Legislature(2009 - 2010)HOUSE FINANCE 519

02/16/2010 01:30 PM FINANCE

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01:36:40 PM Start
01:37:47 PM Alaska Mental Health Trust Authority Board of Trustees Confirmation Hearing:
01:51:20 PM HB312
03:09:05 PM HB319
03:51:16 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Confirmation Hearing: Alaska Mental TELECONFERENCED
Health Trust Authority Board of Trustees
Heard & Held
Moved CSHB 319(FIN) Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 312                                                                                                            
     "An Act authorizing an advisory vote on use of Alaska                                                                      
     permanent fund earnings for an in-state natural gas                                                                        
     pipeline; and providing for an effective date."                                                                            
REPRESENTATIVE MIKE CHENAULT,  discussed the intention of the                                                                   
legislation. The bill would put  up for an advisory vote from                                                                   
the  public  the   question  of  using  the   permanent  fund                                                                   
earnings, after  dividends were paid  and the fund  was fully                                                                   
inflation proof,  to offset the  cost of an in-state  natural                                                                   
gas pipeline.  Holding an advisory vote would  be informative                                                                   
for the creation of a financing  plan for state participation                                                                   
in an in-state  line. He felt  that the issue was  timely and                                                                   
that the legislature  should be exploring energy  options. He                                                                   
believed that using the permanent  fund earnings was a viable                                                                   
option. The bill  was drafted to ensure that  dividends would                                                                   
be  paid out  and that  the permanent  fund  continued to  be                                                                   
inflation proof, prior to using the earnings.                                                                                   
1:51:20 PM                                                                                                                    
Representative Chenault  believed that it was  important that                                                                   
state  be directly  involved  in the  construction  of a  gas                                                                   
pipeline.  He asserted  that the gasline  would create  jobs,                                                                   
provide a  long term  source of  energy, and create  economic                                                                   
Co-Chair  Hawker communicated  that  existing statute  stated                                                                   
that the  payout of dividends  may not exceed more  than half                                                                   
of the earnings reserve. He expressed  concern that, by using                                                                   
the other half of the reserve  to fund the gasline, the state                                                                   
would  not have  enough to  pay out  dividends the  following                                                                   
year. He thought  that the consequences of using  the reserve                                                                   
should be made clear to the public.                                                                                             
1:55:01 PM                                                                                                                    
Representative  Chenault admitted  that he  was not  familiar                                                                   
with the methodology  used to calculate the  dividend amount.                                                                   
He maintained  that the question  needed to be  addressed and                                                                   
that the  conversation concerning  using the reserve  to fund                                                                   
the pipeline  was necessary. He  thought that a  well crafted                                                                   
question  should be  put the  people.  Alternatively, a  bond                                                                   
could be an option.                                                                                                             
1:56:11 PM                                                                                                                    
Co-Chair Hawker  understood that the  intent was to  gage the                                                                   
receptivity  of the public.  He thought  the question  should                                                                   
state: In addition to permanent  fund dividends and inflation                                                                   
proofing; should a portion of  the permanent fund earnings be                                                                   
used for the development of an in-state gas pipeline.                                                                           
1:57:36 PM                                                                                                                    
Representative  Chenault agreed that  the question  should be                                                                   
crafted  skillfully, in  order to  convey to  the public  the                                                                   
intention that the funds would  be used to support a gasline.                                                                   
He strongly believed that the  state has been idle concerning                                                                   
the issue  and should  be ready to  be proactive  in creating                                                                   
energy generating projects across  the state. He related that                                                                   
an in-state gasline would create  jobs and create an economic                                                                   
future for  Alaska. He  hoped the  committee would  assist in                                                                   
drafting  language   of  the  question  that   needed  to  be                                                                   
1:59:33 PM                                                                                                                    
Co-Chair Hawker  thought that it  would be a  good diagnostic                                                                   
question to ask  the public, and that a statewide  vote would                                                                   
be informational.  He relayed  that a similar  question could                                                                   
be found in his spring 2009 legislative district survey.                                                                        
Representative  Fairclough wondered if  the state  would help                                                                   
to  maintain  gasline  running  into  Canada,  or  only  line                                                                   
running from Alaska to the Canadian border.                                                                                     
2:02:19 PM                                                                                                                    
Representative  Chenault replied  that the  plan had  been to                                                                   
build an  in-state gas pipeline  to tidewater.  He considered                                                                   
the state's fiduciary involvement  in the construction of the                                                                   
gasline an  investment. If  a line were  to be built  through                                                                   
Canada,  the funds  could be used  to lower  tariffs for  in-                                                                   
state gas usage.                                                                                                                
2:03:19 PM                                                                                                                    
Representative  Fairclough though that  the public  should be                                                                   
aware of  the flexibility  in the language  of the  bill that                                                                   
allowed  the  legislature  to  make the  decision  about  the                                                                   
state's level  of involvement. She believed that  the project                                                                   
would ultimately  be driven by  the private sector,  but that                                                                   
the state may need  to offer incentives in order  to move the                                                                   
gasline forward.                                                                                                                
Representative  Salmon pondered  where the  money would  come                                                                   
from.  He  wondered  if  the   formula  that  calculated  the                                                                   
permanent fund would need to change.  Representative Chenault                                                                   
replied  that occasionally,  excess  earnings were  available                                                                   
from  the  earnings   reserve,  and  those  funds   would  be                                                                   
available   to  fund  the   project.  Representative   Salmon                                                                   
wondered if the  funds taken from the earnings  reserve would                                                                   
be  deposited  immediately  into  an  account  for  the  sole                                                                   
purpose of the  funding the project. Representative  Chenault                                                                   
replied  that that  would be  the  next step,  if the  public                                                                   
majority  approves.  He  emphasized  that  the  bill  was  an                                                                   
option, similar  to other plausible  bonding options,  if the                                                                   
project was to move forward, and  a capital need was created,                                                                   
the state could chose then whether or not to invest.                                                                            
2:06:55 PM                                                                                                                    
Representative Austerman  thought that ambiguity  as to where                                                                   
the gasline was going to go in  the state would be removed by                                                                   
including  "tidewater"  in  the language.  He  addressed  the                                                                   
$178,000 million the state had  spent on pipeline studies. He                                                                   
felt that  the state should  have a voice  in the  process to                                                                   
assure a return  on the investment. He questioned  the use of                                                                   
the  earnings reserve.  He thought  that  the permanent  fund                                                                   
could be used as  an asset that covered a bonding  issue, and                                                                   
allowed  the state  to  build  the gasline  independently.  A                                                                   
tariff  could   be  charged,  which  would   reimburse  state                                                                   
expenditures back into the permanent fund.                                                                                      
Co-Chair Stoltze  informed the  committee that during  the HB
44 floor debate of 2009, a floor  amendment by Representative                                                                   
Doogan removed the reference to  authorize the permanent fund                                                                   
to  make  in-state  energy  investments.  Concerns  had  been                                                                   
discussed about the legislature  directing investment policy.                                                                   
2:10:05 PM                                                                                                                    
Representative Chenault  believed the $178,000  was the total                                                                   
amount  spent over  several years  on all  gas projects,  the                                                                   
majority of which went to the Canadian pipeline project.                                                                        
2:10:46 PM                                                                                                                    
Representative  Austerman  requested   documentation  of  the                                                                   
amount  spent to date  on the  gasline. He  recalled the  way                                                                   
members  of the committee  had  voted on HB  44, but  thought                                                                   
that   public   perspective   could   provide   a   different                                                                   
Representative  Gara  asked  if  a  representative  from  the                                                                   
Alaska Permanent  Fund Corporation (APFC) would  be available                                                                   
to provide an  analysis of the potential impact  on the fund.                                                                   
Co-Chair Stoltze  replied yes.  Representative Gara  wondered                                                                   
if the  formula used to  determine the dividend  incorporated                                                                   
the amount in  the earnings reserve. Representative  Chenault                                                                   
responded that the dividend could be affected.                                                                                  
Representative  Gara said that  Harry Noah, In-state  Gasline                                                                   
Project  Manager, had  told the committee  that the  cheapest                                                                   
gas would come  from a big pipeline. Likewise,  a smaller in-                                                                   
state line would deliver more  expensive gas. He thought that                                                                   
the state  should opt for  the gasline that produced  cheaper                                                                   
2:13:35 PM                                                                                                                    
Representative Chenault agreed  that a bigger line, pushing a                                                                   
bigger  volume, would  be less  expensive than  a small  line                                                                   
pushing a  small volume. He felt  that the crux of  the issue                                                                   
was; was  it going  to take communities  along the  rail belt                                                                   
losing  the  energy to  heat  their  homes before  the  state                                                                   
decided that the wait for in-state gas was over.                                                                                
Representative  Gara requested  information  from experts  on                                                                   
the  gasline  issue  before  the  legislation  moved  out  of                                                                   
committee. Co-Chair Stoltze thought  that gasline experts had                                                                   
been informed  of the meeting. Representative  Gara felt that                                                                   
the  issue was  of  great  cost to  the  state.  He felt  the                                                                   
experts should  be present  when the  decision was  made. Co-                                                                   
Chair Stoltze opined that there  were no representatives from                                                                   
the  Department of  Administration  present  at the  meeting.                                                                   
Representative Gara  expressed concern that gas  prices would                                                                   
be  higher while  the state  waited for  the big  line to  be                                                                   
built, and consumers  may end up being locked in  to high gas                                                                   
prices for  the next  20 years,  all before determining  that                                                                   
gas could possibly come from a lower priced project.                                                                            
2:16:47 PM                                                                                                                    
Representative   Chenault  replied   that  there  were   many                                                                   
unknowns. He added  that for years legislators  had worked on                                                                   
incentives  for  a  Cook Inlet  gasline.  The  Department  of                                                                   
Natural Resources  study reported 1.8 trillion  cubic feet of                                                                   
gas left. He believed  that the majority of the  easy gas was                                                                   
gone from  Cook Inlet.  An issue  out of  the control  of the                                                                   
state was the critical habitat  for the Beluga Whale. Bonding                                                                   
authority was  being written into legislation  and discussed,                                                                   
tax  credits  had been  worked  on  and passed,  and  storage                                                                   
issues had been addressed to ensure  that the rail belt had a                                                                   
supply  of  gas.  All  energy   opportunities  needed  to  be                                                                   
examined in order  to decide which project would  go forward.                                                                   
He  reiterated that  the goal  was  economic development  and                                                                   
long term sustainability.                                                                                                       
2:20:41 PM                                                                                                                    
Co-Chair Hawker  reminded that the legislation  called for an                                                                   
advisory  vote  in order  to  gauge  the public  climate.  He                                                                   
warned that  it had had become  a question of  more expensive                                                                   
gas or no gas, and that the urgency was growing.                                                                                
Representative  Kelly  said  that  the state  could  have  10                                                                   
billion in the bank by the end  of 2010. A choice that needed                                                                   
to be  made was where  to spend the  money. He asserted  that                                                                   
the money  should not be used  to expand the  state operating                                                                   
2:23:47 PM                                                                                                                    
Representative  Kelly continued  that the  state had  located                                                                   
the gas and now the line should  be built. He stated that the                                                                   
funds  should be  used  to build  an in-state  gasline  while                                                                   
simultaneously   taking   care    of   infrastructure   needs                                                                   
throughout the state.                                                                                                           
Representative  Fairclough supported  that process  of asking                                                                   
the questions,  but thought that  ultimately, the  ability to                                                                   
negotiate contracts  could be  reduced by the  competition in                                                                   
the free market.                                                                                                                
2:27:42 PM                                                                                                                    
Representative  Chenault  voiced  his support  for  the  free                                                                   
market.  He communicated  his  hope  that a  private  company                                                                   
would approach  the state to build  and pay for  the gasline.                                                                   
The state would  be responsible in the end to  pay the tariff                                                                   
costs to  ship the  gas. The  big line  could be the  state's                                                                   
best opportunity.  He did not  think that examining  in-state                                                                   
gas needs  had  an effect  on a big  line. The  big line  was                                                                   
already  guaranteed to  provide  off-takes  for in-state  gas                                                                   
usage. If the state chose to build  a bigger line it runs the                                                                   
risk of  incurring treble  damages in the  AGIA process.   He                                                                   
did not think that  it would be prudent to slow  the big line                                                                   
process down, but  that the residents of Alaska  needed to be                                                                   
aware of  other options for natural  gas should the  big line                                                                   
project  shut  down.  An  advisory  vote  was  the  necessary                                                                   
informative  step needed  to inform  the  legislature of  the                                                                   
will of  the people. He emphasized  that the State  of Alaska                                                                   
should provide  the permits and  the right of ways,  and then                                                                   
get out  of the  way, and  let the private  sector build  the                                                                   
2:31:17 PM                                                                                                                    
Representative  Gara thought  that initially  investing  in a                                                                   
big line could be an option.                                                                                                    
Representative  Chenault   agreed  that  many   options  were                                                                   
available to the state. Perhaps,  if the state invested in 20                                                                   
percent of the project, it would become more feasible.                                                                          
2:34:09 PM                                                                                                                    
Representative Gara  agreed that the state should  not make a                                                                   
financial  commitment  yet.  He   felt  that  more  would  be                                                                   
revealed within the  next few years that would  aid the state                                                                   
making the decision. Representative  Chenault maintained that                                                                   
the  state needed  to  be ready  to move  on  the issue  when                                                                   
Vice-Chair Thomas  felt that voters outside of  the rail belt                                                                   
would need incentive to vote "yes"  on the project. He feared                                                                   
a divide between urban and rural communities.                                                                                   
Representative Chenault agreed  that that was a concern. But,                                                                   
in the  long term,  what projects were  out there  that would                                                                   
provide for the Alaskan economy.  What could a pipeline do///                                                                   
He spoke  of things  provided to  rural Alaska. Rural  Alaska                                                                   
would benefit from an in-state gasline.                                                                                         
2:37:26 PM                                                                                                                    
Vice-Chair  Thomas wondered  what would  happen when  the gas                                                                   
runs out.                                                                                                                       
Representative  Kelly  stated   that  where  there's  a  will                                                                   
there's a  way. He said the  Anchorage to Fairbanks  line was                                                                   
obvious. The  determination need to  be made as to  which way                                                                   
to go after that. TransCanada  had laid out options. He hoped                                                                   
that the  committee could  restate the  question. Where  does                                                                   
the money  come from.  If the right  questions are  not asked                                                                   
the answers are meaningless.                                                                                                    
2:40:40 PM                                                                                                                    
Representative  Chenault  said he  was  open  to options  and                                                                   
discussion   concerning   re-crafting    the   question.   He                                                                   
maintained that  he was concerned  for providing a  future of                                                                   
economic and resource security in the state.                                                                                    
2:42:01 PM                                                                                                                    
Representative Fairclough  felt that the $10  billion thought                                                                   
to be in savings was actually  owed to the retirement system.                                                                   
2:44:33 PM                                                                                                                    
LAURA  ACHEE, DIRECTOR  OF COMMUNICATIONS,  ALASKA  PERMANENT                                                                   
FUND  CORPORATION,  testified  that the  calculation  of  the                                                                   
dividend  would not be  affected. The  most immediate  effect                                                                   
would  be  the 50  percent  test  that limited  the  dividend                                                                   
payment  to no more  that 50  percent of  the balance  of the                                                                   
earnings reserve.  Paying out  in one  year from the  earning                                                                   
reserve  could limit a  future dividend  payment. She  stated                                                                   
that anytime the use of earnings  outside of the dividend was                                                                   
discussed there would be a small impact on the dividend.                                                                        
Representative Austerman  wondered if using the  PFD to build                                                                   
the pipeline,  and reimbursing the fund through  the charging                                                                   
of a tariff, was plausible. Ms.  Achee replied that the board                                                                   
of trustees was  free to invest the PFD in anything  that met                                                                   
the  requirements   for  risk  return  and   diversification.                                                                   
Funding the  entire pipeline  could compromise the  statutory                                                                   
requirement of maintaining a diverse portfolio.                                                                                 
Representative Austerman  asked if an answer  in reference to                                                                   
investing  in  the  pipeline could  be  obtained.  Ms.  Achee                                                                   
replied  that  as  with  any project,  before  the  board  of                                                                   
trustees would need to see a comprehensive project plan.                                                                        
2:47:52 PM                                                                                                                    
Representative  Fairclough  asked   about  the  recent  asset                                                                   
losses  due to the  weak economy.  She asked  how the  losses                                                                   
would affect  individual PFDs. Ms.  Achee said that  FY09 was                                                                   
the  first  time  there  had been  more  losses  than  gains.                                                                   
Representative  Fairclough asked how  the proposal  to invest                                                                   
in a  pipeline would  affect the state's  ability to  pay out                                                                   
dividends.  Ms. Achee  replied that if  the fund  experienced                                                                   
statutory  net losses  due to legislature  choosing  to spend                                                                   
earning from the earning reserve  for the pipeline, there was                                                                   
a  possibility that  dividends  might not  be  paid out.  She                                                                   
stressed that  in any  year, anything  could happen.  In 2003                                                                   
the earnings reserve  was taken, by legislative  action, down                                                                   
to  $100  million,   and  everything  else  was   swept  into                                                                   
principal. The  next year the  corporation paid  the dividend                                                                   
and  inflation proofed,  and still  had $800  million in  the                                                                   
earnings  reserve. She  concluded  that it  was difficult  to                                                                   
tell what  would happen  from year-to-year,  but it  could be                                                                   
said with certainty that if the  balance was zero there would                                                                   
be no way to pay out anything at all.                                                                                           
2:51:17 PM                                                                                                                    
Co-Chair  Stoltze  asked about  public  corporation  failures                                                                   
that have  been linked to  legislative activity.  He wondered                                                                   
if the  board was  concerned about  bringing the  legislature                                                                   
into investment decisions.                                                                                                      
Ms.  Achee replied  that the  legislature set  the statue  by                                                                   
which  the  board invests  and  the  board  would do  as  the                                                                   
legislature wished.                                                                                                             
Co-Chair Hawker  noted that in  recent history the  board has                                                                   
let their opinion  be known as to what legislation  should be                                                                   
passed. Ms.  Achee agreed that  the board had been  active in                                                                   
the past to that end.                                                                                                           
Representative  Gara  understood   only  50  percent  of  the                                                                   
earnings  reserve could  be  used to  pay  out dividends.  He                                                                   
asked how  much would need to  be in the earnings  reserve to                                                                   
pay out a $1500 dividend. Ms.  Achee said she would need time                                                                   
crunch  the  numbers. She  said  that  a $1200  dividend  was                                                                   
anticipated in 2010.                                                                                                            
Representative Gara believed that  if a substantial amount of                                                                   
money from  the earnings reserve  was spent for  the pipeline                                                                   
dividend payout would be affected.                                                                                              
Ms. Achee noted that in the 1980s  the fund was significantly                                                                   
smaller than  it was now.  In 1989 the  fund was only  at $10                                                                   
billion, yielding  dividend of $200-$300 per  person. She did                                                                   
not feel that  the ending reserve balances of  the 1980s were                                                                   
comparable to  present day balances. She reiterated  that any                                                                   
time money  was taken  out of the  earnings reserve  the nest                                                                   
year's dividend was potentially at risk.                                                                                        
2:56:22 PM                                                                                                                    
Ms. Achee  said that the dividend  was calculated off  of the                                                                   
entire  earnings  of the  corpus  and the  earnings  reserve.                                                                   
Statutory net  income was  used and not  the rate  of return.                                                                   
Statutory  net income  consisted of; the  cash received  from                                                                   
rent on  the properties  the fund  owned, dividends  from the                                                                   
stocks owned  by the  fund, interest from  bond, and  any net                                                                   
gains from the sale of assets.                                                                                                  
Representative  Gara asked  if  the amount  of  money in  the                                                                   
earnings reserve  were reduced, would that impact  the amount                                                                   
of  money  used to  calculate  the  5  year average  for  the                                                                   
dividend.  Ms.  Achee  said yes.  Earnings  in  the  earnings                                                                   
reserve contribute  toward the dividend calculation,  but the                                                                   
earnings that  go into the dividend  are not the same  as the                                                                   
performance earnings that go into the fund.                                                                                     
2:59:14 PM                                                                                                                    
Representative  Austerman  asked to  be  involved in  further                                                                   
examination of the bill outside of committee.                                                                                   
~Merrick  Peirce, Self,  spoke in  opposition of  HB 312.  He                                                                   
expressed concern  that the project proposed  for funding was                                                                   
nebulous. He  stated that  in 2002 the  voters voted  for the                                                                   
all Alaska  gasline from the North  Slope to Valdez.  He felt                                                                   
that if  the legislature  had  funded the law  passed by  the                                                                   
voters the state  would now have a gasline. He  felt that the                                                                   
voice  of  the  voters  had  not   been  represented  in  the                                                                   
3:04:01 PM                                                                                                                    
Co-Chair Stoltze closed public testimony.                                                                                       
Co-Chair    Stoltze    appointed     Representative    Kelly,                                                                   
Representative  Hawker, and  Representative  Foster to  craft                                                                   
potential language for discussion by the committee.                                                                             
Representative Kelly hoped that  a resource would be provided                                                                   
to  aid in  the drafting  of the  language. Co-Chair  Stoltze                                                                   
said that the needs of the drafters would be answered.                                                                          
HB  312  was   HEARD  and  HELD  in  Committee   for  further                                                                   
3:05:47 PM                                                                                                                    
Co-Chair Stoltze                                                                                                                

Document Name Date/Time Subjects
HB 312 ERA balance.pdf HFIN 2/16/2010 1:30:00 PM
HB 312
HB312-OOG-DOE-2-3-10NEW Fiscal Note.pdf HFIN 2/16/2010 1:30:00 PM
HB 312
HB312APF Historical Fund Value.pdf HFIN 2/16/2010 1:30:00 PM
HB 312
HB319 Sponsor Statement (2).pdf HFIN 2/16/2010 1:30:00 PM
HB 319
HB319 Summary of Changes.pdf HFIN 2/16/2010 1:30:00 PM
HB 319
HB319 Sectional.pdf HFIN 2/16/2010 1:30:00 PM
HB 319
HB319 Background.pdf HFIN 2/16/2010 1:30:00 PM
HB 319
Laraine Derr 2010 Confirmation Hearing.pdf HFIN 2/16/2010 1:30:00 PM
Mary Jane Michael 2010 Confirmation Hearing.pdf HFIN 2/16/2010 1:30:00 PM
Carlton Smith 2010 Confirmation Hearing.pdf HFIN 2/16/2010 1:30:00 PM
HB319 Hawker Amendment.pdf HFIN 2/16/2010 1:30:00 PM
HB 319
HB312 Sponsor Statement (2).pdf HFIN 2/16/2010 1:30:00 PM
HB 312
HB 319 Hawker Amendment #2.pdf HFIN 2/16/2010 1:30:00 PM
HB 319