Legislature(2015 - 2016)HOUSE FINANCE 519
02/22/2016 01:30 PM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Flow Charts & Modeling: Legislative Finance Division | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 224 | TELECONFERENCED | |
| += | HB 245 | TELECONFERENCED | |
| += | HB 303 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 224
"An Act relating to income of the Alaska permanent
fund; relating to the disposition of income of the
Alaska permanent fund; establishing and relating to
the distribution account; relating to the calculation
of permanent fund dividends; relating to the dividend
fund; and providing for an effective date."
HOUSE BILL NO. 245
"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."
HOUSE BILL NO. 303
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; and providing for an effective
date."
Co-Chair Thompson reviewed the meeting for the day.
^PRESENTATION: FLOW CHARTS & MODELING: LEGISLATIVE FINANCE
DIVISION
1:35:40 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced the PowerPoint Presentation: "A Comparison of
Plans to Re-Plumb Alaska's Cash Flow." He indicated that
the Legislative Finance Division (LFD) prepared models of
the fiscal plans. He believed that modeling was the best
method for comparison between plans which allowed for
evaluation of projected deficits, dividends, and reserve
balances. However, understanding each plan individually was
necessary for comparison. Cash flow models helped
illustrate where money flowed, identified "decision
points," and underlined the "trade-offs inherent in the
decisions." He explained that the following slides depicted
the cash flow for each fiscal plan but did not include the
account balances.
1:38:11 PM
Mr. Teal turned to the cash flow diagram on slide 2: titled
"Current Cash Flow." He explained that the Permanent Fund
(PF) was divided into two accounts: the principal and the
Earnings Reserve Account (ERA). He noted that the accounts
were separate from the General Fund (GF) and funds from
both accounts were not used for government expenditures.
Earnings from investments from the PF and the ERA itself
accumulated in the ERA. Dividends were the first priority
based on a five year moving average, which were based on
investment earnings and were not connected to the fiscal
health of the state. He added that dividend distribution
was guided by statute. He pointed to the fiscal loop
between the PF principal and the ERA where the statutory
net income flowed from the principal into the ERA and
inflation proofing money looped back. Inflation proofing
occurred annually and was outlined in statute. He turned to
the general fund which was comprised of revenues from
production tax, royalties, and other "less volatile
revenue" derived from taxes and fees. He reported that
currently the state revenues were roughly $800 million in
royalties, $200 million in production tax, and $800 million
in less volatile revenues totaling $1.8 million. He
explained that when oil prices were high revenue increased
and any surplus was deposited into reserve accounts: the
Constitutional Budget Account (CBR) and the Statutory
Budget Reserve (SBR). Conversely, when revenue was low
deficits were filled by reserve funds. He qualified that
although the system had worked for 25 years it was
dysfunctional in a low production, low price environment
due to the fact that reserves were being drawn without
being replenished. The model indicated that reserves would
be exhausted by FY 2019. He relayed that the following 5
slides depicted how the governor's Permanent Fund
Protection Act (PFPA) changed the "fiscal plumbing."
1:42:24 PM
Mr. Teal advanced to slide 3: "1. Change Royalty Percentage
(PFPA)." He reported the first change portrayed the state
"harvesting" money from the ERA, which reduced the savings.
Currently 30 percent of the royalties flowed into the PF
principal, which was comprised of 25 percent of the
royalties from old leases (prior to 1980) and 50 percent
from new leases. He noted that revenue from new field oil
was so much smaller than from the legacy fields that it
averaged 5 percent. Under the PFPA, 25 percent of all
field's royalties would flow into the PF principal. The 5
percent was added to the royalties that flowed into the GF
(69.5 percent to 74.5 percent).
Representative Gara asked whether the governor was
proposing not depositing the revenues from new oil into the
PF principal. Mr. Teal answered in the negative because the
second changed proposed under PFPA rerouted both royalties
and production taxes from the GF into the ERA. He explained
that 25 percent of the royalties was the constitutional
minimum deposit into the PF. The deposit was statutorily
changed to include 50 percent of the revenue from oil
fields developed after 1980.
Vice-Chair Saddler asked whether inflation proofing the PF
principal account was accomplished with funds withdrawn
from the ERA. Mr. Teal responded in the affirmative. He
clarified that a small amount of ERA money did flow into
the GF, which was expended on the Permanent Fund Division
operations. In addition, approximately $8 million was
divided between the Department of Law (DOL), the Department
of Revenue (DOR), and the Department of Natural Resources
(DNR) for activities related to increasing money into the
PF.
Co-Chair Thompson recognized former Representative Bill
Thomas in the audience.
1:46:49 PM
Representative Kawasaki asked whether the small withdraws
from the ERA was historical. Mr. Teal replied that the
precedent went back to the late 1990's as part of GF
spending reduction measures. Representative Kawasaki
wondered whether reducing the PF royalty deposit from 30
percent to 25 percent significantly altered the PF
principal and if LFD performed modeling in regards to the
change. Mr. Teal argued that the reduction was not very
material relatively. He remarked that when compared to
inflation proofing that amounted to approximately $1
billion, the roughly $50 million (5 percent of the current
year's royalties of $1 billion) was "dwarfed."
Co-Chair Thompson recognized Representative Matt Claman in
the audience.
In response to remarks by Representative Gara, Mr. Teal
clarified that 5 percent of the royalties were redirected
which was roughly $50 million.
Mr. Teal turned to slide 4: "2. Re-Route Taxes and
Royalties to ERA (PFPA)." He indicated that the second
change proposed by the PFPA redirected the 74.5 percent of
the royalties from the GF into the ERA. Currently
approximately $1 billion would move into the ERA and the
same amount would be withdrawn from the ERA into the GF and
called the "Sustainable Draw." He scrolled to slide 5: "3.
Add Sustainable Draw from ERA (PFPA)." He offered that the
Sustainable Draw was statutorily set at $3.3 billion and
could be adjusted downward if oil revenues or interest
rates were not able to maintain the real value of the PF
and could be adjusted upward by inflation. He related that
in dollar terms the change reduced GF revenue by $1 billion
and replaced it with a $3.3 billion Sustainable Draw
totaling a net gain of $2.3 billion.
1:51:54 PM
Mr. Teal continued to slide 6: "4. Change Inflation
Proofing to an "Overflow" Mechanism (PFPA)." He stated that
the fourth change was the altering the annual inflation
proofing mechanism to an overflow mechanism. The bill's
inflation proofing was predicated on an overflow or surplus
of 4 times the Sustainable Draw amount. He discussed the
differing view points on inflation proofing. He observed
that the goal of the plan was to "maintain the real market
value" of the sum of the principal and ERA accounts and
that it did not matter which account inflation proofing was
deposited into.
Co-Chair Thompson recognized Representative Laura Reinbold
and Representative Wool in the audience.
Representative Wilson asked whether the Sustainable Draw
was a figure or a formula. Mr. Teal offered that the
Sustainable Draw was a "fixed" draw and did not randomly
change. The governor had a "module in the model" that
determined the Sustainable Draw. The model had projected
the total cash inflow and determined that the amount could
be annuitized at $3.3 billion per year in perpetuity. The
module also included an inflation proofing adjustment. The
Sustainable Draw increased with the adjustment. In
addition, there was a review provision to decrease the
draw.
1:55:19 PM
Representative Kawasaki asked whether the Sustainable Draw
amount was sustainable. Mr. Teal answered that under the
"current set of assumptions" the draw was sustainable but
it was "highly sensitive" to interest rates and oil prices;
i.e., the methods the portfolio was replenished. He related
that the bill contained a provision for review every 4
years and could be adjusted downward if "the real value of
the PF and ERA was not keeping pace with inflation."
Representative Kawasaki asked whether Mr. Teal modeled the
best and worst case scenarios. Mr. Teal answered in the
affirmative and stated that he would address the models
later in the presentation.
Mr. Teal advanced to slide 7: "5. Change Dividend Source
and Calculation (PFPA)." He explained that the source of
the dividend changed from a percentage of a 5 year moving
average to 50 percent of the previous year's royalties and
altered both the source and the amount. The PF was based on
a completed fiscal year in order to determine the dividend.
He summarized that 74.5 percent of royalties flowed into
the ERA, 24.5 percent remained, and 50 percent of the
previous year's royalties was distributed via the dividend
fund.
1:59:33 PM
Co-Chair Neuman asked Mr. Teal to further discuss placing
production taxes and royalties directly into the ERA and
the ability to withdraw money from the ERA. Mr. Teal
responded that the model worked by reducing volatility,
which involved switching cash flows from the GF to the ERA.
He shared that concerns about the legality of the plan
existed. He relayed that the attorney general testified
that he would argue in favor of the legality of the
"sweepability" of the ERA. The Legislative Legal staff
argued that depositing royalties, production tax, and CBR
into the ERA changed the "character" of the account and
questioned the legality of the plan. He revealed that the
CBR sweep into the ERA was a onetime event and was not
illustrated on the diagram. The ERA was exempt from the
sweep of funds into the CBR in the years that the state
carried a liability to the CBR due to the fact that the ERA
only contained PF earnings. Therefore, the legal staff
concluded that a legal issue occurred with the sweep of
funds from the ERA. He understood that the motivation of
the plan was "stability" which was only achieved through
moving the volatile revenue sources from the GF to the ERA
and replacing it with a steady fixed draw; resulting in the
elimination of volatility. He was unsure why the plan
included the CBR draw into the ERA; he offered that it
could be interpreted as a way to avoid a super majority
vote. He suspected that the move was due to the higher
earnings the ERA garnered. He underscored that the higher
earnings was not the difference in interest each account
earned; the CBR earned 1 percent and the ERA's anticipated
earnings were 6.9 percent. Earnings in the ERA were
spendable and CBR earnings were only spendable with a super
majority vote. He voiced that the increase on the rate of
return of 7 percent on $7 billion was over $400 million
"and not an insignificant amount of money." He believed
that the matter was a "legalistic argument" and that it was
"not worth getting into the weeds." He advised that the
easiest solution was to move the CBR, royalties, and
production tax in a type of "holding tank" comprised of the
CBR, ERA, and principal and compute the draw based on the
sum of the accounts. Consequently, it was not required to
physically move the funds; it was only necessary to define
the pool of money. He thought the legal issues were
solvable.
2:04:47 PM
Vice-Chair Saddler understood that the CBR draws were
required to be replenished. He asked what the balance of
the CBR was. Mr. Teal responded that the CBR was the
highest that it had ever been. He stated that the question
vis-à-vis when payback was required remained. He explained
that the repayments were "ratcheted." The state had a
liability to the CBR for any type of withdrawal and an
annual sweep into the CBR occurred until the amount was
repaid.
Representative Gara referred to the governor's plan and the
$3.3 billion draw. He discerned that the PFPA was "more
comprehensive" and ultimately wanted to produce a $4.5
billion annual draw. He asked how much the governor's plan
was reduced if the entire package including revenue raising
measures was not adopted. Mr. Teal replied that the
question was answerable through a model he had available
that allowed for the calculation of different variables. He
agreed that the governor's plan "was not merely changing
cash flow." He reminded the committee that cash flow
alterations, cuts, or revenue by itself was not sufficient
to close the deficit and a combination of all three were
most likely required. He indicated that the governor's full
plan demonstrated his cognizance of the situation.
Mr. Teal continued to discuss issues regarding the PFPA. He
remarked on the inflexibility of the plan. Hypothetically,
if the state currently gained an extra $4 billion in
production tax and royalties, the entire amount was
spendable. He noted that a price of $110 per gallon of oil
was necessary to generate $4 billion under the PFPA. The
windfall would be deposited into the ERA and the
Sustainable Draw remained $3.3 billion without a provision
to increase the amount. A provision allowing an upward
adjustment of the Sustainable Draw granted the legislature
the flexibility to spend only a portion of the windfall
prorated out over years and also save a desired amount. He
worried that the inherent rigidity would create a situation
where the legislature broke the rules in a windfall year by
spending above the Sustainable Draw. He suggested that in a
rule based system, the rules should be revised to allow
upward or downward adjustments to the draw. He communicated
that the PFPA relied heavily on long term projects which
made it vulnerable to changes in interest rates and oil
prices. He warned that a Sustainable Draw did not equal a
sustainable budget. He calculated that even if the draw was
accurately predicted it did not fill the deficit, which was
closer to $3.8 billion and diverted $1 billion. The
restructuring alone did not fill the budget deficit. He
reiterated that the governor was aware of the situation;
therefore, added revenue measures and spending reductions.
2:11:55 PM
Representative Wilson stated that under the plan, money to
refund the CBR was unavailable unless less volatile revenue
increased and wondered whether her assessment was correct.
Mr. Teal explained that the statement was correct. He
explained that any windfall oil revenue was deposited
directly into the ERA without a provision to repay the CBR.
Representative Gara believed that any plan adopted that
only included restructuring the PF as a revenue measure was
"completely imbalanced." He relayed that in the first year
the governor promised a $1000 dividend but in future years
the dividend would be less. He wondered what the future
dividend amounts were at oil price ranges of $30 to $70 per
barrel. Mr. Teal answered that roughly 50 percent of
royalties would pay $500 million and calculated on a per-
capita basis that the dividend amounted to $750. At $30
dollar per barrel oil dividends dropped to approximately
$400. He recommended consulting the LFD model for more
accurate information.
2:14:48 PM
Representative Edgmon asked whether LFD modeled depositing
production tax directly into the PF principle or if the
Sustainable Draw was too heavily dependent on the annual
production tax flowing into the ERA in order to make the
draw sustainable. Mr. Teal responded that LFD had not
modeled his scenario but knew the answer. He detailed that
production tax was currently low but projected to be $1
billion. If the tax was deposited into the principal the
Stainable Draw was at risk. The tax was not spendable in
the corpus and the money was needed in the ERA to ensure
the Sustainable Draw amount. He added that in years with
low earnings the reserves were necessary for the
Sustainable Draw. Representative Edgmon stated that he
lacked expertise in sovereign wealth funds but deduced that
most sovereign wealth funds would deposit production tax
into the principal. He thought it was a fundamental
difference between the PFPA and sovereign wealth funds. Mr.
Teal responded that the state was in an unusual situation
with the PF; the corpus was not spendable. He expounded
that most sovereign wealth funds were designed as an
endowment comprised of one spendable account. In Alaska, a
constitutional amendment was required to spend the
principal.
2:18:33 PM
Representative Edgmon added that most sovereign wealth
funds did not pay dividends and was another significant
difference. Mr. Teal affirmed the statement. He voiced that
no other sovereign wealth fund paid dividends. The PF could
be turned into a sovereign wealth fund or endowment with a
constitutional change.
Vice-Chair Saddler referred to the AKLNG project and
relayed that the project "envisioned" a portion of gas
royalties and gas production tax to help fund the cost of
the project and noted that was in conflict with the
governor's plan. The royalties and taxes were deposited
into the ERA and draws were limited to the Sustainable Draw
amount. He asked what would happen if the state had to make
a cash call for AKLNG. Mr. Teal reminded Vice-Chair Saddler
that royalties were meant for dividends under the PFPA so
the pledged royalties reduced the Permanent Fund Dividend
(PFD). Vice-Chair Saddler wondered when the CBR would be
totally empty. Mr. Teal deferred to the models later in the
presentation.
Mr. Teal turned to slide 8: "Current Cash Flow." He
advanced to slide 9: "1. Change Royalty Percentage (SB 114
/HB 303)" and discussed the cash flow for the fiscal plan
contained in the legislation. He remarked that the first
change was identical to slide 3 under the PFPA. He
highlighted slide 10: "2. Add POMV Payout (SB 114/ HB
303)." The second change did not redirect the royalties and
production tax out of the GF into the ERA. The second
change was considered a Point of Market Value (POMV)
payout. He elaborated that the volatile revenue stayed in
the GF and was not as stable as the PFPA. The draw from the
ERA was variable and was a percent of balance that changed
over time. Mr. Teal pointed to slide 11: "3. Remove
Inflation Proofing (SB 114/HB 303)." He indicated that the
third change removed the annual inflation proofing
mechanism and did not include a provision in the
legislation. However, inflation proofing theoretically did
happen when the earnings were in excess of the payout rate.
The excess earnings accumulated in the ERA and could be
appropriated to the corpus. He deemed that inflation
proofing was "ad hoc" rather than through rules.
2:24:32 PM
Mr. Teal discussed slide 12: "4. Change Dividend Source and
Calculation (SB 114/HB 303)." He announced that dividends
were higher than those generated from the PFPA because the
full 74.5 percent of the previous year's royalties that
flowed into the general fund were used for dividends. The
GF was used due to the year time lag. He pointed to slide
13: "PFPA vs. SB 114/HB 303" and stated that the diagram
compared the two bills. He noted that the PFPA was
represented by blue lines and SB 114 and HB 303 was
presented in red and that black represented the same
provisions. He explained that both plans maintained the 0.5
percent of royalty's distribution into the Public School
Trust Fund and changed to the 25 percent royalty into the
PF principal. The royalties and production tax percentages
were the same but under the PFPA they flowed into the ERA
and under SB 114/HB 303 they remained in the GF. He
commented that the governor placed a high value to the
stability of the GF. Directing the money into the ERA
allowed a fixed draw for the PFPA versus a variable draw
under SB 111/HB 303. The amount of the draw changed but not
the 5 percent POMV. He believed that the difference in
inflation proofing was a policy choice and not a
"conceptual difference. Inflation proofing could be added
to the POMV plan as a provision in the bill. The divided
change between the plans was a policy choice rather than a
technical change. He believed that the two plans were
"conceptually close" except for the legal issues regarding
"contaminating the ERA" with outside funds. He concluded
that the only "significant difference" was the degree of
stability.
Representative Edgmon thought that the PFPA offered a
"better opportunity to grow more" than the POMV concept.
He wanted to better understand how the governor's claim
that his plan offered greater opportunity for the PF corpus
to grow.
2:30:39 PM
Mr. Teal agreed that the PF corpus would be larger under
the governor's plan because the Production tax was
deposited into the ERA. He related that the corpus may grow
more under the governor's plan, because more funds were
necessary to sustain the $3.3 billion annual draw. If oil
was less than $85 per barrel, than the Sustainable Draw
would be larger. If oil was greater than $85 per barrel, SB
114/HB 303 plan would result in a larger revenue source for
the GF. He furthered that "which plan would pay more,
depended upon oil prices."
Representative Wilson asked what money could travel from
the GF into the CBR under SB 114/HB 303. Mr. Teal confirmed
that he left out the arrow on slide 13. He explained that
under SB 114/HB 303 a surplus could build in the GF. If
there was high revenue coming from production tax and the
POMV that was higher than expenditures the surplus was
available for spending or saving in the CBR.
2:33:41 PM
Co-Chair Thompson interjected that the surplus in the GF
had potential to "grow government." Mr. Teal agreed. He
suggested that it was important to consider the point that
the PFPA offered more stability in the fixed draw. He
referred to slide 14:
"PFPA vs. POMV: Which is Better?"
1. A fixed draw is highly dependent on actually
attaining the projected rates of return and projected
oil revenue.
2. Those projections look forward 20 years--hence the
need for review of sustainability of the draw.
3. We are not very good at projecting rates of return,
and even worse at projecting oil revenue.
4. POMV looks backwards 5 years and the payout is
based on actual events rather than on projections.
5. Ask yourself this question: Is your hindsight
better than your foresight?
6. Lest that question appears to be one-sided, note
that POMV fails the stability test-if royalties and
production tax revenue jump $4b and fill the deficit
without the need for a payout, the payout still occurs
and there would be a tendency, or at least a
possibility, of spending the windfall.
7. Is there a hybrid that offers the comfort of
hindsight offered by POMV and the stability of PFPA?
Mr. Teal suggested limiting the payout from POMV when it
was not required that removed the primary difference
between the two plans. He indicated that at that point they
became very similar bills.
Co-Chair Thompson recognized Senator Lesil McGuire and
Representative Liz Vasquez in the audience.
2:38:17 PM
Representative Wilson wondered whether there was a
mechanism that could also limit spending in either plan.
Mr. Teal responded that the legislature could include a
provision that limited the draw in some way for SB 114/HB
303. The PFPA Sustainable Draw provided a limit by
mandating a fixed draw.
Representative Kawasaki returned to slide 13. He asked
whether HB 303 had a material impact on the PF principle
without specific inflation proofing. Mr. Teal reiterated
that he viewed inflation proofing as a policy decision that
could be easily accomplished. He observed that a number of
ways existed to build inflation proofing into any of the
plans. He noted the tradeoff was between protecting the PF
and maintaining a sufficient balance to make the spending
draw. Representative Kawasaki agreed that the issue was a
policy discussion. He relayed that historically the state
had inflation proofed in the amount of $17 billion. He
worried that the corpus would not grow without inflation
proofing. Mr. Teal offered that the principle cannot be
spent. The issue was how much each plan deposited into the
principle. The constitution mandated 25 percent of
royalties as a minimum and did not require inflation
proofing. He mentioned that inflation proofing was added
years later. He thought that the argument went both ways.
One could argue the issue in terms of the "real value of
the sum of both accounts" (ERA and principle) where the
inflation proofing money remained in the ERA and was not
moved.
2:43:54 PM
Representative Kawasaki wanted the PF to remain a
"permanent fund." He felt that without inflation proofing
in SB 114/HB 303 the fund was not "permanent anymore."
Vice-Chair Saddler referred to slide 14 and pointed to
points 6 and 7. He liked that failure was defined as
collecting more money than expected. He commented that the
bills were not designed to fix every aspect of the fiscal
plan and that a spending cap currently existed in statute.
He relayed that the cap was $2.5 billion plus population
and inflation.
Representative Gara understood the bulk of Mr. Teal's
presentation. He was unclear about the dividend. He
referred to Mr. Teal's remarks regarding the revenue
generated in SB 114/HB 303 was slightly larger than the
PFPA. He asked how that was possible when the reduction in
the dividend was larger in the governor's bill. Mr. Teal
deferred to the models.
2:46:57 PM
Mr. Teal examined slide 15: "HB 224 Cash Flow." He reported
that HB 224 incorporated spending limits in the plan and
contained a "strong rules based system." He characterized
the plan as a "waterfall approach." The bill set forth a
number of rules in statute. He explained that the statutory
net income flowed from the PF principle into the ERA that
happened in all plans. The other plans priority was to pay
a dividend. The first priority of HB 224 was to pay a 4.5
percent POMV and fill a deficit. The entire payout could
pay a deficit. If the payout filled the deficit, some of
the surplus could be used for dividends. He expounded that
dividend payouts of $250 up to $2000 depended on reserve
balances. He viewed the plan's philosophy as paying
dividends based on the long term fiscal health of the state
measured by reserve balances. The plan offered very strong
protection to the treasury and filled the deficit at the
expense of the dividend. He maintained that whether to
amend the plan to ensure dividend distribution was a policy
call. He continued that once dividends were paid any
remaining funds were deposited into the CBR until repayment
was reached. After the obligation to the CBR was reached,
the excess was distributed into the Statutory Budget
Reserve (SBR). He relayed that if all funds were used to
achieve the payout, the deficit was filled from the CBR.
Representative Gara relayed that Representative Hawker
stated the plan raised approximately $2.4 billion in POMV
payout. He noted that a dividend would not be issued in
deficit situations and a dividend would be eliminated with
implementation of income taxes in HB 224. Mr. Teal
responded that there was a significant amount of policy
embedded in the bill and any of the other plans as well.
All of the payouts were passed on a five year moving
average. HB 303's POMV was basically 5 percent based on the
balance three years ago. He delineated that in essence the
effective payout was approximately two tenths of a
percentage point below 5 percent or 4.8 percent that was
inflation proofing the fund. The HB 224 plan with a 4.5
percent payout seemed less than a 5 percent payout;
however, more money accumulated in the fund. In the long
run a 4.5 percent payout could be a higher payout than 5
percent. The higher balance made more earnings. The lower
payout rate favored future generations over the current
generation and was therefore, intergenerational.
2:54:44 PM
Representative Wilson referred to the HB 224's POMV of 4.5
percent and deduced that in the future the dividend would
come back or grow larger due to the growth of the ERA. Mr.
Teal agreed. He recapped that the growth in the ERA due to
a lower payout would eventually spill into dividends. The
dividends would not grow until deficits were filled and
overflow was distributed into the CBR to pay higher
dividends.
Representative Gara believed that under HB 224 it was very
difficult to achieve enough overflow to deposit into
dividends. Mr. Teal agreed with the statement.
2:57:06 PM
Representative Edgmon pointed out that an arrow on slide 15
could be placed from the CBR to the dividend box, since the
money could be used to pay a higher dividend amount. He
noted that the model required $1 billion in reductions in
order to work. He asked whether an alternative to any of
the three plans existed in order to achieve a sustainable
budget. Mr. Teal stated that when LFD modeled it could only
model rules. Many variables existed including using the CBR
to enhance dividends. He remarked that the clear intent of
HB 224 was designed to prioritize filling deficits.
Representative Edgmon wanted to know what the "opportunity
costs" were between all three of the models if budget
action was not taken by the legislature in the current
year. Mr. Teal remarked that the model indicated that HB
224 worked without reductions as large as stated by
Representative Edgmon. Representative Edgmon understood
that if the legislature did not adopt a fiscal plan in the
current fiscal year, up to $150 million in investments
would be lost. He wondered what the "opportunity costs"
would be for the other plans if the legislature failed to
act. Mr. Teal affirmed that an opportunity cost applied to
any of the fiscal plans if no action was taken in the
current fiscal year and was similar for all plans. He
ascertained that the PFPA was expected to gain larger
returns due to the consolidation of reserve accounts. He
suggested investing the CBR at higher rates than the
current 1 percent, assuming that the legislature would
adopt any one of the fiscal plans avoiding reliance on the
CBR to fill the deficit. Adoption of a plan significantly
reduced the draw on the CBR and allowed the balance to
accrue more earnings over years. He delineated that the
long-term investment portion of the CBR was eliminated due
to the anticipated reliance on the reserve to fill
budgetary needs.
3:03:44 PM
Vice-Chair Saddler deduced that there "were a couple of
places" where the governor's plans contained opportunity
costs. The governor assumed that if a fiscal plan was not
adopted and the CBR used for the budget the investment
earnings would be lost. He thought that the second factor
was the lost "investment horizon" with short-term
investing. He wondered whether the opportunity cost would
be the same for all plans that maintained CBR investment in
the short-term. Mr. Teal replied in the affirmative.
Representative Gara announced that the provision regarding
elimination of the dividend with the implementation of an
income tax was found on page 4 of HB 224. Mr. Teal
explained that HB 224 clearly established the notion that
the dividend was a government expenditure that competed
with other government expenditures. In addition, all
windfall revenue would be available for spending. It
appeared that the POMV payout acted as a spending limit
because the payout was limited to the amount of the deficit
but the legislature could spend more. The lack of spending
constraints inherent in the bill currently existed. He
emphasized that any rules that limited spending for any of
the plans cannot "truly control spending." He contended
that the lack of spending constraint was therefore, not a
"weakness" in the plan. The plan was more volatile than the
PFPA and SB 114/HB 303 due to the fact that all revenue
continued to flow into the general fund. Lack of oil
revenue was first absorbed by reduction or elimination of
dividends in HB 224 and then employing reserves, which was
common in all plans. He summarized that HB 224 was similar
to SB 114/HB 303 in the manner GF revenue was enhanced via
a payout from earnings but did not shift volatility. The
major differences were not prioritizing dividend payout and
varied the dividends amount on the long-term health of
reserves rather than royalty revenue in the short-term.
Dividends would not increase if oil prices spiked.
3:09:13 PM
Representative Guttenberg wanted to see all of the
mechanisms embedded in the plans in the models.
Vice-Chair Saddler believed that HB 224 "rationalized cash
flow" by making the dividend a "regular part of state
spending" and linked the dividend to spending. He thought
the plan made more "net sense" from an accounting
viewpoint.
3:11:09 PM
Co-Chair Neuman asked whether the public could weigh in on
how the legislature spent money. He felt that if the
legislature had to use dividends to pay for government the
public should have an "opportunity" to determine how their
dividend was spent. He thought that departments could
adjust its budgets to accommodate the plan. He was looking
for new options to help persuade public opinion. Mr. Teal
thought HB 224 was a good option and clearly connected the
dividend to the budget process. He voiced that currently
"money appeared to fall out of the sky" eventhough the
dividend was appropriated. The dividend was a government
check similar to any other government check. The dividend
competed with every GF expenditure. He discerned that once
the public understood the connection they will weigh in on
budgetary items. He cautioned to "be careful what you ask
for."
3:15:24 PM
Co-Chair Neuman declared that none of the plans created
"new money." He was thinking of a program similar to the
PFD "Pick, Click, and Give" program except that citizens
would choose the state agency and dedicate their dividend
amount to fund a program such as K-12 education. Mr. Teal
responded that "he was thinking in more general terms" and
thought something like that" was possible.
3:16:59 PM
Mr. Teal pointed to slide 16: "Decision Point." He
explained that the diagram included production taxes,
royalties, and less volatile taxes in boxes. He pointed to
the first decision whether the revenue should be deposited
into the ERA or GF, which represented a choice between the
stability of a fixed draw or less stable POMV draw. He
noted that both plans made the choice. The PFPA placed the
money in the ERA versus the POMV plans that deposited
revenues into the GF. He moved to the second choice:
whether to place royalties into the PF principle. He
reminded the committee that a minimum of 25 percent of
royalties was deposited into the GF via mandate. The real
question was whether the legislature chose to save and
harvest simultaneously. He indicated that the costs were in
the tens of millions of dollars. He emphasized that the
next decision of payout was the first very critical
decision. He indicated that the tradeoff was between
favoring a "forward looking manually adjusting fixed draw
that promised greater stability" or "a backward looking
self-adjusting draw" offering decreased stability. A key
element of the PFPA was a spending restraint under high oil
prices. The POMV's weakness in spending restraints was
overcome by placing a limit on the draw. The variable POMV
payout rate could be adjusted (lower payout) to favor the
long-term. However, in order to address short-term deficits
decisions regarding how to fill the gap through reduced
spending, revenue generation, or reliance on reserves were
necessary. The longer the legislature waited to act the
lower the reserves and the higher the risk of failure. He
added that inaction drained reserve balances and diminished
the choices on "the amount of payout" necessary to fill the
deficit. He spoke of another critical choice: the amount
and source of dividends. He noted that the interest earned
on inflation proofing was spendable. However, higher
dividends lead to lower reserves and a higher risk of
"unfillable" deficits. Money spent on dividends was "gone."
He notified the committee that higher dividends were the
"critical element in determining what the reserve levels"
were and the reserve level determined the risk of the plan.
He communicated that another trade off related to dividends
was the amount of the dividend and its connection to the
economy. He cautioned that lower dividends was better for
the state treasury but not necessarily for the economy. He
suggested a plan that did both; issue dividends based on a
certain percentage of royalties reflecting the short-term
and included a provision that increased dividends based on
the long-term health of the treasury. He stressed that
every decision had a "trade-off and every trade-off had a
sweet spot." He stated that "deciding what to do with the
money that remained after the deficit was filled and after
dividends were paid was probably not worth talking about."
He suggested that the legislature establish rules or leave
the decisions to future legislatures.
3:24:23 PM
Mr. Teal referred to his excel spreadsheet model [The model
was a real time interactive computer projected model and
was not distributed as backup]. He reported that the model
used the official revenue forecast data. He explained that
the model assumed that any remaining deficit was first
filled through the CBR and then the ERA because the money
had to be produced from "somewhere" if it was budgeted. He
noted that unplanned draws were shown in red. The base of
the model was the current budgeting system or status quo.
He pointed to the unplanned draws from the ERA in the model
that occurred in FY 19 after the CBR was exhausted. The
deficit was then filled with expenditures for the ERA until
it vanished in FY 21 or FY 22. Earnings would continue to
be spent but were not enough to cover expenditures. The
only option would be to cut the budget, which currently
amounted to $2.5 billion.
Co-Chair Thompson guessed that there would be no dividend
distribution at the point he just described. Mr. Teal
answered in the affirmative because the system "was broken"
at that point. Mr. Teal continued that there were several
options including cutting inflation proofing that filled
the gap until 2025. He modeled cutting dividends instead of
inflation proofing when the ERA draws began. The scenario
resulted in rapidly drawing down reserves and the system
broke down again within two or three years. He noted that
the scenarios he modeled were based on a price of $50 per
barrel of oil. He changed the model to $30 per barrel of
oil. He showed that the reserves would be exhausted, the
dividends and inflation proofing would be eliminated, and
the plan would be broken by 2030. He summarized that the
scenarios were the status quo options. He mentioned that
many variables and choices existed with the status quo, but
continuing with the status quo wasn't considered a plan.
3:31:42 PM
Mr. Teal discussed the model for the governor's plan. He
illustrated what dividends were set at 50 percent of
royalties, which amounted to a range of $700 to $900. He
pointed out that under the PFPA revenues fell because the
plan diverted royalties and production tax from the GF to
the ERA and produced the Sustainable Draw. He demonstrated
that the draws from reserves were necessary to fill the
budget deficit that still remained. After the CBR vanished
unplanned draws from the ERA were necessary to fill the
gap. He pointed to the red bars signifying the unplanned
draws. He stated that the red bars did not designate
failure it indicated that the rules were being broken. He
deduced that the plan failed the "real value" test due to
the unplanned draws from the ERA. The unplanned draws
resulted in the PF balance not growing fast enough to keep
pace with inflation. He noted that the governor wanted the
plan to keep pace with inflation and the model showed that
it failed and therefore, failed the real value test. He
showed that reducing the draw did not help and resulted in
a larger unplanned draw.
Co-Chair Thompson indicated that the committee needed to
wrap up and would continue at a later date.
Mr. Teal invited members and other legislators to come to
his office to further discuss the model.
HB 224 was HEARD and HELD in committee for further
consideration.
HB 245 was HEARD and HELD in committee for further
consideration.
HB 303 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson //.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2 22 16 HFC Comparison of Re-Plumbing Plans.pdf |
HFIN 2/22/2016 1:30:00 PM |
|
| Cost of Delay narrative (3.4.16).pdf |
HFIN 2/22/2016 1:30:00 PM |
HB 245 |