to grow. He said both
the PFD and the inflation proofing would be drawn from the
Permanent Fund with the allocation between the two would be up
to the Legislature and not from some formula.
9:37:28 AM
He set forth that the three proposals have a lot in common. He
addressed the state's fiscal structure where oil revenues and
royalties, excluding non-petroleum revenues, flowed into the GF
as well as the Permanent Fund corpus. He detailed that from the
Permanent Fund corpus, earnings flow into the earnings reserve
and are available for spending. He summarized that there are two
sources of revenue for spending, both from oil revenue and those
that come through the earnings reserve.
He said the three proposals have two "policy levers." He
detailed that one "policy lever" is what share of oil revenues
are going to go into the Permanent Fund and which share of oil
revenues are going to go directly into the unrestricted GF. He
disclosed that the percentage can go from zero, excluding the 25
percent of royalties that are constitutionally mandated to go
into the Permanent Fund, up to 100 percent. He pointed out that
the current structure is that all of the previously noted
revenues go into the GF. He noted that SB 128 proposes to put a
bigger share into the Permanent Fund corpus.
DR.GOLDSMITH said the second "policy lever" involves the draw
from the earnings reserve and the decision whether the draw
should be a percentage or a fixed amount in addition to how
large should the draw be. He set forth that two "policy levers"
can be combined in a number of ways.
9:40:15 AM
He stated that all of the proposals have two common objectives
that are most important: reduce today's budget deficit, and
sustain assets for the future. He revealed that the tradeoff is
the more the earnings are used to reduce the budget today, the
less there is for sustaining assets, and vice versa.
He said he would review the three Permanent Fund alternatives
using the same set of assumptions that the Department of Revenue
(DOR) uses. He noted that the assumptions used by the Department
of Revenue are relatively conservative regarding future
petroleum revenues.
He specified that SB 128 proposes a Permanent Fund draw of $3.3
billion in 2017, a fixed amount that maintains the future value
of the Permanent Fund. When the petroleum revenues are added to
the general fund, the total amount of $4.25 billion would be
spent from the petroleum-asset base to both fund government and
to pay a dividend. He demonstrated that the level of spending
starts high, declines, and the total asset falls over time
because of declining petroleum revenues. The tradeoff is that
overspending today leads to a decline in spending and in the
asset portfolio in the future. He noted that the decline is
relatively modest.
9:44:53 AM
He explained that SB 114 proposes a Permanent Fund draw in 2017
that is a fixed-percentage value, 5 percent of the moving
average of the Permanent Fund value; adding that $2.8 billion to
the petroleum-reserve spending of $1.27 billion, totals $4.07
billion in total spending of the petroleum-asset base. The same
general pattern of the tradeoff found in SB 128 is found under
SB 114, spending starts high and declines slowly, and the total
asset value falls slowly. The decline in oil does not provide
future growth in the Permanent Fund.
He examined the tradeoff in the Sustainable Spending Target
Plan. He said the Permanent Fund draw in 2017 uses a fixed
amount that maintains the future value of the Permanent Fund and
unproduced petroleum. Under the Sustainable Spending Target
Plan, all of the draw, $3.55 billion, would come out of the
Permanent Fund. Spending would start lower and the draw and
asset value would both stay constant.
9:47:43 AM
DR. GOLDSMITH questioned which draw mechanism produces the best
sustainability tradeoff between solving the short-term fiscal
problem and maintaining the asset base for future generations.
He stated that the choice is a value judgement about the future
in light of declining petroleum production. He suggested the
state should be concerned because there is not an alternative
resource base. He spoke in favor of 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.
9:49:32 AM
He said one of the challenges of the sustainability target is
dealing with volatility and risk regarding future petroleum
revenues. He provided an analysis of the sustainable spending
levels in the GF in 2014 and 2015. He said the target method
would use an average over several years in order to make future-
petroleum revenues less volatile. The other challenge is to use
the most appropriate assumptions. He reiterated that DOR's
forecasts are fairly conservative.
9:53:49 AM
SENATOR MCGUIRE asked about the allocation for inflation-
proofing.
DR. GOLDSMITH understood that under SB 128 and SB 114 the
appropriation for inflation-proofing would no longer be
necessary because the Permanent Fund corpus would be
automatically inflation-proofed because statutory return would
leave enough in the corpus.
SENATOR MCGUIRE agreed. She asked if Dr. Goldsmith's plan
includes inflation-proofing.
9:56:09 AM
DR. GOLDSMITH addressed approximating a draw mechanism from the
three proposals. He listed the total "spend" from petroleum
resources for each proposal.
9:58:01 AM
SENATOR MCGUIRE suggested that inflation-proofing should be
included in the model. She requested a chart that includes it.
DR. GOLDSMITH reiterated that it is likely that all tools
available will be needed to close the fiscal gap. He said his
model is the tool that should be put in place first because it
provides the biggest solution, is the easiest, and has the least
negatives. He did not want to give the impression that it alone
can solve the problem and asserted that none of the proposals
"produce money out of a hat."
10:01:39 AM
SENATOR MCGUIRE recognized the need for a second set of
assumptions, but stressed the importance of understanding the
math in order to understand the risk.
10:03:37 AM
CHAIR STOLTZE commented on public testimony. He noted the
governor's thinking about making further reductions in the
budget and the need for other options.
10:05:18 AM
DR. GOLDSMITH emphasized that the total spending for 2017 under
SB 128, SB 114 or the Sustainable Spending Plan are all fairly
close. He continued that the spending level is then measured
against the unrestricted GF and the dividend. He agreed that
there is a remaining hole, but the hole can be filled
immediately with a draw from the Permanent Fund.
10:07:07 AM
He looked at the criteria for choosing the draw mechanism. He
set forth that the draw mechanism should be explainable,
understandable, implementable, fair, disciplined, flexible, and
able to minimize unintended consequences. He opined that the
most important criteria is to maintain the integrity of the
Permanent Fund; that has been accomplished in the past mainly by
the PFD, which has protected the Permanent Fund corpus. He
cautioned that any changes made to the Permanent Fund structure
may have unintended consequences.
10:09:40 AM
He addressed the fragility of Alaska's economy with a graph
comparing Alaska's job growth against the rest of the U.S. from
2005 to 2015. He specified that the forecast is for a further
decline in employment.
DR. GOLDSMITH concluded that any method of closing the fiscal
gap using the Permanent Fund will have some negative consequence
on the economy. He suggested to move cautiously with the other
tools and not try to do everything at once. He advised to
proceed with caution.
^Presentation: "A Way Forward on the Alaska Budget"
PRESENTATION: "A Way Forward on the Alaska Budget"
10:12:13 AM
CHAIR STOLTZE announced a presentation titled "A Way Forward on
the Alaska Budget" by Brad Keithley.
10:13:16 AM
BRAD KEITHLEY, President, Keithley Consulting, LLC, Anchorage,
Alaska, shared his professional experience in the oil and gas
industry. He noted key points that his presentation will
address:
· Alaska is facing a budget challenge and how big is Alaska's
challenge;
· There is a solid and realistic fiscal alternative that does
not rely on PFD cuts or taxes.
CHAIR STOLTZE asked whether Mr. Keithley is a paid lobbyist.
MR. KEITHLEY replied that he is not and noted that his
presentation to the committee was "on his own dime." He
explained the reason why he makes presentations is because
Alaska is his home and he wants the state and the oil and gas
industry to be successful. He said he sees a bright future for
Alaska and fiscal policy is a very important part of it.
10:16:12 AM
He continued to say that both SB 128 and SB 114, based on
General Communication, Inc. (GCI) numbers, are unnecessary due
to an imbalance between private and government sectors and may
do more harm than good to the overall Alaska economy.
He addressed the size of the budget challenge by showing graphs
of the decline in revenue projections from FY 2013 through the
Department of Revenue's 2015 projection. He said he questioned
whether the forecast picture was accurate. He asserted that if
the assumptions are correct, the long-term sustainable revenue
is $4.3 billion from existing assets if new oil, Alaska
liquefied natural gas, and PF earnings reserve are included.
10:19:16 AM
MR. KEITHLEY commented on an article by Dermot Cole in the
Alaska Dispatch News about challenging this view on oil prices.
He shared a quotation from International Energy Agency's
November 2015 world energy outlook:
The process of adjustment in the oil market is rarely
a smooth one, but in our central scenario, the market
rebalances at $80 per barrel in 2020 with further
increases in price thereafter. An annual $630 billion
and worldwide upstream oil and gas investment, the
total amount the industry spent on average each year
for the past five years, is required just to
compensate for declining production at existing fields
and to keep future production flat at today's levels.
He said the most recent estimates of what has been lost, due to
the oil price downturn, is about $250 billion to $300 billion of
deferred investment projects. He concluded that because of the
decline in volume and supply of oil, there would be an oil price
increase. He said the article concluded that the current
overhang in supply should give no cause for complacency about
oil-market security.
10:21:28 AM
He said his concern is that Alaska is formulating fiscal policy
projecting out from the bottom of a commodity cycle and, as a
result, may be assuming the need to cut more spending or raise
new revenue than necessary when considered from a long-term
perspective. He termed the fiscal policy as the opposite of the
overspending problem that happened from 2011 to 2014. He
concluded that Alaska is a commodity-based economy and needs to
take a long-term budget view.
10:23:37 AM
He stated that there is a solid and realistic fiscal alternative
that does not rely on PFD or taxes. He set forth that the core
principals of any fiscal policy is to use an approach that looks
at the full commodity cycle and develops a balanced, sustainable
approach that smooths through the revenue's highs and lows. He
recommended not cutting the PFD or imposing other taxes if
avoidable, because of the impact on Alaska's private economy.
He pointed out that the state has two economies: government and
private. The government economy has operated for years on oil
without taking money from the private economy; however, current
consideration takes money from the private economy for the
government economy and that will have effects on the private
economy. He opined that moving money to the government economy
from the private economy has not been a big part of the
discussion to this point.
10:24:45 AM
MR. KEITHLEY maintained that the best approach is the Goldsmith
Model because it sets spending at long-term sustainable levels
based on the best, reasonable, long-term forecast. He detailed
that the Goldsmith Model uses the Permanent Fund earnings
reserve, the part remaining after the PFD and inflation
proofing, to act as the balancing mechanism. He added that the
Goldsmith Model also remains alert to changes in key, long-term
forecast variables and adjusts levels if there are significant
long-term changes.
10:26:01 AM
He repeated the goal of long-term sustainable revenues with the
assumptions used in the Goldsmith Model, not the Department of
Revenue assumptions. He pointed out that significant spending
cuts would still be needed. He recalled FY 2006 budget numbers,
which he said was the last time the budget was not inflated by
high oil prices; he compared those numbers to FY 2016 numbers,
adjusted for inflation and population growth. He revealed that
the adjusted number would be $4.1 billion for FY 2016; the
actual spending number for FY 2016 is $5.4 billion.
He recommended cuts to the oil and gas tax credits because they
are not fully utilizing the state's resources. He spoke in
support of the governor's proposal to establish a loan program
based on development costs. He also suggested cutting opt-in
Medicaid expenditures and non-formula programs, such as
corrections and the university. He noted that when the FY 2006
education budget is adjusted for inflation and population, the
education budget totals $1.2 billion, exactly what was spent in
FY 2016.
10:30:35 AM
He talked about a possible implementation plan for the Goldsmith
Model and noted that the plan was in HB 136 last year. He said
the model could be reworked into an appropriate form that could
be used as a substitute for Article 9, Section 16, to reset the
appropriation limits that is realistic.
10:32:01 AM
He addressed the point that SB 128 and SB 114 are unnecessary
because, if the long-term sustainable revenue level is $4.3
billion and spending can be cut to that level, the state does
not need to be adding revenue. He asserted that until the state
has a better feel for where oil and gas markets are headed,
there is no reason to make significant, permanent, long-term PFD
cuts and enact taxes.
MR. KEITHLEY maintained that SB 128 and SB 114 are imbalanced
between government spending and private sector cuts. He said his
analysis of spending and cuts under both bills, using GCI
numbers, shows inequities and a huge imbalance.
10:35:45 AM
He stressed the need to consider the overall economy, especially
the effect on the private economy. He referred to an analysis
that Dr. Goldsmith did in 2010 that said taking money out of the
private economy and putting it into government could do more
harm than good to the overall Alaska economy. He added that the
effect would probably increase capital spending, generate less
employment and increase income inequality.
He concluded that if new revenues are required, taxes do less
harm than PFD cuts. He specified that his conclusion was also
arrived at by Dr. Goldsmith in 1987:
Reducing dividends to produce the same amount of
revenues as would the proposed income tax would
actually cost Alaska more jobs and income than would
re-imposing an income tax.
10:38:47 AM
CHAIR STOLTZE pointed out that though Dr. Goldsmith has been
affiliated with the university, he was not speaking in its
behalf, but for himself.
SENATOR MCGUIRE asked why Dr. Goldsmith referenced GCI numbers
for SB 114 when GCI has also prepared numbers for SB 128.
MR. KEITHLEY said he wasn't aware that there were multiple
numbers out on SB 114.
SENATOR MCGUIRE offered to provide them.
MR. KEITHLEY specified that the GCI plan based its numbers on SB
114 and he is familiar with them.
SENATOR MCGUIRE noted that "words matter to people." She said SB
114 is her bill and she requested a correction to the numbers.
MR. KEITHLEY agreed to do so.
10:40:37 AM
SENATOR HUGGINS agreed that the state is formulating fiscal
policy projecting out from the bottom of a commodity cycle and
termed it a "knee jerk" method. He suggested to have a mechanism
built in to facilitate re-visitation.
10:42:12 AM
CHAIR STOLTZE noted there would be public testimony in the
evening.
10:43:44 AM
There being no further business to come before the committee,
Chair Stoltze adjourned the Senate State Affairs Committee at
10:43 a.m.