Legislature(2015 - 2016)BUTROVICH 205
02/16/2016 09:00 AM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB127 | |
| SB123 | |
| SB114 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 114 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 127 | TELECONFERENCED | |
| += | SB 123 | TELECONFERENCED | |
SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
9:23:13 AM
CHAIR STOLTZE announced the consideration of SB 114. He noted
that the bill has been previously heard.
9:23:38 AM
SENATOR LESIL MCGUIRE, sponsor of SB 114, reviewed the previous
presentation of the bill. She began by reading the following e-
mail:
As an Alaskan resident, I've watched for decades how
the Alaska government has mismanaged our economy and
budget. With the current chaos on world oil markets,
things have reached a fever pitch. Before everyone
follows through on knee-jerk reactions, I'd like to
add my voice to the din. First, ignore the idiotic
notions by the GCI lobby. None of it addresses the
most fundamental problem - your spending. I had lunch
with then-Governor Parnell several years back and told
him that excessive capital investment is stupid
because it not only doesn't guarantee your growth, but
it guarantees greater carrying cost at the expense of
the budget. Math is simple. At some point, some of you
will have to learn how to do it. Stop spending. Leave
the Permanent Fund Dividend (PFD) alone. Find more
ways to siphon funds. Raiding the CBR and the PFD -
whatever - don't do anything to solve the root of the
problem, and that root is undeniably undisciplined,
unsustainable spending by the Alaska government.
9:25:30 AM
She said she likes that email. She stated she would prefer to be
anywhere talking about anything but this particular subject. She
maintained that she is a messenger of the legislative body who
decided last April that a restructure of the permanent fund was
necessary in order to stabilize a basic level of government. She
said she considered many options and decided on SB 114.
She noted that there has been ongoing discussion about the
unsustainable size and cost of government by the administration
and the legislature. She used an example of a family that had
overspent as an example. She stressed the importance of
addressing this topic now. She pointed out that SB 114 does not
attempt to address the entire deficit, it only attempts to
stabilize the volatility of the commodity of oil and to manage
the large, single asset of the Permanent Fund into perpetuity.
9:28:27 AM
SENATOR MCGUIRE addressed the GCI/Alaska's Future lobby. She
related the history behind sponsoring SB 114. She pointed out
that the budget grew and retracted depending on the price of
oil, times the volume of oil. She took into account all of the
plans designed to address the budget crisis and decided that SB
114 was the best set of tools to address that problem. She
stated that SB 114 was drafted in her office in conjunction with
economists, but with no one from the private sector.
She said that about 30 people began to be interested in SB 114
in August of 2015. One of the people was Ron Duncan, CEO of GCI,
one of the largest private sector employers. Those 30
individuals formed a group made up of unions and others in
support of the bill. She emphasized that SB 114 is not a
private-sector driven bill. She acknowledged that it is a good
sign when the private sector becomes interested in your bill.
9:33:04 AM
She stated that she wants a PFD and agrees with those who say to
leave it alone. She addressed the history of the Permanent Fund
and the PFD and commented on the genius of Governor Hammond's
plan, which created an enduring source of revenue that converted
non-renewable resources into renewable resources to be shared
across future generations.
9:35:11 AM
She reported how in 1977 the legislature created a Permanent
Fund designed to reward longevity and would have paid dividend
checks to pioneers of Alaska. In 1982, the U.S. Supreme Court
determined that the 1981 Zobel v. Williams case was correct in
that dividends must be paid to all, not just a select group of
Alaskans. This resulted in the current PFD from an asset that
was originally $50 billion.
9:38:50 AM
She said her office analyzed whether it was appropriate to use
the Permanent Fund to help solve the deficit.
CHAIR STOLTZE added that the Legislature first passed a
statutory framework for the Permanent Fund and Governor Hammond
vetoed it in deference to a more permanent constitutional
amendment.
9:40:58 AM
SENATOR MCGUIRE clarified that the statutory proposal ended up
being exactly what the constitutional amendment proposed. She
emphasized that it is the corpus of the fund that is
constitutionally created and protected and it is the statutory
overlay that created the current method of paying out a
dividend. She opined that she could propose a new law to change
how the dividend is paid out in an attempt to solve the budget
crisis.
She said she first determined that there was a problem of a $3.5
billion to $4 billion deficit. She noted that the Legislature
has enacted heavy spending cuts over the last two years and the
state has several savings accounts, such as the Statutory Budget
Reserve, but they will be gone in about two years. She opined
that the state cannot wait and hope for high oil prices. She
concluded that the price of inaction now could be disastrous for
the state's future.
9:43:58 AM
She addressed "Alaska's Fiscal Situation This Year (FY16)" by
showing a graph of what Alaska is spending on and how the state
is paying for it.
CHAIR STOLTZE clarified his previous point.
SENATOR MCGUIRE said there isn't a lawmaker that will not agree
that the corpus is constitutionally protected and the dividend
itself is the basis of discussion by the legislature, which has
the right to determine if and how the dividend should be paid
out and if an appropriate use of the corpus is necessary.
She continued to say that a restructure is in order, but the
process is not going to be easy. She highlighted the fact there
is only $1.06 billion coming in from oil revenues to pay for the
$5.20 billion the state is spending. She emphasized that it is a
revenue problem.
9:46:50 AM
She addressed the cost of doing nothing. She showed another
graph of revenue vs. spending under the status quo. She
highlighted the fact that the PFD would end in FY22 if nothing
is done and in the three years proceeding FY22, the savings will
be able to pay the dividend, but it won't be able to cover the
fiscal gap. When the CBR and the ERA are gone, there will be no
reserves left by FY20.
9:50:23 AM
SENATOR MCGUIRE shared the principles she had in mind in SB
114's path forward by retaining a dividend, reducing volatility
in the budget, expose the size and cost of government, be
enduring, and be simple and easy to implement.
9:55:31 AM
She emphasized that reducing the volatility of the state budget
is an important principle. She maintained that SB 114 does not
purport to close the budget gap; it is a part of a fiscal plan.
The most important principle is that the plan last for
generations.
9:57:31 AM
She explained that SB 114 is not a raid on the Permanent Fund
because it cannot be touched without a constitutional amendment.
SB 114 would only draw funds from the ERA. It is not a way for
government to increase the budget and is not a dividend killer.
She related that SB 114 is a way to connect Alaskans directly to
their share of the state's natural resources and a way to
protect the dividend in the future. It is also a way to ensure
that services people enjoy continue. She provided examples.
10:00:20 AM
She addressed the impacts of selected options for reducing the
deficit by $100 million; they show how difficult budget cuts
will be and their impacts.
She said without oil-tax revenue flowing through the ERA,
available general funds will continue to swing with commodity
prices and some volatility will remain unless limitations are
put in place.
She commented that she expects the Senate State Affairs
Committee to pass the bill with a spending cap or some method of
constraining the growth of government into the future. She
suggested that the appropriation not exceed 120 percent of the
previous year's draw.
10:02:00 AM
She pointed out that the reason behind SB 114 is because there
is a revenue problem due to basing the budget on the price of
oil per barrel, times the volume; it is volatile and unstable.
SENATOR MCGUIRE questioned the probability that oil prices would
rebound. She showed graphs to reinforce how difficult it is for
the Legislature to balance the budget base on oil forecast. She
noted that she has data on the analysis of future oil prices,
but maintained that even the U.S. Energy Information
Administration has been far off on its predictions. She spoke of
China's impact on oil prices, OPEC's loss of power, and shale
oil's impacts.
10:04:34 AM
She summarized that oil price projections have been inaccurate
and the international oil market is fundamentally different. The
state should not bet its future on oil prices.
She addressed what has been done with savings at high oil
prices. She dispelled the myths that the state has not made cuts
nor saved, but she agreed that the state has not saved as much
as it could have and therefore should include a spending cap.
She showed a graph of how the Legislature saved during high oil
prices - the Statutory Budget Reserve and the Constitutional
Budget Reserve - but those savings have now been depleted.
10:06:49 AM
She turned to how the Legislature is spending in FY16, noting
that the capital budget was bare bones and reflected only
federal matches. She described how bond rating is determined.
She pointed out that the two largest parts of government are the
Department of Health and Social Services (DHSS) and the
Department of Education and Early Development (DEED), predicting
that some changes will be needed; however, if every employee was
cut in those two departments, it would not solve the budget
problem.
CHAIR STOLTZE noted that there was one large capital expense, a
school in Kivalina.
10:09:14 AM
SENATOR MCGUIRE addressed the potential of new revenue from the
sustainable Alaska plan. Even together, all new revenues will
not close the fiscal gap. She maintained that Alaska cannot
close the gap with cuts alone or new broad-based revenue alone,
and a sound fiscal solution will be necessary - involving the
Permanent Fund.
10:11:10 AM
SENATOR MCGUIRE highlighted the spending impact from the PFD,
noting it is the single largest budget item.
She listed the important advantages of SB 114, noting that the
bill is simple. She set forth that the bill leaves the general
fund, CBR, the public school trust fund, exactly as they are;
the Permanent Fund remains enshrined in the constitution and its
corpus is protected; the ERA is left exactly as it is; and only
the payout is changed.
She described the change to the royalty percentage in SB 114.
Currently, roughly 75 percent of royalties from rents and
royalties from future oil and gas development goes to general
fund and 25 percent goes to the Permanent Fund. SB 114 will
change that to 25 percent to GF and 75 percent to the Permanent
Fund, and the PFD will come out of a statutorily created fund.
10:14:47 AM
CHAIR STOLTZE pointed out that it is the central feature of SB
114.
SENATOR MCGUIRE agreed. She asserted that the bill is a shift in
the way Alaskans will understand and appreciate their share of
the non-renewable resources of the state. She stressed that
Alaskans will become involved in the debate about oil and gas
revenues.
10:16:20 AM
She discussed the percentage of market value (POMV) payout that
will be included in SB 114. She detailed that the payout is a
draw of 5 percent from the ERA to the general fund to stabilize
the cost of basic government services. The amount of the draw is
negotiable by the Legislature.
She explained that the removal of the general fund inflation
proofing that would take place under SB 114.
10:18:43 AM
CHAIR STOLTZE noted that Ms. Rodell could provide information
related to that.
SENATOR MCGUIRE said other changes made by SB 114 related to
dividend source calculations. She offered two scenarios as to
the dividend and GF amounts and timing.
10:20:26 AM
CHAIR STOLTZE said the intent of the committee is to move the
bills forward and let other committees make changes. He
questioned some of the constitutional assumptions.
SENATOR MCGUIRE questioned whether new fund sources that have
been created can be removed at a later date. She said
"retrievability" and "sweepability" are untested points.
CHAIR STOLTZE questioned the legality of de facto dedicated
funds. He said the bills are complicated, but deserving of
hearings.
10:23:47 AM
ANGELA RODELL, Executive Director, Alaska Permanent Fund
Corporation, Juneau, Alaska, provided an overview of the
Permanent Fund.
CHAIR STOLTZE asked what the corporation's philosophy on
inflation proofing is.
MS. RODELL explained that inflation proofing came into being in
1982-1983 and was designed when the corporation was only
investing in fixed-income assets, it was designed to preserve
the purchasing power of the corpus of the fund. Over the years
the legislative approved list of investments changed, and in
2005 the Legislature recognized the need to remove the
legislative list altogether and to give the authority to the
Board of Trustees. The current Permanent Fund asset allocation
consists of 80 percent self-inflation proofing funds; their
market value already incorporates the concept of inflation. She
detailed that inflation proofing as designed forty years ago is
not as necessary today.
10:25:55 AM
She noted that the constitution is very simple and clear - to
invest the income, of which, will be moved to the general fund.
After that the ERA was created, the only way the corpus gains
wealth is through the receipt of minerals and royalty revenues
it is entitled to and any other appropriations the Legislature
and the governor move back into it. She said inflation proofing
has become the only way for the corpus to build up its own
wealth, although it is no longer necessary for preserving the
purchasing power. She offered to provide an example.
SENATOR MCGUIRE added that the Legislature has deposited new
wealth of about $1 billion every year over the last 20 years
into the Permanent Fund to help it grow.
CHAIR STOLTZE asked how much has been both constitutionally
appropriated and statutorily appropriated.
10:27:55 AM
MS. RODELL reported that the constitutionally mandated amount is
roughly $25 billion to $26 billion and the amount of inflation
proofing and extra deposits is slightly over $16 billion.
She used an example of a blueberry pie to explain how money is
moved in and out of the ERA. She detailed as follows:
When we buy that pie, we take a portion of the corpus
and a portion of ERA to buy that pie, it is roughly a
75 percent/25 percent split. If the pie is $20 we are
going to take $5 from the ERA and $15 from the corpus.
Ten years later it is an old pie, but it is still
worth something and we want to sell it and it's worth
$40. We sell it at $40, putting $15 back into the
corpus because that's what the corpus contributed and
the balance of $25 would all go into the earnings
reserve.
She said if you want to buy another pie, but now they cost $25,
it will cost $17 dollars from the corpus. Inflation proofing has
built up the wealth and allowed a mechanism for the fund to keep
buying investments and participating to the same degree. The ERA
continues to build. She specified that the distribution formula
determines the size of the dividend and 50 percent remains in
the account.
10:30:47 AM
SENATOR WIELECHOWSKI requested a chart of how much the
legislature appropriated for inflation proofing and how much it
has impacted the dividend over the years. He asked what the
impacts would be if the legislature stops inflation proofing
over the next ten years.
MS. RODELL explained that the dividend is paid first and then
the inflation proofing is done and the balance is left in the
ERA.
SENATOR MCGUIRE did not think the Legislature intends to stop
the inflation proofing of the corpus. She asked Ms. Rodell to
comment on POMV and what a sustainable amount would be and if it
could help inflation proof the corpus.
10:33:17 AM
MS. RODELL said at this point her intent is to provide
information as the debate continues because the board has a very
simple mission to manage the corpus of the fund. She noted that
there were many good discussions and it will be interesting to
see the outcome at the end. She said accounting rules have
changed over the years since the fund was created. She explained
the challenges of moving unrealized gains and losses and their
decision to stick with statutory net income. Back in 2004 the
board passed a resolution in support of a constitutional
amendment for POMV in order to simplify it. The board recognizes
the value of the entire fund and moves over an available amount
by a POMV percentage. The Legislature then has that amount to
appropriate as it sees fit, including whether or not to pay a
dividend. The POMV has advantages because it allows recognition
of a number of different types of asset classes. The challenge
of not having a constitutional amendment is recognizing that you
only can spend what is in the reserve earnings account and the
corpus cannot be touched. Under a constitutional amendment there
would be an easier recognition of all the earnings.
10:36:59 AM
CHAIR STOLTZE countered that there could be more limitations on
how the other funds were spent. He did not think the Legislature
was ready to push a constitutional amendment.
MS. RODELL clarified that she was speaking of a resolution the
board passed twelve years ago. She said it is a tough question.
CHAIR STOLTZE appreciated the information and the value of the
depoliticized trustees.
MS. RODELL noted that the trustees are very interested in the
discussions and how they will affect their management decisions.
SENATOR WIELECHOWSKI said he has never seen the board testify in
support of a policy change. He stated that he did not want the
board to become politicized, but to manage the Permanent Fund
for the maximum value for Alaskans. He asserted that having the
board take part in the debates would be dangerous.
10:40:14 AM
SENATOR MCGUIRE clarified that she asked Ms. Rodell to attend
the meeting as a resource for the committee. She said Ms. Rodell
was clear in that she does not endorse a particular plan, but
would provide data. She concluded that the fund is Alaska's
single largest asset and how it is managed is a matter for all
Alaskans. She said she is open to finding out that best way to
inflation proof the fund.
CHAIR STOLTZE recalled when Representative Red Boucher chaired a
special committee called the Committee on the Future of the
Permanent Fund. He said Representative Boucher had a vision of
increasing the fund to $50 billion without touching it.
10:43:35 AM
CHAIR STOLTZE held SB 114 in committee.