Legislature(2011 - 2012)BUTROVICH 205
01/24/2012 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SJR10 | |
| SB150 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SJR 10 | TELECONFERENCED | |
| *+ | SB 130 | TELECONFERENCED | |
| *+ | SB 150 | TELECONFERENCED | |
| *+ | SB 136 | TELECONFERENCED | |
SJR 10-CONT. AM.: BUDGET RESERVE FUND
9:01:22 AM
CHAIR WIELECHOWSKI announced that the first order of business to
come before the committee was SJR 10, a Constitutional Amendment
intended to ensure that the legislature continues to save during
times of surplus.
CHAIR WIELECHOWSKI reviewed the purpose of SJR 10. He said that
with a large projected surplus this fiscal year and next, now is
the time to talk about savings.
SENATOR PASKVAN moved to adopt the proposed committee substitute
(CS) for SJR 10, labeled 27-LS1091\D, as the working document.
CHAIR WIELECHOWSKI objected for discussion purposes.
9:02:43 AM
SAM GOTTSTEIN, staff to Senator Wielechowski, sponsor of SJR 10,
discussed changes made in version D. He said the first change is
on page 1, line 14; the words "in population" were removed to
keep the $6 billion threshold from increasing too rapidly. The
second change is on page 1, line 15; the words "on July 1" were
removed to allow time to calculate actual annual unrestricted
oil revenue. The third change is on page 2, lines 7-8; language
was added to ensure that the proposed amendment will not apply
to Permanent Fund royalty payments.
MR. GOTTSTEIN stated that Alaska has benefited from substantial
budget surpluses in recent years largely as a result of high oil
prices. Alaska has the greatest amount of savings in the nation
with about $16 billion in savings accounts and reserve funds.
Oil revenue, which makes up about 90 percent of the state's
revenue, is a non-renewable resource. Although Alaska depends on
a non-renewable resource, it is possible for the oil revenue to
be used like a renewable resource. If Alaska saves money now, it
will be in a better position to have oil wealth in the future.
He said the legislature is constitutionally required to develop
Alaska's resources to the maximum benefit of its people. This
includes managing resources for future generations.
MR. GOTTSTEIN maintained that existing savings accounts do not
save enough for the future. He described Alaska's three main
savings accounts: the Permanent Fund, the Statutory Budget
Reserve, and the Constitutional Budget Reserve. The Permanent
Fund is the largest of the accounts, currently valued at
approximately $39 billion. Dividends from the fund go to Alaska
residents each year, and the earnings from the fund have not
been used to fund public services. Putting more money into the
account would not count as a way to save for the state's future
budgetary needs.
MR. GOTTSTEIN continued to say that the Statutory Budget Reserve
(SBR), substantially smaller than the Permanent Fund, is
currently valued at approximately $2.6 billion. Since the SBR's
funds can be accessed by a simple majority, it is not likely
that this fund will sustain the state in the future.
MR. GOTTSTEIN related that the Constitutional Budget Reserve
(CBR) is considered Alaska's rainy day fund. Established in 1991
through a constitutional amendment, the CBR acts as a
stabilization fund. It was initially funded through settlements
with oil and gas companies, and the value of the fund has grown
from just under $600 million to approximately $10.3 billion
today. Under most circumstances the CBR requires a three-
quarters majority vote from both houses to access the fund for
general fund use. After taking out the money, the legislature is
obligated to pay it back, along with any non-appropriated funds,
at end of any given fiscal year. Both requirements keep the
legislature from appropriating money from the CBR unless it is a
necessary stop gap measure. In years of high oil revenue, there
is currently no automatic mechanism to appropriate additional
funds into the CBR. SJR 10 would change that. Through this
legislation, the constitution would ensure that the legislature
continues to save for the future.
MR. GOTTSTEIN continued that after reaching a threshold of $6
billion in unrestricted oil revenue for a fiscal year, SJR 10
provides that two-thirds of the remaining surplus would be
deposited into the CBR. The $6 billion threshold would be
adjusted annually for inflation. Unrestricted oil revenue
includes royalties, production taxes, corporate income taxes,
and property taxes for the oil industry. Unrestricted oil
revenue, for the purpose of this legislation, would not include
royalty payments to the Permanent Fund.
9:07:47 AM
MR. GOTTSTEIN addressed the potential fiscal impact of SJR 10.
He maintained that if this policy were in place today, Alaska
would have over $7.5 billion of unrestricted revenue for general
fund use and the ability to deposit over $1.475 billion into the
CBR this year, while maintaining a $600 million surplus. The
amount of the deposit would depend on the size of a given year's
oil revenue surplus. For example, for the next three years,
under current Department of Revenue projections, the state would
deposit over $800 million into the CBR.
MR. GOTTSTEIN stated that the goal of the legislation is to
create a framework for saving. The Department of Revenue has not
always been right about oil revenue projections. For example,
back in 2008, the department's forecast ended up 47 percent
lower than the prediction. Conversely, the department has also
estimated revenue to be substantially higher than what it
actually was. The goal of this legislation is not to deposit
more money into the CBR every year. The goal is to deposit money
into the CBR in years of high revenue surpluses.
MR. GOTTSTEIN concluded that it is not the sponsor's intent to
solve all of the state's fiscal problems with this legislation.
It is the first step toward managing a non-renewable resource,
such as oil wealth, like a renewable resource.
9:09:31 AM
SENATOR MEYER asked for clarification regarding the figure of
"two-thirds of the surplus after $6 billion."
MR. GOTTSTEIN explained that it is a policy call. The amount of
$6 billion has been adequate in the past. "Two-thirds" shows a
commitment to savings after obligations are met.
SENATOR MEYER speculated that the number could be changed.
CHAIR WIELECHOWSKI stressed that all figures used are policy
calls. Two-thirds is enough to meet financial obligations. In
years with large surpluses, one-third is enough for capital
projects and the remainder could go into savings.
SENATOR MEYER noted the bigger policy call is how best to
protect savings.
Chair Wielechowski replied that the bill was his attempt to
allocate savings for future generations, but he agreed that the
issue should be discussed further.
9:12:41 AM
SENATOR PASKVAN observed that the $2.6 billion in the SBR is
subject to access by a simple majority for immediate needs;
however, there is an overlying constitutional requirement to
save when there are excess dollars.
CHAIR WIELECHOWSKI recalled that when the CBR was established,
there was a desire to make it hard to access. He agreed that the
SBR is more accessible. He said he thought the people of Alaska
like having a savings account that is harder to get to.
SENATOR GIESSEL asked how long this type of plan would be in
effect, based on oil revenue forecasts. She also inquired if
changing the constitution would require a vote of the people.
MR. GOTTSTEIN affirmed that it would require a vote of the
people. He explained that under current projections, $800
million would be put into the CBR for three years. He added that
those projections are questionable due to many factors. He gave
a hypothetical example. The goal of the legislation is to create
a framework for years into the future.
SENATOR GIESSEL clarified that there would be a large surplus
for just three years.
MR. GOTTSTEIN agreed, under current projections. Projections are
fairly simple today, but the goal is to create a framework to
balance the highs and lows of revenue surpluses and deficits.
SENATOR GIESSEL asked how much interest the fund would accrue.
MR. GOTTSTEIN addressed the main account vs. the subaccount and
various scenarios. He said the earnings from the CBR would be
about a 4 percent rate of return in order to make sure the funds
are available immediately.
9:17:45 AM
SENATOR GIESSEL asked what the current rate of inflation was.
MR. GOTTSTEIN believed it was projected to be 2.5 percent for
this model.
SENATOR GIESSEL speculated that the profit would be about 1.5
percent.
MR. GOTTSTEIN agreed.
CHAIR WIELECHOWSKI pointed out that some people would prefer to
invest the CBR more aggressively. The bill is intended to be a
framework. There are 33 or 34 new exploratory wells on the North
Slope, as well as shale oil and heavy oil, not factored into
future oil projections. He predicted that there would be an
explosion of oil production on the North Slope in the next three
to five years and substantial new revenue to the state. He said
he would like to see that revenue put into savings.
9:19:52 AM
SCOTT GOLDSMITH, Professor of Economics, University of Alaska,
Anchorage, Institute of Social and Economic Research (ISER),
testified as an individual, not as a representative of the
university. He read from the following statement:
I am here to testify in support of the two concepts
embodied in SJR 10 - a petroleum revenue spending cap
and a sweep of the surplus into savings to meet the
fiscal needs of future generations of Alaskans. If we
are careful and lucky, the pipeline will be carrying 1
million barrels a day in 2020 and activity in the oil
patch will be growing, generating more and more
petroleum jobs for the next generation of Alaskans.
Unfortunately that production will likely not be
generating the level of petroleum revenues we have
come to expect and depend upon.
Production of conventional oil, the basis for current
revenues, has been falling for more than 20 years and
that decline is projected to continue as the giant
fields are depleted. Heavy oil and shale oil may
supplant some of that decline, but because of high
unit production costs, neither will generate large
amounts of revenue. Likewise production from the OCS
might help to keep the pipeline operational, but
almost all its revenues will go to the federal
government. Commercialization of gas seems to be
permanently at least 10 years in the future-perhaps
more than ever today as the world is awash in low cost
natural gas.
We all recognize the need to save some current
petroleum revenues for the future, but how much saving
is enough? Our current strategy of putting away the
leftovers after the current budget is built is not the
answer. Rather, the answer pops out if we stand the
question on its head and ask, "How much of our
petroleum wealth can we afford to spend today?" This
is the right way to pose the question because, as we
all agree, our petroleum wealth is finite. The more
we spend today, the less will be left for the next
generation of Alaskans.
To answer the question of how much we can afford to
spend today, we need to figure out how much our
petroleum wealth is worth and we need to decide how
much of that wealth we should share with the next
generation of Alaskans. I have started to think about
both of those issues and my thoughts are in some of
the papers in the bill packet before you. Let me
summarize each.
I have estimated state petroleum wealth to be $140
billion. This consists of $55 billion of financial
assets derived from past petroleum revenues as well as
$85 billion in taxes and royalties on future
production. The $85 billion is the value of those
future revenues if we could bank them all today rather
than waiting for them to trickle in over the next
decades.
Then how should we share this $140 billion grubstake
among current and future Alaskans? One answer is to
take a page from the successful management of our
fisheries, where we restrict the current harvest to
maintain maximum sustainable yield. By doing that
future fishermen get the same harvesting opportunities
as current fishermen.
Applying that concept to our petroleum wealth, we
could harvest, or spend, $5.5 billion this year. That
amounts to about $7,000 for every Alaskan today and
would guarantee that every future Alaskan would get
the opportunity to spend an equal amount, $7,000
adjusted for inflation. Of course, this is just a
different way of saying treat the petroleum wealth
like a permanent endowment, or as the British would
say, never spend principle.
Is this a fair distribution? That is for all Alaskans
to decide. But it is a discussion that needs to occur
and this bill is a way to stimulate that discussion.
Capping spending from petroleum revenues has a number
of other positive features. It will reduce the FISCAL
BURDEN we are currently shifting to the next
generation of Alaskans by spending petroleum revenues
at a non-sustainable rate. It will force us to weigh
the benefits of increased public spending against the
cost of new taxes to pay for them. It will give the
governor and legislature a valuable tool to help
instill fiscal discipline where none exists today.
Of course many people will argue that putting our
wealth into saving is a mistake because that money is
not working for us and that the funds would be better
spent on investments to build our infrastructure,
particularly roads and energy projects. Without
getting into that discussion I would simple say there
needs to be a considered balance between those
investments and savings.
Saving for the future is never easy, as we all know
from personal experience. But high oil prices have
given us a second chance to do the right thing and we
should not let this opportunity slip. Several times in
the past we have taken the opportunity to create
vehicles for saving when revenues were high and today
we have the Permanent Fund, the Statutory Budget
Reserve, and the Constitutional Budget Reserve.
I think the best way to motivate the need to save more
is to look to Norway and its $300 billion Petroleum
Savings Account. Just as we have an oil production
goal of one million barrels in the pipeline in 2020,
we could and should have a savings goal of $100
billion by the year 2020. This bill is a first step
toward achieving that goal. Let's get to work to make
it happen. Thank you.
9:26:00 AM
CHAIR WIELECHOWSKI thanked Professor Goldsmith for his work.
SENATOR MEYER related that the Governor's current operating
budget is $8 billion and the capital budget is $1.8 billion with
additions probable. Under this legislation, he predicted cuts
totaling $4 billion would have to be made.
MR. GOTTSTEIN said he understood that the Governor had included
$2 billion to go into the SBR. He offered to get back to Senator
Meyer regarding the other $2 billion.
CHAIR WIELECHOWSKI pointed out that there were also matching
federal funds. He asked Mr. Gottstein if he listed unrestricted
oil revenue at $7.5 billion.
MR. GOTTSTEIN reported that current revenue projections are for
about $8.2 billion of unrestricted oil revenue for this year.
CHAIR WIELECHOWSKI noted that sometimes money budgeted for
savings gets counted as an operating number.
SENATOR MEYER agreed, but stressed that there would have to be a
reduction in order to arrive at the $6 billion figure.
9:28:53 AM
SENATOR PASKVAN requested a written copy of Professor
Goldsmith's presentation.
SENATOR GIESSEL noted she reads Professor Goldsmith's
publications. She inquired if he had looked for projected costs
for education and health care in the budget. She pointed out
that 50 percent of the budget is formula-driven, and that
pending national health care programs will significantly
increase it.
PROFESSOR GOLDSMITH said he hadn't looked at the most current
projections, but agreed it was a major concern.
SENATOR GIESSEL pointed out that Norway does not pay dividends
to its citizens from its permanent fund. She asked Professor
Goldsmith to comment on Norway's substantial personal income tax
rate of 50 percent.
PROFESSOR GOLDSMITH related that Norway's taxes were
significant, and essentially all petroleum revenues were
diverted into the permanent fund from which 4 percent is
withdrawn to help support the cost of government.
9:32:43 AM
STEPHEN HAYCOX, Professor Emeritus of History, University of
Alaska, Anchorage, spoke in support of SJR 10. He described his
theory of colonial economics as it applies to Alaska. He spoke
of the difficulties in addressing Alaska's long-term future and
thought SJR 10 would help. He recalled the periods of flush and
lean in Alaska's history. He called the CBR savings a
responsible step.
9:37:33 AM
CHAIR WIELECHOWSKI thanked Professors Haycox and Goldsmith and
closed public testimony.
CHAIR WIELECHOWSKI pointed out that the fiscal note shows a cost
of $1,500 to cover the cost of providing information about the
amendment in the Official Election Pamphlet for the 2012 general
election.
CHAIR WIELECHOWSKI stated that SJR 10 would be set aside.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB150.Vietnam Veterans of America Support Letter.pdf |
SSTA 1/24/2012 9:00:00 AM SSTA 1/26/2012 9:00:00 AM |
SB 150 |
| SB150.Sponsor Statement.pdf |
SSTA 1/24/2012 9:00:00 AM |
SB 150 |