Legislature(2015 - 2016)SENATE FINANCE 532
04/12/2016 01:30 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB128 | |
| HB188 | |
| HB83 | |
| HB289 | |
| HB231 | |
| HB268 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 128 | TELECONFERENCED | |
| + | HB 188 | TELECONFERENCED | |
| + | HB 83 | TELECONFERENCED | |
| + | HB 289 | TELECONFERENCED | |
| + | HB 231 | TELECONFERENCED | |
| + | HB 268 | TELECONFERENCED | |
| + | TELECONFERENCED |
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."
1:37:58 PM
Co-Chair MacKinnon explained the intent of the committee
substitute for SB 128 was to address the state's fiscal
crisis.
1:38:44 PM
Vice-Chair Micciche MOVED to ADOPT the committee substitute
for SB 128, Work Draft 29-GS2859\N (Wallace/Martin,
4/12/16).
Co-Chair MacKinnon OBJECTED for DISCUSSION.
1:39:00 PM
AT EASE
1:40:42 PM
RECONVENED
1:41:09 PM
Co-Chair MacKinnon announced that the documents discussed
at the table were available online under the bill.
1:41:24 PM
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, explained the
committee substitute. She read from the Sectional Analysis
(copy on file):
Section 1: Legislative intent that the legislature
reevaluate the use of the earnings of the Permanent
Fund in three years
Section 2: Amerada Hess income no longer flows to the
Capital Income Fund. Segregation of these funds is no
longer legally required
Section 3: Dedicated deposits of royalties to the
Permanent Fund are reduced from the current 25/50
split on old/new leases to the constitutional minimum
of 25 percent
Section 4:
(a) Requires the Alaska Permanent Fund
Corporation to determine the net income of the
earnings reserve account as the income is
realized and received
(b) Defines the Percent of Market Value (POMV)
payout as 5.25 percent of the average year-end
market value of the Permanent Fund and Earnings
Reserve Account for the first five of the most
recently completed six fiscal years. The payout
may not exceed the year-end balance of the
earnings reserve account for the fiscal year just
ended
Section 5: AS 37.13.145 is the Disposition of Income
of the Permanent Fund statute
(a) Unchanged - Establishes the ERA and
identifies the ERA as holding earnings of the
Permanent Fund and ERA
(b) Repealed in this bill - dividends based on
statutory net income
(c) Repealed in this bill - inflation proofing
(d) Repealed in this bill - segregation of
Amerada Hess
(e) Added in this section - each year the
legislature may appropriate to the General Fund
the amount available for distribution from the
Earnings Reserve Account under the POMV in Sec. 4
(b)
Section 6: Dividends are comprised of 20 percent of
the 5.25 percent POMV outlined in Sec. 4(b), and 20
percent of prior year royalties, excludes those
dedicated to the Permanent Fund or School Fund (25.5
percent are dedicated)
Section 7: Mental Health Trust Fund may not be
included in the computation of income available for
distribution under the POMV
Section 8: Makes computation of Mental Health Trust
Fund income consistent with computation of other
Permanent Fund Income
Section 9: Transfer of money to the Dividend Fund
requires an appropriation
Section 10: The amount of each Permanent Fund Dividend
for fiscal years 2017, 2018, and 2019 shall be $1,000
Section 11: Conforms to Sec. 9, which moves money to
the Dividend Fund by appropriation
Section 12: Once the money is in the Dividend Fund,
the Department of Revenue shall annually pay dividends
without further appropriation
Section 13: Repeals language relating to the former
dividend calculation, inflation proofing calculation,
and Amerada Hess language
Section 14: Repeals Sec. 10 - $1,000 dividend for
three years
Section 15: The Commissioner of Revenue and the Alaska
Permanent Fund Corporation may adopt regulations,
policies and procedures to implement this Act
Section 16: Retroactivity clause
Section 17: Effective Date for sections 15 and 16,
immediate
Section 18: Effective Date, July 1, 2016
1:45:56 PM
Senator Olson wondered how the dividend amount would
fluctuate under Section 6, what the expected dividend
payout would be after 2019.
1:46:34 PM
Co-Chair MacKinnon relayed that David Teal, Director,
Legislative Finance Division would be available to answer
questions.
1:46:39 PM
Ms. Cramer agreed that Mr. Teal would walk through the
output from the model.
1:46:55 PM
Co-Chair MacKinnon WITHDREW the OBJECTION. There being NO
OBJECTION, the proposed committee substitute was adopted.
She relayed that Mr. Teal would walk through how the bill
would address the budget shortfall and how it would affect
the Permanent Fund.
1:47:47 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, looked
at the "LFD Fiscal Model" (copy on file).
1:48:00 PM
AT EASE
1:48:33 PM
RECONVENED
1:48:35 PM
Co-Chair MacKinnon remarked that the Permanent Fund
Corporation had requested a model using a 6.9 percent
Permanent Fund investment return; the governor's original
model had used 7.45 percent. She noted that the model
before the committee used the 6.9 percent investment
return.
1:49:16 PM
Mr. Teal looked to the price scenario at the center of the
document. The scenario used the spring 2016 revenue
forecast. He noted that the yellow highlighted fields
reflected no growth in the operating budget, and in fact
had a targeted cut of $247 million, which was subject to
change.
1:50:07 PM
Co-Chair MacKinnon understood that the estimated capital
spend projected in the model was $185 million.
Mr. Teal replied in the affirmative.
1:50:16 PM
Mr. Teal noted the factors of Community Assistance and Debt
Service, as projected, and highlighted that the model
contained no revenue variables: sales tax, income tax,
motor fuel tax, indirect expenditure adjustments, the
Governor's tax bills package, except for the Tax Credit
Reform bill - the modeling output of which were the House
Finance Committee numbers. He directed committee attention
to the blue bars under "Custom Plan Specifications" which
reflected a POMV payout of 5.25 percent, with 20 percent of
the payout going to dividends, and an additional 20 percent
going to dividends from royalties. He pointed to the upper
right line graph on the slide, which showed that dividends
would be steady at $1000. He said that without the cap,
dividends would drop to $900 for 3 years and then would go
back to $1000 through 2025. He said that the model assumed
that the CBR would earn more than the current 1 to 2
percent. He said that it was not in the bill, but there had
been discussion of more aggressively investing the CBR so
that the returns on it would be higher. He elaborated that
there were a number of ways to do that, but it would not
make a significant difference to the model. He noted that
the lower left graph on the slide reflected that the CBR
balance under the model would drop to $2 billion. He
furthered that those earnings did not make or break the
model. He indicated the graph in the upper left corner,
which showed the UGF revenue/budget, in millions. He stated
that the expenditure line was the dark line on top, the
bars represented oil revenue [blue], CBR/SBR draws
[orange], and the POMV draw from the earnings reserve
[green]. The graph indicated that the deficit would narrow,
but that it would still exist through 2025. He said that
the lower left graph showed that reserve balances were
expected to stabilize at approximately $12 billion. He
noted that the table at the bottom of the graph showed
reserves of approximately $12 billion in 2025. The deficit
would still exist, but because it would be lower than it
was currently, the reserves would be exhausted after 28
years. He said that it was worth noting that although
reserves in 2017 were approximately $14 billion, the state
was spending reserves at a more rapid rate, which would
exhaust them in 8 years or less.
1:54:39 PM
Mr. Teal remarked that the reserve balance would be
slightly lower, and the deficit would be so much lower that
the glide path would be better under the legislation than
under the status quo. He noted the table in the lower right
of the slide that reflected in turquoise the real value of
the Permanent Fund would fall slightly overtime and would
not keep pace with inflation at the projected earnings
rates. He noted that although there would be a nominal
payout of 5.25 percent, there was a 6 year lag in the
projection because the payout was based on the first 5 of
the most recently completed 6 years. Because of the long
look back, the effective payout as shown in the lower right
hand corner of the slide was at roughly 4.9 percent.
1:55:59 PM
Co-Chair MacKinnon surmised that the slide reflected a
spending increased from FY16 to FY17.
Mr. Teal replied that there was actually a reduction in FY
17, but remarked that in FY16 the dividends were not shown
as general fund expenditures. The graph was showing only
UGF expenditures. He clarified that if FY 17 dividends were
shown, the line would increase from $5 billion to $6.4
billion.
1:56:47 PM
Co-Chair MacKinnon surmised that the way that the dividend
was calculated and paid out would change under the
legislation and the dividend payments would be reflected in
the Operating Budget.
Mr. Teal responded that currently the dividends did not
show as general fund expenditures. They were reflected in
the fiscal summary, but in a different section; under the
legislation dividends would appear as general fund
expenditures.
1:57:23 PM
Co-Chair MacKinnon assured Alaskans that there would be
zero growth in the operating budget.
1:58:04 PM
Co-Chair MacKinnon asked whether the green bars on the
graph in the upper left of the slide reflected a $2.4
billion draw in FY17.
Mr. Teal responded that $2.4 billion was an accurate
approximation.
1:58:26 PM
Co-Chair MacKinnon referred to FY 25 on the same chart, and
surmised that the draw would increase to $3 billion.
Mr. Teal replied that the draw would increase as the
Permanent Fund and the Earnings Reserve increased.
1:58:55 PM
Co-Chair MacKinnon noted that the dividend check would
remain steady at about $1000, in perpetuity. She said that
the Governor's original plan, SB 114, as well as offerings
in the house had all been incorporated into the cs in an
effort to stabilize the dividend, while using the bulk of
the assets in the form of earnings to diversify Alaska's
revenue stream. She indicated the lower left hand corner of
the slide which showed the stabilizing of the draw on
reserves. She said that currently the legislature was
looking at removing $7 billion, over two years, to pay for
expenses. She furthered that more work needed to be done to
ensure that the state did not lose any stability in growing
the corpus of the fund.
2:00:19 PM
Senator Dunleavy surmised that if spending could be driven
down from $5.2 billion, to $4 billion, reserves could be
extended and less of a draw would be necessary.
Mr. Teal replied in the affirmative.
2:00:52 PM
Senator Dunleavy remarked that people should understand
that as spending was pushed down, the life of the savings
and the Permanent Fund would be extended.
2:01:37 PM
Co-Chair MacKinnon agreed. She understood that for the
first time in Alaska's history, $700 million for dividend
payouts was listed as new money spending in the Operating
Budget. She furthered that there was no increase to the
Operating Budget, but dividends going out to the people of
Alaska were reflected.
Mr. Teal responded yes. He added that the $5.3 billion in
spending included the payout of dividends, which meant that
the graph reflected a $4.5 billion budget, in conventional
terms.
2:02:26 PM
Co-Chair MacKinnon asserted that the downward pressure on
the budget would continue; the bill would not solve all of
the state's fiscal problems, but would go a long way toward
future fiscal stabilization.
2:02:45 PM
Senator Hoffman looked at the bottom left graph, which
showed budget reserves without growth, out to 2053. [He
added the Years to Exhaust, 28, to the last date on the
graph 2025: 2053]
Mr. Teal replied that the Years to Exhaust used simple
math. He explained that in FY 25, reserves would be lower
at $11.9 billion, but the deficit would also be lower at
minus $432 million. He said that although there would be
lower reserves, they would last much longer.
2:04:09 PM
Senator Hoffman understood that with no growth, the
reserves would be exhausted by 2053.
Mr. Teal warned that it was risky to get too accurate with
projections of this kind.
2:04:30 PM
Vice-Chair Micciche queried the factors that made the
corpus of the fund grow faster under the scenario on the
slide, versus the status quo.
Mr. Teal replied that the balance included both the
Earnings Reserve and the Corpus. He said that they
continued to increase because 25 percent of royalties,
leases, etc., were being deposited into the Corpus every
year. He stated that 6.9 percent was being earned, but 5.25
percent was being paid out, any earnings above the payout
remained in the fund. He furthered that although the
inflation proofing provision had been repealed, inflation
proofing would still exist.
2:05:49 PM
Vice-Chair Micciche noted that the cuts in state government
that were reflected on the slide were less than what the
committee hoped to accomplish. He pointed out that the
model also did not include changes to oil and gas credits.
2:06:18 PM
Co-Chair MacKinnon interjected that the model did take oil
and gas tax credit changes into account, she referred to
the Tax Credit Reform line in yellow at the center of the
page.
2:06:21 PM
Vice-Chair Micciche asserted that it would be more
favorable to the fiscal outlook if the actual reductions
were higher.
Mr. Teal agreed. He said that the Governor's oil and gas
credit reform bill would have the most impact, the House
Resource Committee version would have had the least impact,
and the House Finance Committee version would split the
difference.
2:06:45 PM
AT EASE
2:06:59 PM
RECONVENED
2:07:01 PM
Vice-Chair Micciche thought that it would be helpful to
include a separate box on the slide that reflected the
expected $700 million payout for the dividend, with a spend
line below it.
2:07:28 PM
Co-Chair MacKinnon wondered whether there could be an
asterisk on the FY 17 line to reflect the addition of the
$700 million payout for the dividend. Something to
highlight that the Operating Budget was not growing.
Mr. Teal replied that he could include the dividend
payments in the FY 16 line.
Senator Dunleavy reiterated that highlighting the figure
for the public as a "different spend" could be helpful.
2:08:15 PM
Co-Chair MacKinnon repeated that clearly highlighting that
the $700 million was for dividends, and not government
spending, would be helpful.
Mr. Teal agreed to highlight the difference on a future
slide.
2:08:56 PM
Co-Chair MacKinnon mentioned the document titled "Status
Quo" (copy on file) and related that the public could find
it online under the bill.
2:09:15 PM
Senator Olson understood that the bill did not eliminate
the need for a three-quarter vote to access the CBR.
Mr. Teal replied that as long as the legislature had a CBR
draw and a large earnings reserve balance it faced
supermajority votes.
2:09:48 PM
Co-Chair MacKinnon hoped that the other body would do the
three-quarter draw because the money currently in the CBR
had a rate of return for interest of 2 percent, the
borrowing interest would be higher if the legislature was
forced to go into the earnings reserve account.
2:11:05 PM
Vice-Chair Micciche remarked that the governor preferred a
fixed draw, and supported the intent for stability. He
asked how the budget could be kept small, even as earnings
increased and the POMV draw grew.
Mr. Teal replied that there were things that could be done
that would limit spending, but that if money was available
it could be spent; future spending was up to the
legislature. He thought that the governor assumed that
extra revenue would always be spent, which was the primary
difference between the DOR analysis of the model and the
LFD analysis. He believed that the truth fell somewhere in-
between always spending or always saving, but it would be
up to each legislature to decide. He said that rules could
be established to limit spending when the price of oil
rebounded, and could be easily added to legislation of this
nature.
Vice-Chair Micciche understood that the stability of the
POMV was similar to a fixed draw because it was based on
earnings that would not fluctuate dramatically. What would
create the change would be a fluctuation in oil related
revenue, which was where rules should be applied.
Mr. Teal responded that the combination of oil revenue and
the POMV payout would be the issue. He agreed that the POMV
payout was fairly stable, but the other oil revenue was
not. He said that exercising spending restraint when
surpluses were available would eliminate volatility. He
said that the hypothetical could not be modeled because
spending would always be at the per-view of the
legislature.
2:15:05 PM
Senator Dunleavy believed that there should be less
government spending.
2:16:19 PM
Co-Chair MacKinnon recalled a conversation with Mr. Teal
about the consideration of a draw that could not exceed the
$3.3 billion as suggested by the governor. She relayed that
in her duration at the legislature, money had been returned
to the CBR over the top of what had been borrowed by past
legislatures, and spending had been done in the Capital
Budget. She recognized that dividend reductions and taxes
made the public uncomfortable unless there was also
conversation about controlled government spending.
2:17:52 PM
Senator Dunleavy remarked that there should be less
government spending. He added that deferred maintenance in
the state needed to be addressed.
2:18:47 PM
Co-Chair MacKinnon remarked that there was also an unfunded
pension liability issue that needed to be considered. She
asserted that there needed to be less spending, but that
the state needed to pay the debts that it owed - one of
which was deferred maintenance.
2:20:08 PM
Vice-Chair Micciche pointed out the Alaska State
Constitution specified that one legislature could not "tie
the hands" of future legislatures, which he believed was a
blessing and a curse.
2:21:20 PM
Co-Chair MacKinnon explained that the senate had proposed
$1 billion in cuts to the Operating Budget and was hopeful
that the two bodies to craft a plan that would work for
Alaska. She noted that the committee was tackling the issue
from all angles.
2:22:46 PM
Senator Bishop asked how the real value effective payout
could be kept at 100 percent in the out years.
Mr. Teal responded that one way would be to earn more
money, and the other would be to reduce the payout rate
from 5.25, which some considered aggressive. He said that
those were the two levers that would help maintain the real
value of the Permanent Fund.
2:23:51 PM
Co-Chair MacKinnon interpreted that to mean to cut the
budget and draw less from reserves - or increase revenue
through other sources.
Mr. Teal agreed.
SB 128 was HEARD and HELD in committee for further
consideration.
2:24:38 PM
AT EASE
2:31:57 PM
RECONVENED