Legislature(2015 - 2016)HOUSE FINANCE 519

02/17/2016 01:30 PM House FINANCE

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01:32:51 PM Start
01:33:49 PM HB224
03:12:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Distribution Flow Charts by David Teal,
Director, Legislative Finance Division
<Above Item Removed from Agenda>
+ Bills Previously Heard/Scheduled 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."                                                                                
1:33:49 PM                                                                                                                    
REPRESENTATIVE   MIKE   HAWKER,  SPONSOR,   introduced   the                                                                    
PowerPoint  presentations:  "HB  224   -  Fiscal  Plan:  The                                                                    
Common-Sense  Solution." He  understood  the serious  fiscal                                                                    
challenge Alaska faced due to  the decline in oil prices. He                                                                    
did not  envy the finance  committee having to close  a $3.5                                                                    
billion  deficit.  He  thought   a  permanent  solution  was                                                                    
Representative   Hawker   turn    to   slide   2:   "Mission                                                                    
        · Long-term balanced budget solution                                                                                    
        · Increasing Permanent Fund balance                                                                                     
        · Responsible and affordable level of future                                                                            
        · Strong budget reserves maintained                                                                                     
        · A simple and common-sense structure                                                                                   
        · No personal income taxes to pay dividends                                                                             
Representative  Hawker  emphasized  the  state  achieving  a                                                                    
long-tern  balanced budget  solution. He  thought the  state                                                                    
could  achieve an  increasing  Permanent  Fund (PF)  balance                                                                    
truly  protecting  the  PF.  He  believed  the  state  could                                                                    
maintain a  system to provide  a responsible  and affordable                                                                    
level of future dividends to  the people of Alaska. He would                                                                    
show  committee  members that  his  solution  would help  to                                                                    
reconnect  Alaskans  to  the budgeting  decisions  that  the                                                                    
legislature made.  He suggested that if  the legislature had                                                                    
to  ask  the  citizens   of  Alaska  to  support  government                                                                    
services   there   would  be   a   direct   result  on   the                                                                    
legislature's ability to pay  continuing dividends. He urged                                                                    
the  maintenance  of  a  strong budget  reserve  to  use  to                                                                    
stabilize the  budget in  the face  of volatile  revenue out                                                                    
flows. He specified that the  approach offered in HB 224 was                                                                    
a very  simple and  straight forward  structure. It  was not                                                                    
complicated  and  did  not offer  anything  really  new.  It                                                                    
respected   the   existing   institutions   in   place   and                                                                    
particularly  respected  legislator  prerogative  in  making                                                                    
future budget  decisions. He furthered  that the  numbers in                                                                    
the  legislation  penciled  out  in a  manner  such  that  a                                                                    
personal  income  tax  would  not  have  to  be  imposed  on                                                                    
Alaskans. He  added that Alaska had  experienced a wonderful                                                                    
run  with the  vast oil  and gas  resources over  many years                                                                    
without  the imposition  of a  personal income  tax. It  had                                                                    
been  an  advantage for  Alaska  and  he  wanted to  see  it                                                                    
1:37:54 PM                                                                                                                    
Representative Hawker explained slide 3: "Structure":                                                                           
        · 4.5 percent statutory endowment from Permanent                                                                        
          Fund earnings                                                                                                         
        · Endowment proceeds first used to balance budget                                                                       
        · Any excess money split between dividends and                                                                          
          savings funds                                                                                                         
        · Savings funds used to stabilize the budget when                                                                       
          revenue swings                                                                                                        
Representative Hawker reviewed the  concept of a 4.5 percent                                                                    
statutory  endowment  from  the   state's  PF  earnings.  He                                                                    
suggested  that members  were  familiar  with the  endowment                                                                    
management  concept  for  the  PF.  The  approach  had  been                                                                    
recommended by the  PF Board of Trustees  to the legislature                                                                    
since about  1998. The Permanent Fund  had resolutions dated                                                                    
in  2003 and  2004 supporting  moving its  management to  an                                                                    
endowment   process.   The   bill    could   not   offer   a                                                                    
constitutional amendment. It was  a statutory approach where                                                                    
each  year 4.5  percent  of the  fund's  value would  become                                                                    
available for appropriation.                                                                                                    
Co-Chair Thompson acknowledged  that Representative Kawasaki                                                                    
had joined the meeting.                                                                                                         
Representative Hawker went on to  explain the second part of                                                                    
the structure  offered in the  legislation. The  bill stated                                                                    
that  the endowment  proceeds  of 4.5  percent  or about  $2                                                                    
billion per  year would have to  be used to pay  the state's                                                                    
debt first. If there was  any excess funding after balancing                                                                    
the budget  it would be  applied to a dividend  program. The                                                                    
bill contained a  mechanism that allowed the  money that was                                                                    
flowing to  the dividend to  be split between  dividends and                                                                    
to the state's savings  accounts - either the Constitutional                                                                    
Budget Reserve  (CBR) or the Statutory  Budget Reserve (SBR)                                                                    
-  to  maintain  those  accounts  at  a  certain  level.  He                                                                    
suggested that money  in savings would be  available to help                                                                    
stabilize  the  state's budget.  He  furthered  that it  was                                                                    
important to  maintain the savings  accounts solely  for the                                                                    
purpose of always  having a resource available in  case of a                                                                    
1:40:39 PM                                                                                                                    
Representative  Hawker scrolled  to  slide 4:  "HB 224  Cash                                                                    
Flow." He relayed that the  graph presented a picture of the                                                                    
bill and the  cash flow path. He pointed to  the upper left-                                                                    
hand corner  showing the principle  value (corpus  value) of                                                                    
the PF.  Next he highlighted  the box denoting  the earnings                                                                    
reserve  account   (ERA).  The  statutory  net   income  was                                                                    
accounted for  every year  in the ERA.  He added  that every                                                                    
penny  in the  ERA could  be appropriated  by a  vote of  21                                                                    
legislators  in  the  House,  11  in  the  Senate,  and  the                                                                    
signature of the governor. He  explained that the purpose of                                                                    
the statutory percent of market  value (POMV) mechanism (the                                                                    
endowment  mechanism) would  only  move 4.5  percent of  the                                                                    
value  of  the  PF  including  the  ERA  each  year  into  a                                                                    
distribution  account  (shown  in  the  purple  box  on  the                                                                    
graph).  At  present there  was  about  $7 billion  or  more                                                                    
dollars  in the  ERA. He  suggested that  $7 billion  of the                                                                    
nearly  $50 billion  PF  could be  spent by  a  vote of  the                                                                    
legislature if  it chose. He  surmised that such  a decision                                                                    
would result  in horrible consequences  to the value  of the                                                                    
PF. The  legislation was about protecting  the fund's value.                                                                    
The idea of the POMV  calculated payout allowed for a steady                                                                    
annual draw that  was less than the long-term  return on the                                                                    
investment of the financial assets  in the PF and inherently                                                                    
inflation  proofed  the  fund.  He claimed  that  all  major                                                                    
endowment funds around the world  used the POMV mechanism in                                                                    
order  to  provide  benefits to  the  beneficiaries  of  the                                                                    
benevolency trust.                                                                                                              
He continued to  explain that each year the  state would put                                                                    
4.5 percent  of the  value of the  fund into  a distribution                                                                    
account. The  money would  be used as  much as  necessary to                                                                    
balance the state's general fund  (GF) budget which included                                                                    
both  of Alaska's  capital and  operating budgets.  He noted                                                                    
that  the  chart  flowed  next   to  the  GF  budget.  After                                                                    
satisfying the deficit  any remaining money would  go into a                                                                    
formula  that  would pay  dividends.  He  reported that  the                                                                    
dividend  formula in  the current  bill proposed  putting an                                                                    
indexed  amount  of  dividends   using  a  relatively  small                                                                    
dividend, minimally $250 per person  indexed up to $2000 per                                                                    
person, but it  would be indexed on the amount  of money the                                                                    
state had in  its savings account balances.  If the balances                                                                    
were  significantly low,  then the  dividend would  be lower                                                                    
and  more   money  would  flow  into   the  state's  savings                                                                    
accounts.  If the  savings accounts  had high  balances that                                                                    
provided  plenty   of  security   and  cushion   for  budget                                                                    
uncertainties,  then  the  state  would pay  a  much  higher                                                                    
dividend and move much less money into the accounts.                                                                            
Representative  Hawker  next  pointed to  the  dotted  lines                                                                    
going from the  CBR and the SBR back to  the GF. The graphic                                                                    
representation  of  the  slide  depicted the  money  in  the                                                                    
savings  accounts always  being available  for appropriation                                                                    
into  the GF  budget  at  the will  of  the legislature.  He                                                                    
reminded  members that  the difference  between the  CBR and                                                                    
the SBR was that the CBR  was established by the vote of the                                                                    
people. The money  that went into the fund came  from all of                                                                    
the  state's   various  settlements   on  tax   claims.  For                                                                    
instance,  when there  had  been administrative  procedures,                                                                    
and  litigation on  major claims  the  resulting funds  went                                                                    
into   the  CBR.   A  three-quarter   vote  of   the  entire                                                                    
legislature  was required  in  order to  spend those  funds.                                                                    
Once money was taken from  the CBR the constitution required                                                                    
that any  excess GF be moved  into the CBR to  replenish the                                                                    
fund  at  the  end  of  the state  budget  cycle.  The  bill                                                                    
maintained  that the  CBR would  be replenished  first, then                                                                    
the remainder would go into  the SBR (accessible with a vote                                                                    
of 21 and 11).                                                                                                                  
Representative  Hawker was  proposing  that the  legislature                                                                    
have a  very serious discussion about  its highest priority.                                                                    
He wondered about the  state's available financial resources                                                                    
to meet that  priority. He posed the  question about whether                                                                    
the highest  priority was the Permanent  Fund Dividend (PFD)                                                                    
or  paying the  state's bills.  The proposal  suggested that                                                                    
paying the  state's bills needed  to be the  state's highest                                                                    
priority. He  opined that  paying all  of the  state's bills                                                                    
meant  meeting all  of the  public services  people expected                                                                    
from  the  state.  He opined  that  schools,  roads,  public                                                                    
safety, and  health and social  services programs  needed to                                                                    
be the  state's first priorities.  Also, when the  state had                                                                    
excess  wealth  it would  continue  to  be shared  with  the                                                                    
people of Alaska.                                                                                                               
Co-Chair Thompson  acknowledged Representative  Cathy Tilton                                                                    
in the audience.                                                                                                                
1:47:40 PM                                                                                                                    
Representative Wilson asked about the  amount that had to be                                                                    
repaid to the CBR.                                                                                                              
Representative Hawker  stated that  in 2015  the legislature                                                                    
appropriated  $3.0   billion  out   of  the  CBR   into  the                                                                    
retirement  fund  accounts   against  the  unfunded  actuary                                                                    
liability. The legislature  also authorized a draw  of up to                                                                    
$500 million for  a deficit in the FY  16 budget. Currently,                                                                    
the state  had a liability  to the CBR  in the amount  of $3                                                                    
billion plus  whatever was ultimately  drawn to fill  the FY                                                                    
16 budget deficit.                                                                                                              
Representative Wilson asked if $10  billion would have to be                                                                    
placed into  the CBR  before any  monies could  be deposited                                                                    
into the SBR.                                                                                                                   
Representative Hawker stated that it  was only the amount of                                                                    
money that the  state had drawn from the CBR  that had to be                                                                    
repaid.  It  was  not a  fixed  number.  The  Constitutional                                                                    
Budget Reserve grew with the  earnings on the money that was                                                                    
in the  CBR as well as  any new deposits that  went into the                                                                    
account from  future settlements.  The legislature  only had                                                                    
to pay the CBR whatever the  amount was on deposit. He would                                                                    
be  providing   additional  information  in   another  slide                                                                    
concerning  how  the  CBR  and  the  CBR  balance  could  be                                                                    
affected by the legislation.                                                                                                    
Representative Gara  complimented Representative  Hawker for                                                                    
his  easy-to-understand  presentation  of  HB  224.  If  the                                                                    
circumstances were  such that $2.5 billion  (or 4.5 percent)                                                                    
did  not cover  the  budget deficit,  he  wondered if  there                                                                    
would be  a minimum $250 PFD  or if a dividend  would not be                                                                    
Representative Hawker  responded that the way  the bill read                                                                    
was  that  if  there  was  not  enough  money  from  the  PF                                                                    
endowment, a dividend  would not be paid. It  was similar to                                                                    
a household  meeting its budget;  bills were paid  first. If                                                                    
the legislature adopted the mechanisms  laid out in the bill                                                                    
the  state would  continue to  have a  PFD program,  to grow                                                                    
balances  in  the CBR,  and  to  grow  balances in  the  PF.                                                                    
However, he felt that the state  would have to be willing to                                                                    
make a couple of difficult  decisions and to maintain fiscal                                                                    
discipline in the future.                                                                                                       
1:51:53 PM                                                                                                                    
Representative  Gattis  appreciated Representative  Hawker's                                                                    
reference to  fiscal discipline.  She wondered  where fiscal                                                                    
discipline  fit into  the  legislation.  She understood  the                                                                    
concept of not having money,  therefore not spending it. She                                                                    
pointed  out that  it was  possible  for the  state to  have                                                                    
money  without having  fiscal discipline.  For example,  the                                                                    
state could  pay for programs  but not payout  the dividend.                                                                    
She wondered how  the state could have  money without having                                                                    
fiscal discipline  and whether  the state could  save itself                                                                    
from itself.                                                                                                                    
Representative   Hawker  stated   that   he  would   address                                                                    
Representative   Gattis'   concerns  as   the   presentation                                                                    
Vice-Chair  Saddler   pointed  out   that  the   system  was                                                                    
predicated  on   fiscal  discipline.  He  opined   that  the                                                                    
legislature  wanted  to  increase GF  spending  which  would                                                                    
result  in the  state not  paying a  dividend. He  liked the                                                                    
linkage proposed  in the legislation  of state  services and                                                                    
1:53:31 PM                                                                                                                    
Representative  Hawker  indicated his  bill  was  part of  a                                                                    
larger fiscal  plan. He suggested  that an  incentive needed                                                                    
to be restored to be  disciplined in the decisions the state                                                                    
made. He indicated that his  fiscal plan concept was simple.                                                                    
He  furthered that  budgeting was  not that  complicated. He                                                                    
thought that  the legislature confused  the public  at times                                                                    
as well as itself. He turned to slide 5: "Fiscal Plan":                                                                         
        · 4.5 percent statutory endowment from Permanent                                                                        
          Fund earnings used to balance budget                                                                                  
        · Significant up-front reduction in government                                                                          
        · Some new up-front taxes to share economic burden                                                                      
          of solution                                                                                                           
        · $1.4 billion appropriated in FY16 used to                                                                             
          guarantee dividends for next two to four years                                                                        
        · Future dividend amounts depend on legislative                                                                         
          decisions to hold spending down                                                                                       
Representative Hawker  specified that there were  four items                                                                    
to consider in balancing  the state's budget and determining                                                                    
the level of appropriation. One  of the questions to ask was                                                                    
how  much the  state  needed  and wanted  to  reduce in  the                                                                    
current budget.  The next question  was about the  number of                                                                    
new taxes  to impose.  The third question  concerned raising                                                                    
new revenues. The  last question had to do with  how much of                                                                    
the PF earnings  or money from savings was  required to fill                                                                    
the budget gap.  Legislators had the authority  to choose to                                                                    
balance  the entire  state budget  from savings  accounts of                                                                    
which   there  was   enough  currently.   He  thought   that                                                                    
legislators  recognized  that  fulfilling  the  budget  from                                                                    
savings was  not the right thing  to do. He argued  that the                                                                    
legislature had  to look for  something that created  a more                                                                    
sustainable  means  of  dealing   with  the  state's  fiscal                                                                    
Representative   Hawker  encouraged   members  to   consider                                                                    
adopting  a  4.5  percent statutory  PF  earnings  endowment                                                                    
draw.  He added  that  later in  the  presentation he  would                                                                    
detail how  his plan would  work. He also  urged significant                                                                    
upfront  reductions in  government  spending. He  emphasized                                                                    
that the  state was  spending at  an unsustainable  rate. He                                                                    
had   used   a  different   approach   than   that  of   the                                                                    
administration  and its  consultants to  determine the  need                                                                    
for about  $1 billion of reductions  in government spending.                                                                    
Independently, he  had concluded that about  $900 million to                                                                    
$1 billion needed to be  cut from the state's current budget                                                                    
in order to meet  expenditures while maintaining a sustained                                                                    
level of government based  on anticipated revenues. Revenues                                                                    
came  in  primarily from  oil  and  gas and  the  investment                                                                    
returns from the PF. He  told of legislators in 1979 setting                                                                    
aside some  money into a  rainy day  fund. At the  time, the                                                                    
state had a large amount  of money on hand generating income                                                                    
that could  ultimately replace the  state's reliance  on oil                                                                    
and  gas revenues  from the  North  Slope. In  the past  the                                                                    
state  had  tremendous  wealth   enabling  the  majority  of                                                                    
people's  fiscal requests  to  be  satisfied. However,  with                                                                    
declining  oil production  the state's  fiscal circumstances                                                                    
had  changed.  The  state  would  have  to  make  some  very                                                                    
difficult  decisions  concerning   spending  reductions.  He                                                                    
added that it would be  important to inform the public about                                                                    
why  changes  were being  made  especially  since the  state                                                                    
would have to take money from  the PFD. He opined that every                                                                    
citizen  of Alaska  would want  to  see government  spending                                                                    
reductions before  they would want  to sacrifice  losing all                                                                    
or a portion of their PFD.                                                                                                      
Representative Hawker  asserted that,  in general,  the vast                                                                    
majority of  people in Alaska  would oppose using the  PF to                                                                    
fund government until the  state demonstrated its commitment                                                                    
to   reducing  the   size  of   government.   Many  of   his                                                                    
constituents understood the need  to reduce the dividend but                                                                    
expected  the state  to reduce  the size  of government.  He                                                                    
also thought new  upfront taxes were necessary  to share the                                                                    
state's economic  burden in the solution.  He furthered that                                                                    
sharing the burden was more  equitable than taking it out on                                                                    
one industry  or cohort.  He thought  everyone should  be at                                                                    
the  table. He  reiterated  that upfront  reductions and  an                                                                    
added  level of  taxes would  make for  difficult decisions.                                                                    
His financial model showed taking  about $900 million out of                                                                    
the budget.                                                                                                                     
2:00:33 PM                                                                                                                    
Co-Chair Neuman  wanted to discuss what  the legislature had                                                                    
already  done to  reduce the  budget. He  relayed that  over                                                                    
$2.4 billion had been reduced  from the budget over a 4-year                                                                    
period, about a  30 percent reduction. In  the previous year                                                                    
over  $440  million  was  reduced  from  the  appropriations                                                                    
budget. He commented  that he was unsure  of what additional                                                                    
reductions  could be  made, as  the  legislature had  looked                                                                    
diligently. He remarked that  the legislature would continue                                                                    
to  look for  further  reductions.  He asked  Representative                                                                    
Hawker what  budget baseline he  used in creating  his plan.                                                                    
In the previous year the budget equaled about $5.2 billion.                                                                     
Representative   Hawker  stated   that   he  would   address                                                                    
Representative  Neuman's  question  in the  next  slide.  He                                                                    
continued  to discuss  the fiscal  plan encouraging  members                                                                    
incorporate it  into budget decisions  in the  current year.                                                                    
He highlighted  reviewing the  use of  the PF  endowment and                                                                    
the continued reduction of expenditures.  He opined that the                                                                    
public did not  think there were enough  reductions made. He                                                                    
relayed that  what legislators did  not see in  the hallways                                                                    
of the Capitol building was  the silent majority of Alaskans                                                                    
at  home  that wanted  more  reductions  in the  budget.  He                                                                    
relayed that in  his 14 years of service  in the legislature                                                                    
he  had  seen a  steady  and  consistent communication  from                                                                    
Alaskans  encouraging budget  decrements. He  suggested that                                                                    
the  legislature  needed  to  be  listening  to  the  silent                                                                    
Alaskans. He  continued that in  making the transition  to a                                                                    
new  budgeting  priority, he  thought  it  was important  to                                                                    
guarantee  that  the  people of  Alaska  receive  a  certain                                                                    
dividend for a certain period of  time. At the same time the                                                                    
state would need to demonstrate  its commitment to increased                                                                    
fiscal responsibility.                                                                                                          
Representative Gara  had worked under four  separate sets of                                                                    
finance    chairs   including    Representative   Austerman,                                                                    
Representative      Thomas,      Representative      Stolze,                                                                    
Representative Hawker,  and the  current finance  chairs. He                                                                    
stated  that  every time  the  finance  chair presented  the                                                                    
budget to  the floor the  speeches included a  comment about                                                                    
the  budget being  a  responsible and  lean  budget. He  had                                                                    
voted for  some of  the budgets. Currently,  the terminology                                                                    
being used was  that the budgets referred  to as responsible                                                                    
and  lean that  the previous  several finance  chairs passed                                                                    
were  considered blotted  in  the current  day  and that  $1                                                                    
billion needed to  be cut. He did not think  that both could                                                                    
be true. He  agreed that there had been  significant cuts to                                                                    
the budget. He thought a poll  could be made to say whatever                                                                    
someone  wanted it  to  say. The  poll he  had  done in  his                                                                    
district favored cutting only  waste. He thought what people                                                                    
meant when they advocated cuts was to cut waste.                                                                                
2:05:22 PM                                                                                                                    
Representative Hawker responded that  he had conveyed in his                                                                    
presentation the  public's perception of the  state having a                                                                    
bloated budget. It  was a very real thing to  people for the                                                                    
state to  take money out  of their pockets and  reduce their                                                                    
PFD.  He   asserted  that  in   order  to   change  people's                                                                    
perception of  the state having  a bloated budget  the state                                                                    
would have to demonstrate a  certainty. He recalled giving a                                                                    
couple of budget  speeches on the floor  using language that                                                                    
included benevolency  and frugality.  The one word  that was                                                                    
left out of  his floor speeches and of  other floor speeches                                                                    
was  sustainable. The  legislature had  been aware  that the                                                                    
level  of spending  by  the state  was  not sustainable.  He                                                                    
recalled a robust  conversation concerning sustainability on                                                                    
the House Floor  in the previous year. He  remarked that the                                                                    
world  had changed.  Oil fields  did not  last forever.  The                                                                    
state's  production  had  declined from  about  1.2  million                                                                    
barrels of oil per day to  below 500 thousand barrels of oil                                                                    
per day since  he and Representative Gara  had been elected.                                                                    
He also  mentioned a world  glutton oil that Alaska  had not                                                                    
seen and  Alaska's oil prices had  dropped substantially. He                                                                    
mentioned looking  at $30 per  barrel of oil, the  world had                                                                    
changed,  and Alaska's  budgeting  process  had changed.  He                                                                    
thought that the legislature had  done the right thing under                                                                    
the  circumstances  to the  best  of  its ability.  However,                                                                    
today something had to be done differently.                                                                                     
Representative  Gattis  did  not  believe  that  polls  were                                                                    
necessary for Alaskans to understand  that the state was not                                                                    
taking in  the same  amount of money  that it  was spending.                                                                    
She advocated cutting  the budget to a point  that the state                                                                    
could afford. She appreciated the  presenter speaking to the                                                                    
subject because it was the  elephant in the living room. She                                                                    
reaffirmed that the  state needed a budget  it could afford.                                                                    
She  mentioned that  in subcommittees  there were  a lot  of                                                                    
things that  people wanted.  It would be  a struggle  as the                                                                    
budgets are  closed out  because in the  past the  state had                                                                    
given  a  significant  amount  to   a  lot  of  people.  She                                                                    
furthered that the struggles would  continue as time passed.                                                                    
However, it narrowed down to  considering what the state had                                                                    
coming  in and  going  out. She  thought  it was  relatively                                                                    
2:09:13 PM                                                                                                                    
Representative Edgmon  had a  different philosophy  from the                                                                    
previous speaker. He believed  that in making very difficult                                                                    
choices the  legislature should be  thinking about  what the                                                                    
state should look like in the  future. It was not just about                                                                    
spending and  cutting, but also  about what  the legislature                                                                    
envisioned  for its  great state  in the  next 50  years. In                                                                    
going forward  the legislature would have  to make decisions                                                                    
about what  programs and services were  essential. He opined                                                                    
that choices needed  to be made along the  way. He supported                                                                    
Representative  Gattis'  comments  about  having  to  reduce                                                                    
spending  and the  size of  government. He  relayed that  he                                                                    
thought   it  was   more  complicated   than  just   cutting                                                                    
government based  on the part  of Alaska he  represented. He                                                                    
had to consider the services  that were important in keeping                                                                    
his smaller communities alive.                                                                                                  
Representative  Hawker commented  that although  legislators                                                                    
represented  different areas  of  the  state with  different                                                                    
needs,  universally he  surmised that  everyone agreed  that                                                                    
there was one  economic pie that was only so  big. The state                                                                    
had to  figure out how  to live  within its means.  He noted                                                                    
that Commissioner Hoffbeck was in the audience.                                                                                 
2:11:20 PM                                                                                                                    
Representative Hawker  continued to  talk about slide  5. He                                                                    
wanted  to further  discuss the  importance of  guaranteeing                                                                    
the people of Alaska a  continued dividend at some level for                                                                    
a  transition period  while the  state demonstrated  that it                                                                    
was getting  its house in  order, figuring out how  it could                                                                    
live within its means. Some of  the things to watch were the                                                                    
low oil  prices and  whether they were  systemic or  if they                                                                    
would  have a  quick  recovery. The  legislature could  make                                                                    
decisions in  the immediate or foreseeable  and coming years                                                                    
based on the facts and circumstances of those years.                                                                            
Representative Hawker  noted that  it was  a data  point for                                                                    
everyone to keep in mind  that in the previous year's budget                                                                    
(FY 16)  there was $1.4  billion set aside for  paying PFD's                                                                    
in  the coming  fall. In  other  words, each  year when  the                                                                    
legislature passed  a budget it forward  funded the dividend                                                                    
for the  following year. He explained  that the supplemental                                                                    
budget bill that was offered  by the administration repealed                                                                    
that authorization. If the supplemental  bill (HB 293/SB 167                                                                    
-  Short   Title:  APPROP:   SUPP/CAP/OTHER  APPROPRIATIONS,                                                                    
Section 10) was passed the  entire dividend in the amount of                                                                    
$1.4  billion for  the  coming fall  would  be repealed.  He                                                                    
asked  the committee  to think  about doing  something other                                                                    
than  repealing the  dividend. He  suggested reappropriating                                                                    
the $1.4 billion  and spreading it out over the  next 2 to 4                                                                    
years. For  example, if  the state was  to spread  the money                                                                    
over 2 years  every Alaskan would be  guaranteed $1 thousand                                                                    
in  the  current  year  and   the  following  year.  In  the                                                                    
meantime, the  legislature could continue to  make decisions                                                                    
based  on  facts  and circumstances  and  the  legislature's                                                                    
abilities to get  the state living within its  means. If the                                                                    
$1.4 million was  spread out over a 4-year  period the state                                                                    
could guarantee a  $500 dividend for the  following 4 years.                                                                    
He furthered that it would be  a part of how the legislature                                                                    
presented  the idea  to  Alaskans conveying  that  it was  a                                                                    
transition time  in which difficult decisions  would have to                                                                    
be  made.  In  the  future  under the  fiscal  plan  he  was                                                                    
proposing  the   level  of   future  dividends   beyond  the                                                                    
guaranteed   dividend   would    be   dependent   upon   the                                                                    
legislature's  ability to  stimulate  the economy,  generate                                                                    
revenues, limit  spending, or  impose additional  taxes. The                                                                    
proposal   in  front   of   the   committee  empowered   the                                                                    
legislature to make decisions into the future.                                                                                  
2:15:03 PM                                                                                                                    
Representative Hawker discussed the  spreadsheet on slide 6:                                                                    
"House Bill 224  - Fiscal Framework." He  explained that the                                                                    
packet  contained  more   detailed  information.  The  slide                                                                    
represented the  current time period  through June  2026. He                                                                    
highlighted the  baseline deficit established (in  the upper                                                                    
section  of the  spreadsheet)  if no  changes  were made  to                                                                    
budget in  the current  year and into  the future.  He noted                                                                    
that the revenue  line (Line 2) came from  the Department of                                                                    
Revenue (DOR)  Revenue Sources  Book and Line  2 out  of the                                                                    
Legislative  Finance  Division's  (LFD) Fiscal  Summary.  He                                                                    
pointed  out the  spending line  which was  also taken  from                                                                    
Line  11   of  LFD's  Fiscal  Summary   which  included  the                                                                    
governor's  proposed legislation  to  both  raise money  and                                                                    
move  the  PFD  around.   He  reported  having  taken  those                                                                    
elements  out. He  relayed that  at the  time he  had walked                                                                    
through his  numbers with David Teal,  Director, Legislative                                                                    
Finance Division.  He had also  reconciled his  numbers with                                                                    
the  Tax Division  at the  Department of  Administration. He                                                                    
had also  reconciled his numbers  with the folks at  GCI who                                                                    
had  been  doing their  own  modeling.  Once the  governor's                                                                    
proposed legislation was removed  from the numbers the state                                                                    
had about a $3.5 billion  deficit to start with. His numbers                                                                    
emphasized   both  designated   general   funds  (DGF)   and                                                                    
unrestricted general  funds (UGF).  The full  spreadsheet in                                                                    
the bill packet was annotated  at the bottom with references                                                                    
to  where  the  numbers  were  derived  and  the  associated                                                                    
philosophy being applied.                                                                                                       
Representative  Hawker  continued  to discuss  slide  6.  He                                                                    
pointed  to  the  first  column.  He  identified  that  $950                                                                    
million [Line 6] needed to  be removed from the budget based                                                                    
on  budget  decisions.  The Permanent  Fund  Endowment  (4.5                                                                    
percent)  figure [Line  10: $2064  million] was  provided by                                                                    
DOR.  The  amount  remaining, if  any,  after  applying  the                                                                    
endowment monies  to the deficit  was the amount  that would                                                                    
be  available for  dividend  appropriations.  In the  Fiscal                                                                    
Framework  spreadsheet he  showed a  reappropriation of  the                                                                    
existing  money where  the state  could  guarantee people  a                                                                    
dividend payout of  $1000 for the following 2  years or $500                                                                    
for 4 years. He pointed to  the CBR balance at the bottom of                                                                    
the  spreadsheet. He  estimated the  starting point  using a                                                                    
suggestion from David Teal, the  director of the Legislative                                                                    
Finance Division.  He used a  $7 billion number for  the CBR                                                                    
balance  as  of  the  end  of June  2016.  The  CBR  balance                                                                    
reflected an investment  growth rate of 5  percent. It would                                                                    
allow for continued growth of  the CBR account. Historically                                                                    
the  account  had  a  much  higher rate  of  return  than  5                                                                    
percent.   However,  Representative   Hawker  used   a  more                                                                    
conservative  number.  He  also  highlighted  line  7  which                                                                    
reflected  a  cumulative  inflation  of the  budget  of  2.5                                                                    
percent  each   year.  He   selected  the   percentage  rate                                                                    
arbitrarily. By the time the  percentage was accumulated out                                                                    
into  2026  the state  would  increase  its budget  over  $1                                                                    
billion  per year.  The model  effectively  moved the  state                                                                    
into  inflated dollars  with the  inclusion of  line 7.  The                                                                    
Permanent  Fund  was a  4.5  percent  endowment against  the                                                                    
earnings  of the  fund, real  money coming  back every  year                                                                    
against increasing costs to the state.                                                                                          
2:21:32 PM                                                                                                                    
Representative  Hawker  surmised  that within  the  first  2                                                                    
years  following making  some very  difficult decisions  the                                                                    
state would  return to  a surplus  position simply  by using                                                                    
the PF  4.5 percent  endowment against  the earnings  of the                                                                    
fund.  While  the   state  had  a  declining   rate  of  oil                                                                    
production, cost  recovery could  be seen using  the numbers                                                                    
published in the Revenue Sources  book. The model created by                                                                    
GCI used a fixed $50  per barrel number to determine revenue                                                                    
- the  model did not  inflation proof. He asserted  that his                                                                    
model worked  similarly and showed  that the state  would be                                                                    
able to live  within its means buy using a  PF endowment. He                                                                    
also pointed  out that the  CBR balance, since it  would not                                                                    
have to  be used, would  continue to grow and  compound from                                                                    
about $7  billion to approximately  $10.6 billion using  a 5                                                                    
percent return.                                                                                                                 
Vice-Chair Saddler mentioned  that Representative Hawker had                                                                    
informed the  committee that  he was  using the  DOR Revenue                                                                    
Sources Book currently  predicated on $56 per  barrel of oil                                                                    
prices.  Using the  current  oil price  (about  half of  the                                                                    
price  used in  the Revenue  Sources Book)  as the  starting                                                                    
point,  he  wondered  about the  tipping  point  going  from                                                                    
deficit   to  surplus.   Currently,  Representative   Hawker                                                                    
predicted it at the start of  FY 19. He commented that while                                                                    
many of the projections were  modeled on the Revenue Sources                                                                    
Book  it seemed  like  every time  someone  asked about  the                                                                    
current day's prices rather than the forecasted prices.                                                                         
2:23:50 PM                                                                                                                    
Representative  Hawker replied  that  the  component in  the                                                                    
revenue  line for  oil  revenue  at $55  per  barrel in  the                                                                    
Revenue  Sources Book  was about  $1.7 billion.  At $30  per                                                                    
barrel would  drop the  revenue number  to about  $1 billion                                                                    
and would require  an additional $700 million  draw from the                                                                    
CBR. He  received the numbers  he was sighting from  the DOR                                                                    
the previous day. They were  the numbers the state was using                                                                    
in  its analysis;  numbers from  the economic  modelers from                                                                    
the DOR.                                                                                                                        
Representative Hawker indicated that  the listed PFD numbers                                                                    
were based  on the  surpluses in  the spreadsheet.  He noted                                                                    
that there was nothing that  would stop the legislature from                                                                    
taking money  from savings to  add to the  people's dividend                                                                    
if the state was comfortable.  He emphasized that he did not                                                                    
want  to see  a headline  that said,  "Mike Hawker  Proposes                                                                    
killing  your  dividend."  He did  not  purpose  eliminating                                                                    
Alaskan's  dividends  but  recommended a  "live  within  our                                                                    
means" mechanism that always  allowed future legislators the                                                                    
ability to decide how much  dividend was within the means of                                                                    
the state.  He mentioned  that good  things could  happen as                                                                    
well. He mentioned  that Repsol/Armstrong had a  find in the                                                                    
Coville  River   Delta  that   the  Department   of  Natural                                                                    
Resources (DNR)  could add  100 or more  barrels of  oil per                                                                    
day to the state's oil production.  It would be a 20 percent                                                                    
increase  from   one  field  if  it   could  get  permitted.                                                                    
Production  from the  field  could  potentially come  online                                                                    
within a couple of years and  was not reflected in the model                                                                    
he was currently reviewing.                                                                                                     
2:26:08 PM                                                                                                                    
Representative  Wilson asked  why Representative  Hawker was                                                                    
using   4.5   percent.   She   wondered   because   of   his                                                                    
recommendation to also impose new taxes.                                                                                        
Representative Hawker  responded that  the model  could work                                                                    
after  the  first year  taking  $950  million along  with  a                                                                    
balance of  increased taxes and  decreased expenses.  He was                                                                    
not  advocating  for additional  new  taxes  every year  but                                                                    
encouraged  making  some  difficult  decisions  upfront.  He                                                                    
noted   his  previous   experience  working   with  the   PF                                                                    
executives  and  the  board   of  trustees  in  promoting  a                                                                    
constitutional  endowment  mechanism  using 5  percent.  The                                                                    
returns  over  time would  be  sufficient  to exceed  the  5                                                                    
percent as well as an  inflation of approximately 3 percent.                                                                    
Standard  endowment  fund  draws  tended to  run  between  4                                                                    
percent and 5 percent. He backed  down to 4.5 percent due to                                                                    
shear conservatism.  The mechanism  for taking the  draw off                                                                    
of  the funds  was to  mitigate the  volatility of  the fund                                                                    
earnings the percentage was applied to  the first 5 of the 6                                                                    
preceding years. It was done to  allow the fund to close its                                                                    
budget year, get  a completed audit, and get  a complete and                                                                    
accurate  measurement of  the fund's  value. Currently,  the                                                                    
fund might not have its audit  completed. In order to have a                                                                    
cushion  the first  five of  six  years was  used to  ensure                                                                    
there was a  year in which the audit could  be completed. In                                                                    
looking  at  a  historic timeframe  mathematically  it  came                                                                    
closer to a  4 percent effective draw off of  the fund which                                                                    
provided greater  assurance that the fund  continued to grow                                                                    
and  that  it  was   adequately  inflation  proofed  it.  He                                                                    
reiterated  that the  4.5 percent  was  judgmental but  were                                                                    
based   on  sound   mechanics   and   was  consistent   with                                                                    
standardized  financing  approaches.  He suggested  that  if                                                                    
members considered  the bill it  would also provide  for the                                                                    
opportunity to  get some professionals before  the committee                                                                    
to answer any questions.                                                                                                        
2:30:15 PM                                                                                                                    
Representative  Wilson  referred  to slide  5  asking  about                                                                    
taxation as  an accompanying solution. She  wanted to better                                                                    
understand the additional taxation he mentioned.                                                                                
Representative Hawker replied that  the budget decisions had                                                                    
to be made by the legislature.  He had it listed as a single                                                                    
line  item on  the  spreadsheet, $950  million of  overspent                                                                    
dollars. In order to balance  the budget $950 million had to                                                                    
be  reduced  from  the  budget.  The  number  was  based  on                                                                    
expected  future revenues  and a  sustainable draw  from the                                                                    
PF. He concluded  that there was only one  economic pie. The                                                                    
administration's bill  proposed $1 million in  cuts and $900                                                                    
million in  new taxes.  The administration's version  of the                                                                    
bill proposed $100  million in cuts and $900  million in new                                                                    
taxes.  He  reviewed  the  numbers  by  starting  with  $6.1                                                                    
billion  and backing  out approximately  $1 billion  for DGF                                                                    
which took the number down  to $5.1 billion. He then removed                                                                    
$950 which  took the  number down again  to $4.1  billion or                                                                    
$4.3 billion.                                                                                                                   
Representative  Wilson asked  why  he  included new  upfront                                                                    
taxes rather  than including a sustainable  [budget] number,                                                                    
4.5 percent or  another percentage, in the  fiscal plan. She                                                                    
understood  the options  of reducing  spending to  a certain                                                                    
level  and implementing  new taxes.  She asked  why spending                                                                    
was not limited versus imposing new taxes.                                                                                      
Representative Hawker  did not  see a  mandate for  taxes in                                                                    
the legislation.  He guaranteed  that all fiscal  models had                                                                    
flaws.  However, the  models  reflected  best estimates  and                                                                    
provided  a  large  enough picture  to  make  decisions.  He                                                                    
remarked  that the  numbers did  interrelate.  If the  state                                                                    
took a  higher percentage of  a POMV  from the PF  the state                                                                    
could  lower its  need to  be making  some of  the difficult                                                                    
decisions the  legislature currently faced. He  thought that                                                                    
using  the  more  complicated and  more  detailed  model  he                                                                    
provided to  committee members would  require the  right mix                                                                    
of upfront budget adjustments of  about $750 million in hard                                                                    
cuts. He  believed that in  order to get  participation from                                                                    
all sectors of the economy  the state needed some additional                                                                    
upfront taxes, about $200 million.  He furthered that all of                                                                    
the  taxed  sectors  should  be  asked  to  contribute.  The                                                                    
administration suggested imposing $900  million in taxes and                                                                    
cutting $100  million from  the budget.  It was  a judgement                                                                    
call of the legislature.                                                                                                        
Representative   Wilson    discussed   hearing    from   her                                                                    
constituents   that  they   wanted  to   control  government                                                                    
spending.  She wondered  if  it was  possible  to include  a                                                                    
mechanism that would mandate the  legislature to control its                                                                    
spending. Although  she appreciated  Representative Hawker's                                                                    
model, she  thought it would  be difficult  for constituents                                                                    
to  believe that  legislators would  control  spending at  a                                                                    
certain level.  She thought it would  be hard to sell  it to                                                                    
Alaska  residents.  She  wondered  if  he  had  looked  into                                                                    
imposing a hard number or a percentage.                                                                                         
2:35:56 PM                                                                                                                    
Representative Hawker  responded, "The answer  is absolutely                                                                    
yes." He  better understood  that Representative  Wilson was                                                                    
asking about some kind of a spending limit.                                                                                     
Representative Wilson responded in the affirmative.                                                                             
Representative   Hawker    responded   that    because   the                                                                    
legislature wrote  law a spending  law could be  placed into                                                                    
statute. However, the limitation  could always be changed by                                                                    
a  future  legislature at  any  time.  He thought  that  the                                                                    
legislature  had the  power. The  legislature  also had  the                                                                    
ability  to  ignore  statute.  Some type  of  a  more  rigid                                                                    
statement in  legislation concerning the level  of tolerable                                                                    
spending  could  be  implemented.  He thought  it  could  be                                                                    
beneficial, but at  the same time, it  brought concern about                                                                    
any future  requirements. He knew  of his district  having a                                                                    
very different perspective on the  need for government spend                                                                    
than Representative  Edgmon's district, for example.  In his                                                                    
proposed  legislation  he  tried   to  show  what  level  of                                                                    
spending the state could afford  with its current resources.                                                                    
He thought that  in order to enforce a  rigid spending limit                                                                    
which could  not be violated, a  constitutional change would                                                                    
be required.                                                                                                                    
Representative Wilson requested that  Mr. David Teal provide                                                                    
a  calculation having  to do  with not  being able  to raise                                                                    
spending  by  a  percentage  of   reserves  in  one  of  his                                                                    
Co-Chair Thompson  asked Representative Hawker if  he had an                                                                    
interactive model  that could be  used to see  how different                                                                    
tax numbers affected the bottom line.                                                                                           
Representative  Hawker replied  affirmatively. He  mentioned                                                                    
that it was very easy to  use and any kind of scenario could                                                                    
likely  be   modeled.  He  had  just   recently  received  a                                                                    
fantastic matrix  of data  on oil prices.  He had  wanted to                                                                    
make  the model  sufficiently sophisticated  in order  to be                                                                    
able to discuss what it  would look like under different oil                                                                    
price scenarios.                                                                                                                
Co-Chair Thompson  invited anyone who might  have a scenario                                                                    
to run through  should get them to Jane  Pierson, his staff.                                                                    
She would get Representative Hawker to do the modeling.                                                                         
2:39:08 PM                                                                                                                    
Vice-Chair Saddler thought the  legislation provide a way to                                                                    
make  the numbers  work. However,  he thought  there was  an                                                                    
opportunity for  leakage. He wondered about  the forecast of                                                                    
increased spending.  He had noticed  Representative Hawker's                                                                    
more detailed model  was based on 2.5  percent inflation. He                                                                    
also  asked   if  the  Representative  had   factored  in  a                                                                    
population increase. He liked that  his model provided for a                                                                    
guaranteed  $1000   dividend.  He  thought  people   had  an                                                                    
expectation.  He  was concerned  about  poor  optics with  a                                                                    
lower PFD amount. He also  stated that Representative Hawker                                                                    
claimed that  it would  be possible  for the  legislature to                                                                    
appropriate money  to bring the  dividend level  to whatever                                                                    
the  legislature decided.  It  also appeared  that it  would                                                                    
need  to   come  from  the  Constitutional   Budget  Reserve                                                                    
requiring a  3/4 vote and  would cost extra. Also,  if there                                                                    
was  leakage  the  legislature  could  certainly  raise  the                                                                    
spending limit to  whatever it wanted. He  concluded that it                                                                    
would  depend on  the  legislature's  fiscal discipline.  He                                                                    
opined  that   it  always  came  down   to  the  discretion,                                                                    
integrity, judgement  and the decisions of  the legislature.                                                                    
He  asked  if  the   legislation  allowed  for  any  capital                                                                    
Representative  Hawker  replied  that  Vice-Chair  Saddler's                                                                    
response had  identified that decisions  had to be  made and                                                                    
certain presumptions had to be  in play. The approach he was                                                                    
offering   in  the   legislation   created  an   affirmative                                                                    
incentive for future legislators  to make wise decisions, to                                                                    
hold  down budgets,  and not  to increase  spending; it  all                                                                    
flew into  the dividend.  He was  not guaranteeing  a number                                                                    
for a  dividend, but rather  showing how, based  on spending                                                                    
patterns, the  state could still  balance its budget  with a                                                                    
POMV and  maintain a dividend  program. If  legislators were                                                                    
willing  to hold  to a  more rigid  spending cap,  the money                                                                    
would go  straight to  the dividend.  If the  state budgeted                                                                    
several  new  programs, the  money  would  come out  of  the                                                                    
dividend.  He  opined that  the  state  had a  dysfunctional                                                                    
fiscal  system. He  suggested that  everyone  that moved  to                                                                    
Alaska cost more money to  the state because of the services                                                                    
that needed to be provided  including schools and roads. His                                                                    
model  demonstrated  that the  state  could  still offer  an                                                                    
almost  Utopian existence  for Alaskans.  He furthered  that                                                                    
Alaska  had  reached  a  point  where  it  could  no  longer                                                                    
continue to have  unrestricted PFD's as well  as the Utopian                                                                    
existence where people did not  have to pay for the services                                                                    
they consumed.                                                                                                                  
2:43:06 PM                                                                                                                    
Vice-Chair Saddler commented  that the dis-synchronicity had                                                                    
been workable  because of  oil prices being  so high  in the                                                                    
past.  He  wanted  to  know what  kind  of  conditions  were                                                                    
necessary  for money  to  flow back  into  the dividend.  He                                                                    
wanted  to see  additional  modeling to  determine how  much                                                                    
funding   would  end   up   available   for  dividends.   He                                                                    
reemphasized  that  the  legislature  had  made  responsible                                                                    
decisions to  reduce spending, to save  the state's windfall                                                                    
profits, and  to make long-term structural  changes limiting                                                                    
spending.  He  believed the  state  had  a spending  cap  at                                                                    
present;  the increases  in the  budget  were predicated  on                                                                    
$2.5  billion  indexed  to   inflation  and  population.  He                                                                    
thought  these   measures  were  currently  in   statue  but                                                                    
remarked that they  were not very affective.  He opined that                                                                    
the  legislature   would  have  to  be   careful  in  making                                                                    
structural changes  and it  would be  up to  the legislative                                                                    
body's personal discipline to adhere to them.                                                                                   
Representative  Hawker   believed  that  the   spending  cap                                                                    
Representative  Saddler  was  referring to  existed  in  the                                                                    
constitution. He  furthered that  in the  constitution there                                                                    
was a spending  limit. However, it was formulated  in such a                                                                    
manner that it was ineffective.                                                                                                 
Vice-Chair  Saddler   admitted  that   it  was   not  solely                                                                    
Representative  Hawker's responsibility  to come  up with  a                                                                    
fiscal plan that solved all  of the state's fiscal problems.                                                                    
He  wondered about  capital spending  within  in his  fiscal                                                                    
Representative Hawker replied that  what was included in the                                                                    
legislation  was the  capital  spend levels  in the  current                                                                    
budget  (about $200  million). The  inflation factor  of 2.5                                                                    
percent cumulative  growth was the generic  provision in his                                                                    
model that anticipated there would  be spending, growth, and                                                                    
needs.  The  point of  the  model  was  to show  the  larger                                                                    
assumptions and  parameters in order  to make  decisions. He                                                                    
added that the CBR balance continued  to grow in his model -                                                                    
a potential source for capital  funding. His model contained                                                                    
a very conservative oil production  forecast inherent in the                                                                    
Revenue Sources Book.  There would be a  20 percent increase                                                                    
in production as  a result of the Repsol  development on the                                                                    
North  Slope that  could  substantially  change the  state's                                                                    
revenue picture. A  gas line in place by 2025  or 2026 could                                                                    
be the state's future. The state  had a way to bridge to the                                                                    
future without having to  completely reconstruct or re-plumb                                                                    
its whole  system and continue  to respect  the institutions                                                                    
of the  state. He  thought Alaskans would  be able  to fully                                                                    
trust the  PF and  the limits and  controls inherent  in the                                                                    
CBR. He opined  that the state did not have  a budget crisis                                                                    
in  Alaska. The  state had  $60  billion in  savings with  a                                                                    
population of  700 thousand.  He argued  that the  state did                                                                    
not  have  a  fiscal  crisis but  rather  had  a  management                                                                    
challenge  figuring  out  the state's  resources,  how  much                                                                    
money  could be  generated from  them, and  how to  meet the                                                                    
needs of the public.                                                                                                            
2:47:54 PM                                                                                                                    
Representative  Guttenberg   agreed  that   the  legislature                                                                    
needed to  have an economist  provide an analysis.  He spoke                                                                    
of  being  involved  with  a  high  school  class  using  an                                                                    
interactive spreadsheet.  One of the solutions  was to focus                                                                    
balancing  the numbers  rather than  looking at  any related                                                                    
Representative    Hawker   explained    that   the    number                                                                    
Representative  Guttenberg was  referring  to  was the  $201                                                                    
million  appropriation  for  capital  budget  spending  each                                                                    
Representative  Guttenberg  asked  whether  the  number  was                                                                    
Representative Hawker responded  that the model [Spreadsheet                                                                    
entitled:  HB 224  - Fiscal  Framework  Simplified Ten  Year                                                                    
Fiscal  Model] was  structured such  that the  revenues were                                                                    
positive  numbers. The  expenditures were  negative numbers.                                                                    
The  capital  budget  baseline   of  $201  million  was  the                                                                    
anticipated baseline capital spend.                                                                                             
Representative  Guttenberg  pointed  to the  following  line                                                                    
dealing  with refundable  tax credit  adjustments. He  noted                                                                    
the Fall  2015 Revenue Sources  Book. He wondered  about the                                                                    
difference between  the most recent  version of  the revenue                                                                    
sources book and the 2015 book.                                                                                                 
Representative  Hawker replied  that the  Fall 2015  Revenue                                                                    
Sources Book was the most current version.                                                                                      
Representative Guttenberg commented that  a CBR vote did not                                                                    
have to add anything.                                                                                                           
Vice-Chair Saddler responded that it did not have to.                                                                           
Representative Guttenberg  responded that it was  up to more                                                                    
than one group  of people. He furthered that a  CBR vote did                                                                    
not have to be additional money to the budget.                                                                                  
Co-Chair   Thompson  asked   Representative  Guttenberg   to                                                                    
explain his question.                                                                                                           
Representative Guttenberg stated  that to get a  CBR vote it                                                                    
did not necessarily mean the  budget would be larger than it                                                                    
was prior to the CBR vote.                                                                                                      
Co-Chair  Thompson remarked  that  he did  not  know if  the                                                                    
legislature  needed  a three  quarter  vote  if it  was  not                                                                    
bigger than it was before.                                                                                                      
2:50:41 PM                                                                                                                    
Representative  Edgmon thanked  Representative Hawker  for a                                                                    
shorter presentation because it  gave members plenty of room                                                                    
to  discuss things  freely. He  referred to  a slide  in the                                                                    
governor's  presentation that  discussed the  benefits of  a                                                                    
non-POMV   approach  in   that  it   offered  a   fixed-draw                                                                    
(Sovereign Wealth  Concept). He thought that  the fixed draw                                                                    
concept allowed for  the fund to grow  appreciably more than                                                                    
with a POMV approach. He  wanted to hear from Representative                                                                    
Hawker  about  why  it  would  not  be  the  case  from  his                                                                    
Representative  Hawker  wanted  to  be  very  careful  about                                                                    
criticizing the approach offered by  the governor, as it was                                                                    
a  valid  concept. His  was  a  competing concept  that  was                                                                    
different and  much simpler. Respecting the  state's current                                                                    
constitutional constructs  of the PF and  the budget reserve                                                                    
funds, he  did not look  at the larger legal  question about                                                                    
whether  the  proposal  would  cause   issues  with  the  PF                                                                    
earnings reserve account to be  characterized as GF and have                                                                    
to be  swept into the  CBR each  year. His bill  avoided the                                                                    
legal  questions raised.  As far  as  the draw  from the  PF                                                                    
there was  a huge body  of financial management  science and                                                                    
successful  practice and  tradition  across many  benevolent                                                                    
funds in  the world where  a similar practice was  in place.                                                                    
His proposal  would put  a very specific  limit on  the draw                                                                    
each year. There had been other  bills referred to as the PF                                                                    
protection act but  the only thing that  truly protected the                                                                    
PF was  limiting the  draw and  using the  best contemporary                                                                    
financial   management   practices  through   an   endowment                                                                    
mechanism.  He  stated that  the  fact  that the  state  co-                                                                    
mingled  a bunch  of  money under  the  earnings reserve  in                                                                    
other proposals  and then recalibrated  how much  money that                                                                    
was  in any  given  year did  not provide  a  great deal  of                                                                    
assurance  that  the  mechanism itself  did  not  inherently                                                                    
allow  over-spending. His  key  point  about preserving  the                                                                    
integrity of  the existing  PF structure  and using  the 4.5                                                                    
percent endowment draw  was that the state  had the greatest                                                                    
possible assurance that the value  of the fund was protected                                                                    
so that it was not overdrawn.                                                                                                   
Co-Chair  Thompson  mentioned  that  the  finance  committee                                                                    
would  be hearing  from David  Teal  who would  be making  a                                                                    
presentation comparing the three scenarios.                                                                                     
2:54:53 PM                                                                                                                    
Representative  Edgmon commended  Representative Hawker  for                                                                    
his work in  the legislature. He noted  that Senator McGuire                                                                    
had said  in the previous  day's meeting that she  was freed                                                                    
up  due to  not running  for  reelection. He  referred to  a                                                                    
slide  from the  governor's presentation  that talked  about                                                                    
what  would  happen if  the  legislature  did not  take  any                                                                    
action  in  the current  session.  One  of the  four  bullet                                                                    
points  on  the  slide  indicated that  the  state's  credit                                                                    
rating  would be  at  risk and  could  also damage  Alaska's                                                                    
economy if  the legislature  did not  do anything.  He asked                                                                    
Representative   Hawker   to   comment.   He   thought   the                                                                    
representative was the perfect individual to ask.                                                                               
Representative  Hawker   addressed  Representative  Edgmon's                                                                    
comment  about speaking  freely because  of not  running for                                                                    
reelection. He  pointed out that  the mechanism  and concept                                                                    
he  had  previously  offered  in   2003.  At  the  time  the                                                                    
legislature had  burnt through  about $5  billion of  a $7.5                                                                    
billion PF balance.  At the then current cash  burn rate the                                                                    
state had  2.5 to 3 years  of money left in  the account. At                                                                    
present, if the  state did nothing the state had  about 2 to                                                                    
2.5 years  left. He commented  that the wheel had  come full                                                                    
circle. He pointed  to a document in the  bill packet called                                                                    
"Components of  Sustainable Fiscal  Policy for  Alaska." The                                                                    
document  contained   the  philosophy  he  was   asking  the                                                                    
committee  to embrace.  He reported  publishing the  5 point                                                                    
fiscal  plan in  April 2003  and  had stood  behind it  ever                                                                    
since. He  thought it was  the foundational  philosophy that                                                                    
as a  legislature needed  to maintain.  Item 1  started with                                                                    
the  legislature's responsibility  to promote  real economic                                                                    
development  in  the  state providing  a  stable  investment                                                                    
climate and  job security. Item  2 was that  the legislature                                                                    
had  to   control  the  cost   and  growth   of  government.                                                                    
Specifically,  the legislature  needed  to  be mindful  that                                                                    
every single  decision that was  made affected the  lives of                                                                    
individual Alaskans. Item 3 was  to manage the PF to protect                                                                    
its real  value over time  - endowment method  management of                                                                    
the fund  for making  money available  for the  budget while                                                                    
providing   a   substantial   individual  dividend   and   a                                                                    
contribution to the cost of public services.                                                                                    
Representative Hawker  continued to  item 4.  He recommended                                                                    
structuring  the  state's  general   revenue  system  for  a                                                                    
balanced  budget  at  mid-range oil  prices  that  minimized                                                                    
personal  taxes  and  respected local  governments'  revenue                                                                    
structures. The  state's entire revenue structure  needed to                                                                    
be based on mid-level oil  prices and the legislature needed                                                                    
to  determine  a  sustainable level  of  spending  based  on                                                                    
revenues. He reported  that item 5 was to  maintain a budget                                                                    
reserve fund for fiscal stability  which could be drawn from                                                                    
at  times  of  lower  than  average  oil  price  cycles  and                                                                    
restored when prices were higher.                                                                                               
Representative  Hawker moved  on  to  respond to  Vice-Chair                                                                    
Saddler's  second  line  of   questioning.  He  agreed  with                                                                    
Governor  Walker's conclusions  that the  legislature needed                                                                    
to  act  immediately.  He  believed  there  was  an  urgency                                                                    
particularly  with the  ratings  agencies.  He relayed  that                                                                    
both  the  state's debt  ratings  agencies  and the  overall                                                                    
state securities  analyst ratings agencies were  looking for                                                                    
the legislature  to take affirmative  action in  the current                                                                    
year. In  the following week  some state employees  would be                                                                    
traveling to  New York to  do presentations for  the various                                                                    
representatives from  the investment banking  community. The                                                                    
three  bills would  be  the focus  of  the presentation  and                                                                    
would  represent   the  items  the  state   was  looking  at                                                                    
implementing  as  a  demonstration  of its  good  faith  and                                                                    
intent to restore a  functional, stable, durable, long-range                                                                    
solution to the state's  fiscal problem. He reemphasized the                                                                    
need for the legislature to  act boldly in the current year.                                                                    
He spoke  of a quote by  J.F. Kennedy that there  were costs                                                                    
and  risks to  every bold  course of  action. The  costs and                                                                    
risks  paled  in  comparison  to  the  costs  and  risks  of                                                                    
comfortable inaction.                                                                                                           
Co-Chair Thompson  asked Representative Hawker if  he wanted                                                                    
to provide a sectional analysis of the bill.                                                                                    
Representative  Hawker was  happy to  indulge the  wishes of                                                                    
the  committee. He  added that  the  sectional analysis  was                                                                    
very easy  to follow.  He noted  that he  would be  happy to                                                                    
come back to the committee  anytime to discuss the detail of                                                                    
HB 224.                                                                                                                         
Co-Chair  Thompson asked  Representative  Hawker to  present                                                                    
the sectional analysis.                                                                                                         
Representative Hawker deferred to his staff, Julie Lucky.                                                                       
3:03:58 PM                                                                                                                    
JULIE LUCKY,  STAFF, REPRESENTATIVE MIKE HAWKER,  viewed the                                                                    
sectional analysis  of HB 224.  She reported that  Section 1                                                                    
of  the  bill adopted  the  statutory  endowment method  for                                                                    
determining how much was distributable  per year from the PF                                                                    
earnings. It was 4.5 percent  of the average market value of                                                                    
the balance of  the fund for the first 5  of the preceding 6                                                                    
fiscal years.  Section 2 of  the bill  basically prioritized                                                                    
the  use of  the  annual  payout -  the  4.5 percent  annual                                                                    
payout.  It also  stated that  the amount  used from  the PF                                                                    
earnings  would be  used before  a personal  income tax  was                                                                    
assessed on state  residents. She relayed that  Section 3 of                                                                    
the bill provided the language  that allowed the transfer of                                                                    
the  money  from  the  PF  earnings  into  the  distribution                                                                    
Ms.  Lucky  continued  to  convey  the  sectional  analysis.                                                                    
Section 4  of the  legislation reflected a  technical change                                                                    
required to deal  with the Amerada Hess  funds. She reported                                                                    
that Section  5 of  the bill  was the  dividend calculation.                                                                    
There were not a lot  of changes in the dividend calculation                                                                    
or the method  of calculation. However, the  amount of money                                                                    
the  calculation  was  based  on would  come  from  the  4.5                                                                    
percent POMV  payout into  the distribution  account. Monies                                                                    
in the distribution account would  first be used to fill any                                                                    
deficit  in the  budget  and the  remaining  funds would  be                                                                    
placed  into the  dividend account  (the orange  box on  the                                                                    
waterfall slide).                                                                                                               
Vice-Chair  Saddler   referred  to  the  bubble   chart  and                                                                    
summarized the  flow from the  ERA (4.5 percent  POMV payout                                                                    
to  the  distribution  account  and then  into  the  GF.  He                                                                    
wondered about  the purpose of  a distribution  account when                                                                    
the POMV payout could be directly distributed into the GF.                                                                      
Representative Hawker  responded that the definition  of the                                                                    
distribution  account was  to facilitate  the management  by                                                                    
the state  agencies involved. It  was defined as  an account                                                                    
within  the  GF. The  money  was,  in fact,  being  directly                                                                    
deposited  into the  GF.  The  rest of  the  bill was  about                                                                    
allocation as the money was appropriated.                                                                                       
Vice-Chair  Saddler  commented  about   the  limits  of  the                                                                    
Representative  Hawker  added  that   the  indexing  of  the                                                                    
progressive dividend which depended  on how much savings the                                                                    
state had in the bank was a concept suggestion in the bill.                                                                     
3:07:32 PM                                                                                                                    
Ms. Lucky  continued with  a brief  review of  the sectional                                                                    
analysis.  She explained  that Section  6 described  the cap                                                                    
which was  based from $250 to  $2000. It was indexed  on the                                                                    
combined value  of the  CBR and  the SBR.  There was  also a                                                                    
statement that relayed  that in any year that  an income tax                                                                    
was assessed  the amount of  the dividend would be  zero. It                                                                    
reflected a policy  call that income tax should  not be used                                                                    
to pay dividends.                                                                                                               
Representative Hawker included the  provision in the bill to                                                                    
encourage  serious debate  in the  legislature.  It was  his                                                                    
personal opinion that it would  be wrong to assess a working                                                                    
Alaskan's  income, take  their  income away  from them,  and                                                                    
indiscriminately  redistribute  it  to  everyone  else.  The                                                                    
point of  the bill was to  show that it was  not a necessary                                                                    
policy in order to achieve a sustainable working budget.                                                                        
Ms. Lucky thought  Section 7 of the bill  best described the                                                                    
waterfall  diagram. It  established a  distribution account,                                                                    
and   codified   the   "waterfall"  concept.   The   section                                                                    
encapsulated how  the annual distribution from  the PF would                                                                    
be placed into statute. She also pointed to Page 5, Line 6-                                                                     
18,  subsection  d to  the  statement  that nothing  in  the                                                                    
section   prohibited   the   legislature  from   making   an                                                                    
appropriation  to   the  dividend  fund   established  under                                                                    
AS.43.23.045  from  a  source   other  than  a  distribution                                                                    
account. If the  legislature chose to make a  policy call to                                                                    
increase the  dividend there  was nothing  in the  bill that                                                                    
would keep that from happening.                                                                                                 
Representative   Hawker  mentioned   the   example  of   re-                                                                    
appropriating  the money  that was  currently set  aside for                                                                    
dividends and  using it to  pay a higher level  of dividends                                                                    
in the immediate future.                                                                                                        
Ms. Lucky  explained that Section  8 was a simple  repeal of                                                                    
the inflation  proofing of the  PF. Moving to  the endowment                                                                    
or  POMV  concept  made   the  inflation  proofing  language                                                                    
unnecessary.  The  last  section  of the  bill,  Section  9,                                                                    
established an effective date of June 30, 2016.                                                                                 
3:10:16 PM                                                                                                                    
Representative  Gattis  thanked  Representative  Hawker  and                                                                    
expressed  her appreciation  for his  succinct presentation.                                                                    
She also thanked Ms. Lucky.                                                                                                     
Vice-Chair  Saddler  asked  if the  legislation  included  a                                                                    
provision  to reappropriate  $1.4 million  to guarantee  the                                                                    
$1000  dividend   for  the  following   2  years  or   if  a                                                                    
supplementary legislation would be required.                                                                                    
Representative  Hawker  explained that  the  reappropriation                                                                    
required  an appropriations  bill. His  bill was  strictly a                                                                    
policy bill.                                                                                                                    
Co-Chair   Thompson  thanked   the   presenters  for   their                                                                    
presentation and  indicated that  the bill would  be brought                                                                    
back  before the  committee for  comparisons  likely in  the                                                                    
following week.                                                                                                                 
HB  224  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair  Thompson reviewed  the  agenda  for the  following                                                                    
day. The committee would be  hearing an update on the Alaska                                                                    
LNG Project.                                                                                                                    

Document Name Date/Time Subjects
HB224 Background Information.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB224 Chart.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB224 Sectional Analysis.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB224 Simplified Fiscal Model.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB224 Sponsor Statement.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 224 NEW FN DOR TT 2-15-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 224 NEW FN DOR PFD 2-15-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB224 Presentation 02 16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 224 NEW FN DOA VCCB 2-16-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 224 NEW FN DOA VCCB 3-22-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 303 NEW FN DOA VCCB 3-22-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 303
HB 224 NEW FN DOA VCCB 3-22-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 224
HB 245 NEW FN DOA VCCB 3-22-16.pdf HFIN 2/17/2016 1:30:00 PM
HB 245