Legislature(2015 - 2016)FAHRENKAMP 203
03/15/2016 09:00 AM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SCR16 | |
| SB114 | |
| SB128 | |
| SJR1 | |
| SB114 | |
| SB128 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SCR 16 | TELECONFERENCED | |
| += | SB 114 | TELECONFERENCED | |
| += | SB 128 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | SJR 1 | TELECONFERENCED | |
SB 128-PERMENANT FUND: DEPOSITS; DIVIDEND; EARNINGS
9:35:22 AM
CHAIR STOLTZE announced the consideration of SB 128.
9:35:55 AM
RANDY HOFFBECK, Commissioner, Alaska Department of Revenue,
Juneau, Alaska, thanked the committee and Senator McGuire for
their efforts in putting forward a plan that would create a
stable and durable fiscal plan for the State of Alaska. He
opined that Alaskans were concerned about government's level of
spending during high revenues and the importance of having
spending accountability so that the state is dealing with a
boom-and-bust economy.
9:38:09 AM
He asserted that the Alaska Permanent Fund Protection Act
(APFPA) encapsulates the volatility within the Permanent Fund by
putting the oil and gas tax with the royalty revenues into the
Permanent Fund. He added that a secondary advantage was created
where the lows within the system were taken out as well.
He stated that the current low-oil price environment
necessitated stress testing the plan's revenue models with
extreme scenarios in order to make sure goals were accomplished
even in times that rarely occur. He revealed that the plan's
modeling did survive the highs and lows of a commodity-based
economy. He added that after a series of tests with thousands of
iterations, the plan could sustainably draw $3.3 billion from
combining oil and gas revenues with investment returns on a
sustained basis.
He reported that the private sector had expressed the need for
government to stabilize its portion of the state's economic
base. He conceded that after attempts to diversify the state's
economy over the years, Alaska has two primary economic engines:
resource development, the commodity side; and government
spending, both state and federal. He remarked that there was
very little that could be done on the commodity side of the
equation, but the one thing that could be stabilized was
government spending. He added that the private sector clearly
stated their need for stability in order to make long-term
financial decisions and investments. He said the lows were taken
out to address the private sector's difficulty in making long
term commitments due to uncertainty.
9:40:45 AM
CHAIR STOLTZE asked how Commissioner Hoffbeck has responded to
businesses that either support a smaller government or the
sector dependent on government activity.
COMMISSIONER HOFFBECK answered that both discussions have
occurred. He detailed that discussions have primarily been on
government's size, followed by predictability and stability. He
summarized that people want to pay for the right size of
government, not excessive government.
CHAIR STOLTZE commented that predictability and stability were
the most important parts and both were being impacted for the
largest revenue producers.
9:42:32 AM
COMMISSIONER HOFFBECK answered correct.
He set forth that the APFPA was a good plan that worked by
taking the volatility component out of the system. He asserted
that thinking had to be different, dynamic, and immediate action
was needed. He said the administration can suggest, but the
Legislature had to make the choices. He asserted that big
problems don't get easier by waiting.
He remarked that closing the $3.5 billion to $4 billion deficit
in a year and a half, two legislative sessions, would be
something that nobody really believed could be accomplished. He
opined that even after the deficit was closed, the individual
tax burden for Alaskans would still be one of the lowest in the
nation. He detailed that the dividend would be protected, a
dividend that no other state pays; the state's savings would
continue to grow at least at the rate of inflation, if not
greater; children's and grandchildren's future would be
protected; most of the government's services that Alaskans have
enjoyed over the years would be preserved; and money would be
left to invest in the state's resources.
9:46:31 AM
SENATOR HUGGINS asked that Commissioner Hoffbeck summarize the
five traits that he was looking for.
COMMISSIONER HOFFBECK summarized as follows:
1. Keep the individual tax burden as low as possible.
2. Preserve the dividend.
3. Preserve the Permanent Fund's corpus for future
generations.
4. Retain as many essential government services as possible.
5. Have money available to support resource development.
9:47:52 AM
CRAIG W. RICHARDS, Attorney General, Alaska Department of Law,
Juneau, Alaska, set forth that the governor's plan does three
things as follows:
1. Places the volatile petroleum revenues, production tax and
royalties directly into the Permanent Fund. Revenues from
oil and gas are no longer large enough to sustain
government.
2. Annually draws $3.3 billion out of the Permanent Fund to
the General Fund. All of the cash-flow streams would act as
an annuity. Revenues from oil and gas are no longer large
enough to sustain government.
3. Changes the dividend formulation from one based on a five-
year average of half of the Permanent Fund earnings to a
royalty formulation of half of royalties.
9:50:40 AM
CHAIR STOLTZE noted that Senator McGuire's plan was not to fill
the whole gap with Permanent Fund earnings, but to provide a
substantial gap. He opined that the governor's "annuity"
approach may make the state dependent on just the payout.
ATTORNEY GENERAL RICHARDS replied that neither Senator McGuire's
POMV approach under SB 114 nor the governor's plan could take
enough out of the Permanent Fund to fully fund state
government's $4 billion budget.
CHAIR STOLTZE asked Attorney General Richards to verify that
Attorney General Richards did not want to be misinterpreted that
people could not be taxed enough.
ATTORNEY GENERAL RICHARDS clarified that Chair Stoltze's
question was whether or not the administration was leaving to
the Legislature the flexibility to budget how they want. He
specified that the answer between SB 114 and the governor's plan
was SB 114 annuitizes one type of wealth and the governor's plan
annuitizes two types of wealth.
ATTORNEY GENERAL RICHARDS detailed that SB 114 takes a measure
of the Permanent Fund's value, not its earnings, the actual cash
flow, and takes the measured value and turns it into an annuity
where "x" amount is taken out, but leaves the petroleum
revenues' volatility in the General Fund.
He added that the third component was the gap that was not
covered by the petroleum revenues and the Permanent Fund. He
asserted that no one's plan was going to be able to close the
gap because the petroleum revenues and the Permanent Fund were
not big enough. He asserted that SB 114 annuities the Permanent
Fund's earnings. He pointed out that the administration's plan
does both the Permanent Fund's earnings and the petroleum
revenues to provide more stability than just annuitizing the
Permanent Fund earnings themselves. He reiterated that both
plans only get part of the way there, which leaves the
Legislature to decide whether to cut more or increase revenues.
9:54:09 AM
He revealed that the state's unrestricted budget compared with
unrestricted petroleum revenues have tracked each other very
closely. He explained that the government spends a lot more
money when it has a lot of money from petroleum revenues, and
the government has to find a way to spend less when it has less.
He pointed out that the Legislature has been incredibly
disciplined in terms of saving Permanent Fund earnings. He
specified that the state has had a rules-based system in place
around the Permanent Fund for over 30 years. He detailed that
the rules-based system inflation proofs the Permanent Fund
corpus, pays out a dividend and then customarily, not a
legislative requirement, of not appropriating the Permanent Fund
earnings reserve or otherwise taking money out of the system.
Even though there has not been particularly a large amount of
discipline in saving monies in high oil environments, there has
been an incredible amount of discipline in terms of how the
Legislature approaches the Permanent Fund. He set forth that the
Legislature has shown a willingness, ability and desire to
follow a structured rule-based framework versus the tendency to
spend the money that is available.
He summarized that one of the goals was not only reducing
volatility, but to put around the petroleum revenues some rule-
based frameworks that would increase the likelihood of saving
money and spending it on a plan rather than just year-to-year ad
hoc.
ATTORNEY GENERAL RICHARDS explained that the goal of the APFPA
was to take the state off of the commodities rollercoaster in
terms of governmental spending. He detailed that stable spending
patterns makes state budgeting easier. He pointed out that
Alaska's revenues have historically gone up and down over 50
percent. He noted that revenues where almost $10 billion in 2008
during the oil tax period from Alaska's Clear and Equitable
Share (ACES) to this year's $2 billion. He summarized that going
to a more annuitized system would make governmental budgeting
easier and its consequence would roll through the state's
economy as well.
9:57:51 AM
He revealed that the International Monetary Fund (IMF) reported
that natural-resource based economies tend not to do well
because they do not have broad-based taxation and are subject to
oil revenue's cyclicality. He said the IMF report suggests that
finding a way to create a fiscal structure that was not reliant
on year-to-year volatility would not only make governmental
budgeting easier, but would actually improve an economy as a
whole by avoiding the danger of "pro-cyclical spending" which
was spending a lot when a government was flush with revenue. He
pointed out that an economic double-whammy occurs when
governmental spending was dramatically reduced at the same time
that other economic sectors and petroleum development comes
down. He noted that the IMF report concluded that diversifying
oil based and commodity-based economies could mean as much as a
0.3 percent increase in annual GDP growth.
He summarized that Alaska's economy was not broad enough to tax
at a level that would diversify the state away from the oil and
gas sector. He said the state has to find a way to use its
sovereign wealth to develop a sound fiscal policy.
10:02:00 AM
CHAIR STOLTZE addressed one of the rules Attorney General
Richards talked about and said there's not a strict adherence.
He specified that the constitution required 25 percent royalties
for quite a while. He noted that the Legislature and the
administration supported 50 percent and the percentage was
reduced during the 23rd Legislature. He said some rules are more
flexible than others.
ATTORNEY GENERAL RICHARDS answered correct. He noted that he
refers to what Chair Stoltze addressed as the Savings Rule and
the Spending Rule. He specified that the Savings Rule has had
variability in it, but he thought of past actions as doing a
little extra. He said the Legislature has been incredibly
disciplined regarding the Spending Rule where the rules
framework has not been broken where the Earnings Reserve was
raided for capital projects.
SENATOR HUGGINS asserted that the State of Alaska pays for
everything. He specified that his statement was an
overstatement, but not far from the truth. He opined that the
concept where the state pays for everything has not been
addressed.
ATTORNEY GENERAL RICHARDS reiterated that any solution with the
Permanent Fund was a half-solution where a billion dollar
differential would still exist. He opined that there was going
to be lots of room for policy discussions on revenues and
spending.
10:04:04 AM
He set forth that a rules-based framework would sustain the
Permanent Fund by:
· Preserving the purchasing power or inflation proofing the
value of the Permanent Fund over time to ensure that the
next generation had the same level of wealth as the current
generation.
· Making sure the plan's durability modeling ensured enough
money for annual draws to the General Fund and dividends.
· Making sure the Earnings Reserve did not grow too large
over time to decrease the chance of a raid.
He added that a good policy would be taking what was not needed
in the Earnings Reserve and moving it to the corpus.
CHAIR STOLTZE noted that Attorney General Richards characterized
any appropriation from the Earnings Reserve as a "raid."
ATTORNEY GENERAL RICHARDS replied that he should frame the
characterization as "ad hoc spending," spending from the
Permanent Fund in a manner that was not under a sustainable
plan.
10:06:22 AM
He addressed the difference between the sovereign wealth fund
model and a classical endowment model. He specified that the
sovereign wealth fund model would house the petroleum revenues
in the Permanent Fund itself. Under the classic endowment model,
the petrol revenues would remain in the General Fund.
ATTORNEY GENERAL RICHARDS said the next option was to decide
whether to go with a fixed draw or a POMV draw. He explained
that the governor's bill has several advantages where petroleum
revenue volatility would be housed in the Permanent Fund with a
fixed-draw amount. He specified that a fixed draw would allow
for a smoothed out or averaged spending where a bit more
spending would be possible in lower years and a bit more savings
in higher years of petroleum revenues. He pointed out that the
Permanent Fund and the POMV both use averages as a way to get
reasoned calculations that do not jump all over the place. He
said putting the petroleum revenues into the Permanent Fund was
a similar concept where revenues are assigned a value and a
certain amount would be spent every year. He suggested that
petroleum revenue be thought of as an asset and deciding what
amount of the asset can be spent every year on a sustained
basis. He added that the governor's plan was similar to Scott
Goldsmith's approach.
10:08:36 AM
SENATOR HUGGINS asked Attorney General Richard to confirm that
under the endowment model, the assumption was that the Permanent
Fund maintains its traditional role and it would not be
leveraged for something else.
ATTORNEY GENERAL RICHARDS answered that the Permanent Fund would
be in its traditional role plus some kind of endowment-like
payment to the General Fund plus dividends.
SENATOR HUGGINS asked if the Permanent Fund would be
destabilized or volatility created if the fund was used as a
backstop for a gas pipeline.
ATTORNEY GENERAL RICHARDS answered that he did not know, but
suggested that there were several ways to do it. He remarked
that he has not heard anyone propose using the Permanent Fund in
the manner Senator Huggins suggested; but if used, he opined
that the Permanent Fund would directly invest as opposed to
backstopping bonds.
He noted that the fixed amount and POMV were both reasonable and
produce the same amount of money over time; however, the
percentage of market value approach would have more fluctuation.
He reiterated that the biggest difference between the governor's
approach and SB 114's sovereign wealth was where oil price
volatility would reside. He said the disadvantage of having oil
price volatility reside in the General Fund was that the state
would be stuck with the annual amount that could be collected.
He specified that reasoned assumptions could not be made about
how much could be spent over time, which meant there would
always be volatility in the General Fund.
10:11:46 AM
ATTORNEY GENERAL RICHARDS explained that a hypothetical modeling
exercise was done by the Department of Revenue to show what
would have happened if the POMV concept was enacted in the past.
He pointed out that the modeling showed that the POMV approach
would not have smoothed out the volatility-curve associated with
oil prices and additional layers would have been laid on the
volatility. He said the layering would have made sense in the
low years because the revenues would have been needed to meet
budgeting needs, but in high years an unadjusted POMV would have
compounded pro-cyclical spending because savings would be placed
into a general fund that already had excess revenues.
He remarked that the revenue-limitation amendment that the
committee passed was a good amendment because during high oil
price environments, money from savings would not be put into a
budget that was already highly funded. He explained that the
difference between the revenue limit and what the governor's
bill does was as follows:
1. Does not provide for automatic savings of the petroleum
revenues at very high revenues.
2. Does not allow for spending a constant level of petroleum
revenues over time regardless of what is collected.
3. Volatility in the General Fund would continue to exist
under the revenue-limit cap.
CHAIR STOLTZE clarified that not spending would increase the
likelihood of spending.
ATTORNEY GENERAL RICHARDS answered correct. He specified that
the POMV payout does not provide a limitation on spending or
revenues in terms of excess oil revenues. He remarked that the
revenue limitation would do a very good job of making sure that
financial savings were not spent when it's not needed, but the
amendment would not go to the next step of ensuring financial
savings at real high oil prices.
10:14:29 AM
ATTORNEY GENERAL RICHARDS addressed the different dividend
methodologies and noted that two combinations did not make the
most sense mathematically. He said using a POMV draw with an
earnings-based dividend was a little dangerous because the POMV
was a pretty steady amount, but the earnings-based dividend
would always be very variable and the result would make it
harder to depend on revenues to the General Fund each year. He
said the preferred alternative to a POMV draw and an earnings-
based dividend would be to base the dividend on the market value
of the fund rather than year-to-year earnings, the end result
would not have the variability and swings that exist under the
current system. He remarked that although variability and swings
might be good policy in terms of people's dividends, variability
rather than stability in revenue to the General Fund did not
make sense.
He said the other type of dividend combination that he found
mathematically challenging was SB 114's initial version with a
royalty-based dividend and a PFD floor. He detailed that
dividends would be paid out on the upside of oil prices, but
guaranteed with a floor on the downside of oil prices. He
asserted that the dividend plan under SB 114 would easily become
unsustainable very fast.
10:17:44 AM
SENATOR MCGUIRE thanked Commissioner Hoffbeck and Attorney
General Richards for working with her office. She opined that an
amalgamation of bills would ultimately happen because people
understand where the state was financially. She analogized that
people were at the acceptance level that a "root canal" must be
performed.
10:19:57 AM
SENATOR COGHILL commented that the real question was whether the
state's wealth could be used to stabilize the government as the
Legislature starts slimming down the budget. He said to date,
the Permanent Fund earnings have not been used for general
government purposes. He detailed that using the current
methodology and taking money out of Permanent Fund earnings for
government spending would highly impact the dividend. He stated
that the intent in the governor's plan and SB 114 was to protect
and sustain the value of the state's wealth when used for the
first time in government services and the dividend. He said he
appreciated the approach being taken and noted that that was the
reason for his methodology change in introducing his amendment.
He remarked that if the Legislature does not do anything, the
Permanent Fund earnings could be used, but the impact on the
dividend would be great and the state's volatility would not
change.
[CHAIR STOLTZE set SB 128 aside for further consideration.]
SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
2:36:48 PM
CHAIR STOLTZE returned attention to SB 128. Finding no
amendments or additional discussion, he solicited a motion.
2:37:01 PM
SENATOR COGHILL moved to report SB 128 from committee with
individual recommendations and attached fiscal notes.
2:37:07 PM
CHAIR STOLTZE announced that without objection, SB 128 moved
from committee.