Legislature(2017 - 2018)HOUSE FINANCE 519

02/03/2017 01:30 PM House FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 61 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
*+ HB 95 APPROP:SUPP; CAP; REAPPROP; AMEND; REPEAL TELECONFERENCED
Heard & Held
+ Pat Pitney, Director, Office of Management & TELECONFERENCED
Budget
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 61                                                                                                             
                                                                                                                                
     "An  Act   relating  to   the  Alaska   Permanent  Fund                                                                    
     Corporation,  the  earnings  of  the  Alaska  permanent                                                                    
     fund,  and the  earnings reserve  account; relating  to                                                                    
     the  mental health  trust  fund;  relating to  deposits                                                                    
     into the dividend fund; relating  to the calculation of                                                                    
     permanent  fund  dividends;  relating  to  unrestricted                                                                    
     state   revenue   available  for   appropriation;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
1:37:19 PM                                                                                                                    
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced   the   PowerPoint  presentation   titled   "PFPA                                                                    
MODELING" (copy on file). He  commented that on the previous                                                                    
day  the  committee had  covered  a  lot  of ground  on  the                                                                    
Permanent  Fund  Protection  Act   (PFPA).  There  had  been                                                                    
significant  concern  whether  the  5.25  percent  draw  was                                                                    
sustainable and  durable. He indicated  he would  be walking                                                                    
through  some  of  the  modeling   that  had  been  done  to                                                                    
determine  the durability  of the  proposed draw  amount. He                                                                    
would  also  be  discussing  the  impacts  of  some  of  the                                                                    
decisions  about other  fiscal issues  surrounding the  PFPA                                                                    
and  their  impacts  on the  durability  of  a  restructured                                                                    
Permanent Fund.                                                                                                                 
                                                                                                                                
Commissioner   Hoffbeck  turned   to  slide   2:  "Scenarios                                                                    
Modeled":                                                                                                                       
                                                                                                                                
   1. Status Quo: ad hoc use of permanent fund earnings to                                                                    
     fill budget deficit                                                                                                        
                                                                                                                                
   2. PFPA with $2.4 billion transfer to the CBR                                                                              
     • With Full Fiscal Solution                                                                                              
     • With No  Fiscal   Solution  for   remaining  budget                                                                    
        deficit.                                                                                                                
                                                                                                                                
   3. PFPA without transfer to the CBR                                                                                        
     • With Full Fiscal Solution                                                                                              
     • With No  Fiscal   Solution  for   remaining  budget                                                                    
        deficit.                                                                                                                
                                                                                                                                
Commissioner Hoffbeck explained that  the committee would be                                                                    
looking  at three  different modeling  scenarios. The  first                                                                    
model reflected  the status  quo where  no changes  would be                                                                    
made. The  state would continue to  spend the Constitutional                                                                    
Budget Reserve (CBR),  and when it was gone,  begin to spend                                                                    
from  the  Permanent  Fund  (PF)  earnings  reserve  account                                                                    
(ERA). The  second scenario reflected  the PFPA  proposed in                                                                    
the governor's bill, HB 61.  A proposed effective date of FY                                                                    
17, as  proposed in the budget,  would create a draw  for FY                                                                    
17 and  replace the CBR draw  using PF earnings to  fund the                                                                    
current  year's  budget. The  committee  would  look at  the                                                                    
second  scenario  in two  ways:  One  would reflect  a  full                                                                    
fiscal  solution closing  the remainder  of the  budget gap,                                                                    
and  another would  show a  budget gap.  The third  scenario                                                                    
reflected  an effective  date  of July  1,  2018. The  draws                                                                    
would start for the FY 18 budget.                                                                                               
                                                                                                                                
Representative   Wilson  had   heard  frequently   that  the                                                                    
legislature  was   doing  nothing.   She  opined   that  the                                                                    
legislature had  made several reductions  and put  two bills                                                                    
forward in the prior year to  help save the state money. She                                                                    
did not think it was appropriate  to tell the public that it                                                                    
appeared  the legislature  would  do the  usual. She  argued                                                                    
that the legislature had taken  significant steps to reach a                                                                    
sustainable  level  of  spending. Although  the  legislature                                                                    
might  not   have  made  enough   changes,  it   had  worked                                                                    
diligently to reduce costs.                                                                                                     
                                                                                                                                
1:41:01 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked if the  legislature had burned through                                                                    
close  to $6.5  billion  or  $7 billion  in  savings in  the                                                                    
previous 2 years. Commissioner  Hoffbeck responded, "That is                                                                    
correct."                                                                                                                       
                                                                                                                                
Vice-Chair Gara asked  what would be left in the  CBR if the                                                                    
legislature did nothing to address  the revenue issue in the                                                                    
current year.  He asked for a  number. Commissioner Hoffbeck                                                                    
responded  that  the  presentation   did  not  contain  many                                                                    
numbers but there were some numbers on the charts.                                                                              
                                                                                                                                
Vice-Chair Gara  asked what would  be left in the  CBR after                                                                    
FY  18,  under  the   governor's  proposed  budget,  if  the                                                                    
legislature failed to adopt revenue  measures in the current                                                                    
year  and  had  to  use  the CBR  to  pay  the  budget  gap.                                                                    
Commissioner  Hoffbeck  reported  that  it  was  about  $2.1                                                                    
billion.                                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  continued  to discuss  slide  2.  He                                                                    
noted the critical test when  looking at the modeling was to                                                                    
maximize the use  of the asset. The department  wanted to be                                                                    
able to extract as much  revenue from the PF without putting                                                                    
the corpus  of the fund  at risk. He suggested  that leaving                                                                    
any money  on the  table had the  effect of  limiting future                                                                    
options  for solving  the fiscal  crisis. He  continued that                                                                    
the idea was to find the  "sweet spot" extracting as much as                                                                    
possible while maintaining a durable fund into the future.                                                                      
                                                                                                                                
Commissioner   Hoffbeck  continued   to   slide  3:   "Model                                                                    
Sophistication  and Vetting."  He reviewed  some of  the key                                                                    
aspects of  the model.  The model  was probabilistic,  as it                                                                    
looked at  a range of  potential scenarios that  could occur                                                                    
over  time rather  than  deterministic. Deterministic  meant                                                                    
choosing a  single scenario and extrapolating  it over time.                                                                    
The  model   used  thousands   of  iterations   of  multiple                                                                    
scenarios and  produced a range  of potential  outcomes. The                                                                    
department  looked  at  the  median  within  the  range.  He                                                                    
thought the  modeling had been  a robust process.  The focus                                                                    
was  on how  the money  flowed between  the PF,  the general                                                                    
fund, and  the dividend  to identify any  potential failures                                                                    
in the  modeling. The modeling  addressed questions  such as                                                                    
whether there  was enough money to  fund government services                                                                    
and the  dividend, whether the  corpus of the fund  would be                                                                    
impacted, or  whether there was  enough money in the  ERA to                                                                    
make  the   annual  payment.  He  reported   using  as  many                                                                    
objective resources as possible  in calibrating the model to                                                                    
remove any  concern about the  model being skewed.  Later he                                                                    
would be  discussing some  of the data  the sources  used in                                                                    
the model.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck  reported  that the  department  used                                                                    
Monte Carlo  simulations to get  a range of results.  In the                                                                    
previous  year there  were multiple  hearings  in which  the                                                                    
modeling  process was  discussed.  The  department had  been                                                                    
asked to  bring back  a tremendous  number of  variations on                                                                    
that  modeling.  The  department   hired  the  McKinsey  and                                                                    
Company, an  international consulting  firm that  has worked                                                                    
with all  the sovereign  wealth funds  around the  world, to                                                                    
ensure that the  modeling was robust. The  company was asked                                                                    
to   review   the    department's   modeling   process   for                                                                    
reasonableness and  accuracy. The  company found  that there                                                                    
were no mechanical  errors in the state's  modeling and that                                                                    
the assumptions  were reasonable.  The company  approved the                                                                    
Monte Carlos process and suggested  some improvements to the                                                                    
modeling, which the Department of Revenue had incorporated.                                                                     
                                                                                                                                
1:46:10 PM                                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  reviewed the graph on  slide 4 titled                                                                    
"Budget Assumptions." He highlighted  the yellow line at the                                                                    
bottom that  represented the  fall forecasted  revenues from                                                                    
the 2006  Revenue Sources  Book less  unrestricted royalties                                                                    
and  production tax.  Royalties  and  production taxes  were                                                                    
taken out  because they were estimated  within the modeling.                                                                    
He  further  explained  that  they  were  removed  from  the                                                                    
baseline numbers  because they  became a  critical component                                                                    
in  the  modeling.  He  pointed   to  the  blue  line  which                                                                    
represented the  Office of  Management and  Budget's 10-year                                                                    
budget plan. In  the plan, the budget held  flat for several                                                                    
years, then increased with inflation going out in time.                                                                         
                                                                                                                                
Commissioner  Hoffbeck scrolled  to  slide  5: "Status  Quo:                                                                    
Method, Inputs,  And Assumptions"  The slide showed  how the                                                                    
PF earnings  performed overtime without changing  the budget                                                                    
or  increasing  revenues.  The  slide  showed  the  list  of                                                                    
assumptions used in the process.  The assumptions included a                                                                    
PF  starting balance  of $54.9  billion  (reflective of  the                                                                    
anticipated  amount at  the  end of  2017),  a 6.95  percent                                                                    
geometric  return with  a 12.32  percent standard  deviation                                                                    
(the return could be 6.95  percent, as high as 19.3 percent,                                                                    
or as  low as -5.5 percent),  and an inflation rate  of 2.25                                                                    
percent.  He   explained  that  about  90   percent  of  the                                                                    
investment returns  were realized  within the  statutory net                                                                    
income payout.                                                                                                                  
                                                                                                                                
Vice-Chair  Gara referred  to slide  5. He  asked about  the                                                                    
6.95 percent return assumption on  the PF and the 50 percent                                                                    
probable 6.24 percent.  Commissioner Hoffbeck responded that                                                                    
the  second  line represented  the  realized  returns -  the                                                                    
statutory net income. He further  explained that of the 6.95                                                                    
percent total  fund return, 6.24 percent  would be realized,                                                                    
a 90 percent realization.                                                                                                       
                                                                                                                                
Commissioner  Hoffbeck  discussed   slide  6:  "Status  Quo:                                                                    
Method,   Inputs,  And   Assumptions."  He   explained  that                                                                    
probabilistic  modeling  (used  in  generating  the  revenue                                                                    
sources book) was applied to  oil price production. Deposits                                                                    
to  the  fund consisted  of  31  percent of  royalties,  the                                                                    
weighted average of the deposit  that occurred. There was no                                                                    
planned payout from [to] the  general fund from the ERA, but                                                                    
unplanned  payouts would  occur after  the depletion  of the                                                                    
CBR. The  balance of the  CBR would  be $4.4 billion  at the                                                                    
beginning  of  2018  with  a 2.25  percent  rate  of  return                                                                    
projected.                                                                                                                      
                                                                                                                                
1:50:00 PM                                                                                                                    
                                                                                                                                
Representative Pruitt referred to  slide 6. He recalled that                                                                    
in a meeting in the prior  year the CBR was expected to have                                                                    
a balance of $3.5 billion in  2018. He asked about the shift                                                                    
to $4.4 billion.                                                                                                                
                                                                                                                                
Commissioner Hoffbeck answered that  the original number was                                                                    
$3.2  billion,   but  multiple   things  had   happened.  He                                                                    
elaborated that  the $4.4 billion  number was a  cash versus                                                                    
accrual accounting  number - the  cash that would be  in the                                                                    
fund. There  were some items  such as capital  projects that                                                                    
had  been approved  but  not  funded that  would  show as  a                                                                    
decrement on  an accrual basis.  He continued that  the $3.2                                                                    
billion  number was  an accrual  number rather  than a  cash                                                                    
number.  He  continued that  much  of  the shift  was  being                                                                    
driven by the fact that in  FY 16 the state had $100 million                                                                    
less in  draws than anticipated.  Also, in  FY 16 and  FY 17                                                                    
the state  had received  more revenues than  anticipated. It                                                                    
was  a combination  of some  accounting  issues and  better-                                                                    
than-projected  returns   from  the  time  the   number  was                                                                    
published in the previous year.                                                                                                 
                                                                                                                                
Representative Pruitt asked about  the balance on an accrual                                                                    
basis  to  compare  apples-to-apples.  He  wondered  if  the                                                                    
number would be  $4.4 billion. He suspected it  would not be                                                                    
as  low as  $3.2  billion. Commissioner  Hoffbeck would  get                                                                    
back to him with an answer.                                                                                                     
                                                                                                                                
Representative  Pruitt  asked  about  the  statutory  budget                                                                    
reserve (SBR) balance.  Commissioner Hoffbeck responded that                                                                    
it  was  $200  million.  He  added  that  the  $4.4  billion                                                                    
included the balances of both the CBR and the SBR.                                                                              
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  7: "Status  Quo:                                                                    
Method, Inputs, And Assumptions":                                                                                               
                                                                                                                                
     STATUS QUO: METHOD, INPUTS, AND ASSUMPTIONS                                                                                
                                                                                                                                
     Dividend Calculation:                                                                                                      
        • Total distributed is equal to half of the sum of                                                                    
          the last 5 years' statutory net income multiplied                                                                     
          by 0.21 or half of the ERA, whichever is less                                                                         
                                                                                                                                
     Inflation Proofing:                                                                                                        
        • The fund's principal is inflation proofed at the                                                                    
          predicted inflation rate.                                                                                             
                                                                                                                                
Commissioner Hoffbeck reported  the dividend calculation was                                                                    
the  last 21  percent of  the previous  5 years'  earnings -                                                                    
essentially  the  average  of  the previous  5  years,  just                                                                    
slightly   more.    Inflation   proofing   was    a   direct                                                                    
appropriation based  on the measured inflation  of the prior                                                                    
year. He  reiterated he was  speaking of the status  quo. He                                                                    
noted that  the dividend calculation  was 21 percent  of the                                                                    
prior 5 years  or half of the remaining ERA,  which ever was                                                                    
less. In other words, when  the state started to deplete the                                                                    
ERA the  dividend would decrease  because it could  never be                                                                    
more than half of the ERA balance.                                                                                              
                                                                                                                                
Vice-Chair Gara  did not  agree with  the term  "status quo"                                                                    
because in  the previous year  the legislature did  not fund                                                                    
inflation   proofing.   He   asked  if   he   was   correct.                                                                    
Commissioner   Hoffbeck   confirmed  Vice-Chair   Gara   was                                                                    
correct.  The  commissioner  was  explaining  the  statutory                                                                    
status quo.                                                                                                                     
                                                                                                                                
Representative  Wilson had  heard  about a  50/50 plan.  She                                                                    
asked about  what would have  been left  in the ERA  had the                                                                    
state paid  the full  dividend amount of  approximately $1.2                                                                    
billion.  She  wanted  to  know   the  figure  for  realized                                                                    
earnings.  Commissioner Hoffbeck  asked  her  to repeat  her                                                                    
question.                                                                                                                       
                                                                                                                                
Representative  Wilson thought  that  the  state would  have                                                                    
paid out about $1.2 billion  in dividends had the amount not                                                                    
been  reduced.  She  surmised that  there  would  have  been                                                                    
another $1.2  billion left  to put in  the ERA  and utilized                                                                    
with  a 21  vote.  Commissioner Hoffbeck  indicated she  was                                                                    
correct.   He   furthered   that  the   portion   that   had                                                                    
historically  been used  for inflation  proofing could  have                                                                    
been  used in  the previous  year. He  noted that  the state                                                                    
could  have used  any amount  that was  in the  ERA balance,                                                                    
about $8.0 billion, with a simple majority vote.                                                                                
                                                                                                                                
1:54:33 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck advanced  to  the chart  on slide  8:                                                                    
"Status Quo, No  Fiscal Plan: Dividend paid  per Person." He                                                                    
indicated that the  slide showed the dividend  that would be                                                                    
paid per  person under  the status quo  plan. He  noted that                                                                    
the 2018 value would be  about $2400 based on the forecasted                                                                    
PF returns. He reported that  the 2041 median value, the end                                                                    
of the  modeling period, would  be zero. He  emphasized that                                                                    
there would  be no  dividend. He  explained that  the yellow                                                                    
bar  represented  between the  median  and  a factor  of  75                                                                    
percent. The blue bar represented  the median to a factor of                                                                    
25  percent. The  median fell  between the  yellow and  blue                                                                    
lines  on  the chart.  The  whiskers  represented the  total                                                                    
range of  the forecast. The  chart showed how far  the total                                                                    
range  could deviate  over time.  It fell  off precipitously                                                                    
after  only  a few  years.  He  added  that the  status  quo                                                                    
without a fiscal plan would result  in a median value of $67                                                                    
billion in  2041. The real  value would be  $39.563 billion.                                                                    
He redirected members'  attention to the first  slide of the                                                                    
presentation  that  showed  a real  fund  balance  of  $54.9                                                                    
billion.                                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  turned  to  the chart  on  slide  9:                                                                    
"Status  Quo,  No  Fiscal  Plan:   Nominal  Fund  Size."  He                                                                    
reported that the  value of the fund  would be significantly                                                                    
degraded under the status quo.  The ERA failure rate over 24                                                                    
years was 98.24 percent. There  was absolute surety that the                                                                    
ERA would run out of money during the forecast period.                                                                          
                                                                                                                                
Commissioner  Hoffbeck  spoke  to  the chart  on  slide  10:                                                                    
"Status Quo,  No Fiscal Plan: Cumulative  ERA Failure Rate."                                                                    
He  thought the  graph provided  a  good visual  of the  ERA                                                                    
failure rate.  He stressed that  the dividend was  paid from                                                                    
the ERA. Therefore, when the  ERA failed, the dividend would                                                                    
likely be  reduced to zero.  He highlighted that by  2023 or                                                                    
2024 there  would be a  50/50 chance  of having no  money in                                                                    
the ERA and  no dividend without a different  plan in place.                                                                    
It was  clear that  the status  quo plan  would lead  to the                                                                    
depletion and failure of the fund.                                                                                              
                                                                                                                                
Commissioner  Hoffbeck reviewed  slide 11:  "APFPA with  CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
     APFPA WITH CBR TRANSFER: METHOD, INPUTS, AND                                                                               
     ASSUMPTIONS                                                                                                                
                                                                                                                                
     • Permanent Fund Starting Value: $53.4 billion                                                                           
          • Realized portion of corpus: $40.7 billion                                                                         
         • Realized portion of ERA: $6.3 billion                                                                              
          • Unrealized earnings held by the fund: $6.3                                                                        
             billion                                                                                                            
          • Starting value was estimated based on the                                                                         
             following:                                                                                                         
               • $54.9 billion estimated EOY 2017 balance                                                                     
                  of PF under status quo                                                                                        
               • Plus $0.8 billion from the difference in                                                                     
                  the calendar year (CY) 2017 dividend                                                                          
                  calculation                                                                                                   
               • Less $2.4 billon transfer to CBR (repaying                                                                   
                  for last year's withdrawal as if we                                                                           
                  started PFPA a year earlier)                                                                                  
                                                                                                                                
        • Investment Return: Callan Associate's 10-year                                                                       
          forecast                                                                                                              
               • Total return: 6.95 percent geometric,                                                                        
                  12.32 percent standard deviation                                                                              
               • Statutory return: P10 = 3.70 percent, P50                                                                    
                  = 6.24 percent, P90 = 8.14 percent                                                                            
             • Inflation rate: 2.25 percent                                                                                   
                                                                                                                                
Commissioner  Hoffbeck clarified  that the  Alaska Permanent                                                                    
Fund  Protection  Act (APFPA)  had  a  2017 effective  date,                                                                    
essentially   creating   a   transfer  to   the   CBR.   The                                                                    
constitutional Budget  Reserve draw  would be  replaced with                                                                    
PF  earnings. The  Permanent Fund  starting  value would  be                                                                    
about $53.4 billion.  He pointed to the middle  of the slide                                                                    
which showed  the calculation of  how to go down  from $54.9                                                                    
to $53.4. The investment returns were the same.                                                                                 
                                                                                                                                
1:58:19 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck spoke  to slide  12: "APFPA  with CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   • Petroleum Revenues:                                                                                                      
        • Oil price: Probabilistic analysis of ANS oil                                                                        
          prices using a PERT distribution from the fall                                                                        
          2016 price forecasting session.                                                                                       
        • Production: Probabilistic analysis of ANS oil                                                                       
          prices using a PERT distribution from the DNR                                                                         
          provided Fall 2016 RSB                                                                                                
   • Deposits: 25% of royalties deposited into the                                                                            
     permanent fund.                                                                                                            
   • Payout Calculation: 5.25% of the average of first 5 of                                                                   
     the last 6 years' total  fund size. This value can then                                                                    
     be  decreased if  the combined  royalty and  production                                                                    
     tax revenues  for the year  are above $1.2  billion, by                                                                    
     the amount over  $1.2 billion. This can  not reduce the                                                                    
     payout amount by more than 80%.                                                                                            
   • Unplanned Payouts: After depleting the CBR, budget                                                                       
     deficits are filled from the ERA.                                                                                          
                                                                                                                                
   • CBR: $6.8 billion BOY 2018 balance with Rate of Return                                                                   
     of 2.25%                                                                                                                   
                                                                                                                                
        • Initial Balance of $6.8 billion is estimated                                                                        
          based on a forecasted balance of $4.4 billion and                                                                     
          a $2.4 billion transfer from the ERA                                                                                  
                                                                                                                                
Commissioner  Hoffbeck reported  that the  petroleum revenue                                                                    
calculations would  be the same. However,  the percentage of                                                                    
royalties  being deposited  would be  reduced to  25 percent                                                                    
from  31 percent.  He detailed  that the  only deposit  that                                                                    
would be  made in  the APFPA  would be  the constitutionally                                                                    
required deposit.  The plan did  not include  the additional                                                                    
statutory deposit. He detailed  the payout calculation which                                                                    
would be  5.25 percent of the  average of the first  5 years                                                                    
of  the previous  6 years.  There  was a  $1.2 billion  draw                                                                    
limit. Once  the state reached  $1.2 billion in oil  and gas                                                                    
severance  tax and  royalties, the  payout  of the  dividend                                                                    
would  be  reduced  dollar  for  dollar.  He  observed  that                                                                    
everything that had  been discussed in the  prior year would                                                                    
be  imbedded  within  the  calculation.  He  continued  that                                                                    
unplanned payouts  would come out  of the ERA after  the CBR                                                                    
was entirely depleted. Although,  under the scenario where a                                                                    
full fiscal plan would be  in place, it was anticipated that                                                                    
the budget  gap would  be closed  and, therefore,  would not                                                                    
require additional  draws. He  clarified that  if additional                                                                    
draws were necessary,  the money would come out  of the ERA.                                                                    
He added that  the CBR would begin with a  higher balance of                                                                    
$6.8  billion because  the $2.4  billion draw  from the  CBR                                                                    
would be replaced with a $2.4 billion draw from the ERA.                                                                        
                                                                                                                                
Commissioner Hoffbeck  discussed slide  13: "APFPA  with CBR                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   • Dividend Calculation:                                                                                                    
     • The sum of:                                                                                                            
        • 20% of the POMV payout before any reduction, and                                                                    
        • 20% of the unrestricted royalties (about 15% of                                                                     
          total royalties) from the most recent FY ended                                                                        
        • Overwriting the above calculation there is a                                                                        
          fixed dividend of $1,000 per person for CY 2018.                                                                      
                                                                                                                                
   • Inflation Proofing:                                                                                                      
                                                                                                                                
     • If four times the 5.25% POMV payout (21% of the total                                                                  
        fund value) remains in the ERA after the POMV transfer,                                                                 
        the amount over the four times the POMV is transferred                                                                  
        into the corpus.                                                                                                        
                                                                                                                                
Commissioner  Hoffbeck  reviewed  the  dividend  calculation                                                                    
under the  new 20/20 formula.  It equaled 20 percent  of the                                                                    
percent of  market value  (POMV) payment  and 20  percent of                                                                    
unrestricted royalties. Inflation proofing  would be tied to                                                                    
the 4-times draw  (once the ERA had 4-times  the annual draw                                                                    
money would flow  back into the corpus of the  PF). He noted                                                                    
that  the  structure  when  doing   the  modeling  had  been                                                                    
discussed in the previous day.                                                                                                  
                                                                                                                                
Co-Chair Seaton  asked about the calculation.  He reiterated                                                                    
that if  the POMV percentage  was fixed and after  it flowed                                                                    
in,  20  percent  of  the  POMV deposit  would  go  out.  He                                                                    
wondered if it would go out  prior to the money flowing back                                                                    
to  inflation proofing  or whether  the POMV  draw would  be                                                                    
reduced.  Commissioner   Hoffbeck  responded  that   the  20                                                                    
percent of  5.25 percent would always  be calculated against                                                                    
the  maximum draw.  He  continued that  as  the actual  draw                                                                    
started to  be reduced, the  dividend would not  be reduced.                                                                    
The dividend would always be  calculated on the maximum draw                                                                    
amount rather than the actual draw.                                                                                             
                                                                                                                                
Vice-Chair Gara referred to slide  13 and asked about the 20                                                                    
percent  of  unrestricted  royalties.  He  wondered  if  the                                                                    
amount  would come  out of  the  POMV or  out of  royalties.                                                                    
Commissioner Hoffbeck responded that  it would come directly                                                                    
from royalties,  the portion of the  royalties not dedicated                                                                    
in the constitution to the corpus  of the fund (the other 75                                                                    
percent).                                                                                                                       
                                                                                                                                
Vice-Chair Gara stated  that if the state had  a deficit and                                                                    
20  percent was  taken from  royalties instead  of from  the                                                                    
ERA,  it  would  come  out  of the  CBR.  It  would  not  be                                                                    
additional money until  there was no deficit  left. He asked                                                                    
if   he  was   accurate.  Commissioner   Hoffbeck  did   not                                                                    
understand the representative's question.                                                                                       
                                                                                                                                
Vice-Chair Gara restated his question.  He suggested that if                                                                    
the state was in a  position where revenues did not approach                                                                    
expenditures  and the  state wanted  to take  20 percent  of                                                                    
royalties  to pay  for  part of  the PF,  it  would mean  20                                                                    
percent less for  general fund spending. It  would require a                                                                    
larger CBR draw.  He continued that instead  of taking money                                                                    
from the  ERA the money  would be taken  out of the  CBR. He                                                                    
asked if  he was  accurate. Commissioner  Hoffbeck answered,                                                                    
"yes." He added  that the intent was for the  monies to come                                                                    
out of royalties first. The net  effect was if there was not                                                                    
enough in the general fund, a  larger CBR draw would have to                                                                    
be  made.  It  did  not  make  any  mathematical  difference                                                                    
whether the money was used  for the dividend or for covering                                                                    
the remaining general fund expenditures.                                                                                        
                                                                                                                                
2:03:06 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck   detailed  slide  14:   "APFPA  with                                                                    
Transfer, Full  Fiscal Plan: Dividend  paid per  Person." He                                                                    
reported that  the plan had  a guaranteed dividend  of $1000                                                                    
until  2041 when  it would  increase to  $1416. Essentially,                                                                    
the dividend  amount would  be about  $1000 for  the 24-year                                                                    
life of the forecast.                                                                                                           
                                                                                                                                
Commissioner  Hoffbeck advanced  to  slide  15: "APFPA  with                                                                    
Transfer, Full Fiscal Plan: Nominal  Fund Size." He detailed                                                                    
that  the 2041  value of  the PF  would be  $99.254 billion,                                                                    
which would  start at $53.4  billion. The real value  of $99                                                                    
billion  would  equal $58.188  million.  The  fund would  be                                                                    
growing at a rate greater  than inflation. It would not only                                                                    
protect the fund  but would allow the fund  to grow slightly                                                                    
over time.  The earnings reserve account  failure rate would                                                                    
be 1.2  percent. There  would be very  little chance  of the                                                                    
ERA being  depleted to  the point  where the  annual payment                                                                    
would not be  viable. The failure rate was  reflected in the                                                                    
following slide.                                                                                                                
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  16: "APFPA  with                                                                    
Transfer, Full  Fiscal Plan:  Cumulative ERA  Failure Rate."                                                                    
He made the  point that the chart did not  show much because                                                                    
the failure rate followed the same line as the base line.                                                                       
                                                                                                                                
Representative Ortiz  returned to  slide 14 that  showed the                                                                    
projected dividends  until 2041. He asked  about the factors                                                                    
in play that  would prevent the dividend  from increasing in                                                                    
value with  at least inflation. He  thought the commissioner                                                                    
was saying that it would  remain around $1000 into 2041. The                                                                    
value would  consistently go down.  He wondered what  was in                                                                    
the  formula that  would prevent  the dividend  from keeping                                                                    
pace with inflation. Commissioner  Hoffbeck answered that it                                                                    
was primarily  the production forecast. The  royalty side of                                                                    
the  equation   was  based  on  price   and  production.  He                                                                    
indicated the  state did not  see large price  increases and                                                                    
saw falling production over time.  He commented, "That piece                                                                    
is going to drop."                                                                                                              
                                                                                                                                
Commissioner  Hoffbeck   detailed  slide  17:   "APFPA  with                                                                    
Transfer,  No Fiscal  Plan: Dividend  paid per  Person." The                                                                    
slide  assumed that  the  current  structural deficit  would                                                                    
remain in  the budget. Once  the CBR was depleted  the state                                                                    
would turn to the ERA to  continue to fill the gap. He posed                                                                    
the  question  about  what  impact  it  would  have  on  the                                                                    
durability  of the  PF and  the  size of  the dividend.  The                                                                    
dividend would start  out at $1000 and would  grow to $1,239                                                                    
over the 24-year  projection which was about  $200 less than                                                                    
under a full  fiscal plan. The real value was  less than the                                                                    
$1000.                                                                                                                          
                                                                                                                                
2:07:03 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck advanced  to  slide  18: "APFPA  with                                                                    
Transfer, No  Fiscal Plan: Nominal  Fund Size." In  2041 the                                                                    
median  value  of  the  fund  would  be  $76  billion  which                                                                    
provided a nominal  value of $44.6 billion.  The start value                                                                    
was $53.4  billion. In the  current scenario there  would be                                                                    
degradation of the fund itself  over the period. There would                                                                    
be an  ERA failure rate of  45.38 percent. There was  a very                                                                    
good chance that  at some point there would not  be money in                                                                    
the  ERA  to  make  the  dividend  payment  or  for  funding                                                                    
government expenditures.                                                                                                        
                                                                                                                                
Vice-Chair  Gara commented  that he  had heard  Commissioner                                                                    
Hoffbeck state  that without a  fiscal plan the  state would                                                                    
run  out of  savings and  earnings  reserve money  to pay  a                                                                    
dividend. He  thought the commissioner was  saying that with                                                                    
no fiscal  plan the  state would still  have a  dividend. He                                                                    
asked  for clarity  about the  chart. Commissioner  Hoffbeck                                                                    
indicated  that the  chart reflected  a permanent  fund only                                                                    
solution. All  that would  be done  would be  to restructure                                                                    
the PF without any other changes.                                                                                               
                                                                                                                                
Representative Wilson  asked about the amount  of the budget                                                                    
and about the  growth rate. She wondered  about the starting                                                                    
number without a fiscal plan.  She wondered about the growth                                                                    
rate  and  a  percentage  decrement.  Commissioner  Hoffbeck                                                                    
directed members to slide 4  which showed the budget numbers                                                                    
in a  graph. The budget stayed  flat through FY 20  and then                                                                    
started to grow with inflation.                                                                                                 
                                                                                                                                
Representative  Wilson clarified  that  flat  meant no  gain                                                                    
whatsoever  and  no  new  contracts. She  asked  if  he  was                                                                    
talking  about the  same amount  until FY  20 at  which time                                                                    
inflation   would   be   included.   Commissioner   Hoffbeck                                                                    
responded  that he  could not  drill down  specifically, but                                                                    
confirmed      that      the      budget      amount      of                                                                    
$4.2  billion would  essentially  be what  it was  currently                                                                    
through 2020.                                                                                                                   
                                                                                                                                
Representative Wilson  thought it  would be very  helpful to                                                                    
get  further clarification  about  how  the numbers  worked.                                                                    
Commissioner  Hoffbeck commented  that there  was no  dollar                                                                    
growth in  the budget through  2020. If there  were contract                                                                    
increases,  they would  be absorbed  in other  parts of  the                                                                    
budget.  After 2020,  growth would  be seen  at the  rate of                                                                    
inflation.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck continued  to slide  19: "APFPA  with                                                                    
Transfer, No Fiscal Plan: Cumulative  ERA Failure Rate." The                                                                    
chart  showed   when  the  state  would   start  seeing  the                                                                    
potential for failure in the  ERA without a fiscal plan. The                                                                    
earnings reserve  account would stay  stable up to  the late                                                                    
2020s. The  chance of failure would  grow dramatically after                                                                    
that time.                                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck continued  to  slide  20 "APFPA  with                                                                    
Transfer,  No Fiscal  Plan: Median  UGF Revenue/Budget."  He                                                                    
explained that the  reason the chance of  failure would grow                                                                    
dramatically after  2028 was because,  under the  APFPA only                                                                    
solution with the  FY 17 transfer, there would  be CBR money                                                                    
available to fill  the void until 2028, after  which the ERA                                                                    
would be tapped.                                                                                                                
                                                                                                                                
Co-Chair  Seaton asked  if  "Other  revenue Draws"  included                                                                    
only the  CBR. He wondered  if it included drawing  from the                                                                    
higher education  fund or the Power  Cost Equalization fund.                                                                    
Commissioner Hoffbeck responded, "That's only the CBR."                                                                         
                                                                                                                                
Commissioner Hoffbeck relayed slide  21: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   Permanent  Fund  Starting   Value:  $55.8   billion  (See                                                                    
   estimate below)                                                                                                              
   • Realized portion of corpus: $40.7 billion                                                                                
   • Realized portion of ERA: $8.7 billion                                                                                    
   • Unrealized earnings held by the fund: $6.3 billion                                                                       
 • Starting value was estimated based on the following:                                                                       
   • $54.9 billion estimated EOY 2017 balance of  PF under                                                                    
     status quo                                                                                                                 
   • Plus $0.8 billion from the difference in the  CY 2017                                                                    
     dividend calculation                                                                                                       
                                                                                                                                
  Investment Return: Callan Associate's 10-year forecast                                                                        
   • Total return:   6.95%  geometric,   12.32%   standard                                                                    
     deviation                                                                                                                  
   • Statutory return: P10 =  3.70%, P50  =  6.24%, P90  =                                                                    
     8.14%                                                                                                                      
   • Inflation rate: 2.25%                                                                                                    
                                                                                                                                
Commissioner Hoffbeck  indicated the  slide reflected  an FY                                                                    
18 start. He reported that  the scenario was very similar to                                                                    
the  previous  two  scenarios he  had  just  discussed.  The                                                                    
difference was  that there  would not  be an  FY 17  draw. A                                                                    
draw  would begin  in FY  18. The  scenario would  include a                                                                    
full  plan to  fix everything  as well  as implementing  the                                                                    
APFPA.  The Permanent  Fund starting  value would  be higher                                                                    
because of  a lack of an  FY 17 draw. The  other significant                                                                    
difference could be found on the following slide.                                                                               
                                                                                                                                
Commissioner Hoffbeck relayed slide  22: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
   Permanent  Fund  Starting   Value:  $55.8   billion  (See                                                                    
   estimate below)                                                                                                              
   • Realized portion of corpus: $40.7 billion                                                                                
   • Realized portion of ERA: $8.7 billion                                                                                    
   • Unrealized earnings held by the fund: $6.3 billion                                                                       
 • Starting value was estimated based on the following:                                                                       
     • $54.9 billion estimated EOY 2017 balance of PF under                                                                   
        status quo                                                                                                              
     • Plus $0.8 billion from the difference in the CY 2017                                                                   
        dividend calculation                                                                                                    
                                                                                                                                
  Investment Return: Callan Associate's 10-year forecast                                                                        
   • Total return:   6.95%  geometric,   12.32%   standard                                                                    
     deviation                                                                                                                  
   • Statutory return: P10 = 3.70%, P50 = 6.24%, P90 =                                                                        
     8.14%                                                                                                                      
   • Inflation rate: 2.25%                                                                                                    
                                                                                                                                
Commissioner Hoffbeck explained that  the CBR would be lower                                                                    
because of not including the payback to the CBR.                                                                                
                                                                                                                                
Commissioner Hoffbeck relayed slide  23: "APFPA without CBRF                                                                    
Transfer: Method, Inputs, And Assumptions":                                                                                     
                                                                                                                                
• Dividend Calculation:                                                                                                       
   • The sum of:                                                                                                              
     • 20% of the POMV payout before reductions, and                                                                          
     • 20% of the unrestricted royalties (about 15% of                                                                        
      total royalties) from the most recent FY ended                                                                            
   • Overwriting the above calculation, the dividend for                                                                      
     CY2018 is $1,000/person.                                                                                                   
                                                                                                                                
• Inflation Proofing:                                                                                                         
   • If four times the 5.25% POMV payout remains in the ERA                                                                   
     after the POMV transfer, the amount over the four                                                                          
     times the POMV is transferred into the corpus.                                                                             
                                                                                                                                
Commissioner   Hoffbeck    reported   that    the   dividend                                                                    
calculation would be the same as previously calculated.                                                                         
                                                                                                                                
2:12:31 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck  detailed  slide 24:  "APFPA  without                                                                    
Transfer, Full  Fiscal Plan: Dividend  paid per  Person." He                                                                    
detailed the impact  on the dividend. He  relayed that, with                                                                    
a FY 18  starting date and a full fiscal  plan, the dividend                                                                    
would start at  $1000 and grow to $1468. He  added that with                                                                    
an FY 17  draw it would equal $1416 -  a difference of about                                                                    
$50 without a FY 17 draw.                                                                                                       
                                                                                                                                
Co-Chair Seaton asked about slide  22. He was looking at the                                                                    
CBR value  of $4.4  billion. On  slide 6  the CBR  value was                                                                    
listed  at  $4.4  billion.  However,  he  thought  that  the                                                                    
commissioner had stated  that if the draw did  not occur the                                                                    
CBR would  be higher.  Commissioner Hoffbeck  suggested that                                                                    
rather than looking at slide  6, Co-Chair Seaton should look                                                                    
at  slide 12.  It showed  the  CBR listed  at $6.8  billion.                                                                    
Slide 12 reflected an effective date of FY 17.                                                                                  
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 25:  "APFPA without                                                                    
Transfer, Full Fiscal Plan: Nominal  Fund Size." He reported                                                                    
that the  slide showed  the effect  on the PF  with a  FY 18                                                                    
effective date. The  fund would grow to  $104,079 billion in                                                                    
a 24-year  period. The fund would  have a real value  of $61                                                                    
billion.  The fund  would  start out  at  $55.8 billion  and                                                                    
would  grow to  $61 billion.  In  the scenario  with a  full                                                                    
fiscal  plan the  fund would  grow  at a  rate greater  than                                                                    
inflation. The  earnings rate  estimated failure  rate would                                                                    
be 0.18 percent or less than one-fifth of 1 percent.                                                                            
                                                                                                                                
Commissioner Hoffbeck continued to  slide 26: "APFPA without                                                                    
Transfer, Full  Fiscal Plan:  Cumulative ERA  Failure Rate."                                                                    
He remarked  that there  would be  little chance  of failure                                                                    
under the scenario.                                                                                                             
                                                                                                                                
Commissioner  Hoffbeck  detailed  slide 27:  "APFPA  without                                                                    
Transfer,  No Fiscal  Plan: Dividend  paid  per Person."  He                                                                    
explained  that the  slide  reflected a  scenario  in FY  18                                                                    
without  solving any  of the  fiscal  issues. The  Permanent                                                                    
Fund Dividend would  go from $1468 under the  full plan down                                                                    
to $1271 over the life of the 24-year projection.                                                                               
                                                                                                                                
Commissioner Hoffbeck  advanced to slide 28:  "APFPA without                                                                    
Transfer, No  Fiscal Plan: Nominal  Fund Size."  He reported                                                                    
that  the nominal  value of  the  fund would  drop to  $46.3                                                                    
billion  down   from  $55.8  billion.   There  would   be  a                                                                    
degradation of the fund without  fixing the remainder of the                                                                    
fiscal  problem  as  well as  implementing  the  APFPA.  The                                                                    
failure rate of the ERA would be 44.61 percent.                                                                                 
                                                                                                                                
Commissioner Hoffbeck continued to  slide 29: "APFPA without                                                                    
Transfer, No  Fiscal Plan: Cumulative ERA  Failure Rate." He                                                                    
highlighted that  the failure rate  would start to  climb in                                                                    
the late 2020s.                                                                                                                 
                                                                                                                                
Commissioner Hoffbeck continued to  slide 30: "APFPA without                                                                    
Transfer,  No Fiscal  Plan:  Median  UGF Revenue/Budget.  He                                                                    
emphasized that the  CBR would start to run out  in the late                                                                    
2020s at  which time the  state would  have to tap  into the                                                                    
ERA to fill the void.                                                                                                           
                                                                                                                                
2:16:36 PM                                                                                                                    
                                                                                                                                
Commissioner  Hoffbeck presented  the conclusions  listed on                                                                    
slide 31 "Conclusions":                                                                                                         
                                                                                                                                
   Status quo situation:                                                                                                        
   • Dividend will collapse                                                                                                   
   • Permanent Fund will be used to fill budget deficits,                                                                     
     depleting value                                                                                                            
                                                                                                                                
   Permanent Fund Protection Act:                                                                                               
   • Stabilizes the dividend and budget with or without CBR                                                                   
     transfer                                                                                                                   
   • However, additional revenue measures or budget cuts                                                                      
     are  required  to  protect  the  fund.  Otherwise,  the                                                                    
     remaining   budget   gap   will   lead   to   unplanned                                                                    
     withdrawals from  the permanent fund that  will degrade                                                                    
     its value.                                                                                                                 
                                                                                                                                
Commissioner Hoffbeck  concluded that there was  very little                                                                    
difference in  durability with  or without  the FY  17 draw.                                                                    
The fund  would be slightly  more durable, as it  would grow                                                                    
larger  and the  dividend would  be slightly  larger with  a                                                                    
start  date in  FY 18.  He suggested  that the  5.25 percent                                                                    
draw  worked  under  the  modeling  -  it  was  durable  and                                                                    
sustainable. All  models containing  a full  fiscal solution                                                                    
worked. However, models without  a full fiscal solution were                                                                    
not  sustainable. Stand-Alone  models  were  not durable  or                                                                    
sustainable. A broader plan was necessary.                                                                                      
                                                                                                                                
Co-Chair  Foster  would be  passing  the  gavel to  Co-Chair                                                                    
Seaton  to discuss  the supplemental  budget.  He asked  for                                                                    
questions from the committee.                                                                                                   
                                                                                                                                
Commissioner   Hoffbeck   indicated  Emma   Pokon,   Special                                                                    
Assistant,  Office of  the Attorney  General, Department  of                                                                    
Law,  was available  for anyone  wanting more  detail or  to                                                                    
walk through  the various forecasts.  She was happy  to meet                                                                    
with   anyone  one-on-one   that  wanted   more  information                                                                    
regarding the modeling.                                                                                                         
                                                                                                                                
Co-Chair  Seaton asked  about the  transfer of  the PFD  for                                                                    
prisoners. He  thought it was  calculated based on  the full                                                                    
dividend.  He  wondered  if  there was  a  necessity  for  a                                                                    
transfer from another  account to fund the  amount. He asked                                                                    
how the amount was accounted. He  wanted to get it on record                                                                    
that there  was a  calculation or a  fund transfer  that the                                                                    
legislature wanted to see.                                                                                                      
                                                                                                                                
Commissioner  Hoffbeck would  have to  get back  to Co-Chair                                                                    
Seaton.                                                                                                                         
                                                                                                                                
HB  61  was   HEARD  and  HELD  in   committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
2:19:15 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:25:13 PM                                                                                                                    
RECONVENED