Legislature(2005 - 2006)SENATE FINANCE 532
05/03/2005 09:00 AM Senate FINANCE
Audio | Topic |
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Start | |
SB46 | |
HB187 | |
SB102 | |
SB22 | |
SB192 | |
HB178 | |
SB125 | |
SB46 | |
Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
+ | HB 187 | TELECONFERENCED | |
+= | SB 46 | TELECONFERENCED | |
+= | SB 102 | TELECONFERENCED | |
*+ | SB 192 | TELECONFERENCED | |
+ | SB 22 | TELECONFERENCED | |
+ | SB 78 | TELECONFERENCED | |
+ | SB 125 | TELECONFERENCED | |
+ | TELECONFERENCED | ||
= | HB 178 | ||
CS FOR HOUSE BILL NO. 187(FIN)(efd fld) "An Act relating to money deposited into the Alaska permanent fund as a result of the settlement of State v. Amerada Hess; relating to the Alaska capital income fund and to deposits of income from State v. Amerada Hess settlement money into the Alaska capital income fund." This was the first hearing for this bill in the Senate Finance Committee. PETE ECKLUND, Staff to Representative Kevin Meyer, the bill's sponsor on behalf of Governor Frank Murkowski, explained that this bill would establish the Alaska Capital Income Fund "within the General Fund and would authorize the deposit into that fund of earnings received ? from the Amerada Hess lawsuit." The Amerada Hess (AH) Settlement was the end result of a 1982 lawsuit the State filed against oil and gas companies. At the time, "both State and federal judges expressed concerns about the capacity of Alaskan judges and juries to participate in the case on an impartial basis in light of the fact that earnings on that portion of any recovery in the case would be deposited into the Permanent Fund and be used to pay Permanent Fund Dividends to all Alaskan juries and judges." This led to the enactment of Alaska Statute (AS) 37.13.145(d) that required the interest earned on that lawsuit's settlement money to be deposited into the principal of the Permanent Fund. Furthermore, it directed that no earnings derived from that money could be used to fund Permanent Fund Dividends. Mr. Ecklund stated that this action eliminated the impartiality concern regarding the Permanent Fund Dividend (the Dividend) amount. Although the AH case was settled, there remains the possibility that it could be reopened or subject to arbitration. Approximately $424,000,000, including earnings and inflation proofing, is contained within an AH subaccount in the Permanent Fund. This bill would propose to retain the AH subaccount at the $424,000,000 level, but to move money that would be contributed to inflation proof the subaccount into another portion of the Permanent Fund principal. Mr. Ecklund stated that this bill would authorize the earnings on the AH principal, which is estimated to be $25,000,000 to $30,000,000 annually, to be deposited into the new Alaska Capital Income Fund (ACIF). Money deposited into the ACIF could be utilized to support "any valid public purpose". Mr. Ecklund noted that the 2006 Capital Budget bill, SB 46, would include provisions to utilize approximately $60,000,000 "of these earnings" to support capital projects. Mr. Ecklund assured the Committee that this endeavor would not impact the calculation of the Dividend "and is neutral on the dollar amount of each Alaskan's Dividend". 9:39:03 AM In response to a question from Senator Dyson, Mr. Ecklund restated the fact that "this legislation is neutral on the dividend"; it has no impact on either the calculation of the Dividend or the amount of each Dividend check. 9:39:14 AM Co-Chair Wilken, referencing the chart titled "Current System" [copy on file) provided by the sponsor, asked the reason the decision was made to establish the ACIF instead of specifying that the money be utilized for the debt reimbursement fund. Mr. Ecklund responded that the Committee could alter the proposal to specify that the earnings from the ACIF be utilized to support the debt retirement fund. 9:39:45 AM Mr. Ecklund stated that the decision not to do that at this time was based on the fact that "the debt retirement fund is a sweepable fund". There would be no sweepablity concern were the earnings appropriated to support capital projects. 9:40:00 AM Co-Chair Green understood that the language in this bill would not prohibit using the earnings for debt retirement. Mr. Ecklund affirmed. The money "could be used for any valid public purpose." Once the money is deposited into the ACIF, it could be used for such things as debt retirement, capital projects, operating budgets, and future bond obligations. Co-Chair Wilken asked for confirmation that the funds in the ACIF would be non-sweepable. Mr. Ecklund clarified that the ACIF would be sweepable, however, as proposed in the capital budget bill, the money deposited into the ACIF could be utilized to fund capital projects in the capital budget. Co-Chair Green understood therefore, that in order to prevent the funds from being sweepable, they must be identified as the funding mechanism in the capital budget, for instance. Mr. Ecklund explained that, "when the money is appropriated from the Alaska Income Fund to capital projects, those capital projects are then non-sweepable". Co-Chair Green understood therefore, that when ACIF money "is used in a capital project or for debt reimbursement, and is paid out, it's not sweepable". Mr. Ecklund clarified that any balance in the debt retirement fund would be sweepable. On the other hand, "capital projects that have been appropriated are non-sweepable". 9:41:35 AM Senator Stedman asked regarding "the mechanics of sweepability" and whether ACIF could be structured to prohibit its funds from being swept. In addition, he asked how the AH earnings would be calculated. 9:42:18 AM Mr. Ecklund stated that "most funds are sweepable". The FY 06 capital budget would propose "to expend the money that flows into the" ACIF for capital projects, as, once that money is appropriated for a capital project, that capital project would not be subject to the sweep. He reiterated that most funds are sweepable, and that the "very few exceptions" to that would include the new education fund that was created this year and the Power Cost Equalization (PCE) Endowment Fund. Senator Stedman asked whether this fund could be protected from the sweep. Mr. Ecklund responded that "the Department of Administration is the entity that makes" the determination as to which funds would be sweepable. A multitude of standards and calculations are involved in the endeavor. He deferred to the Department of Administration in this regard. Senator Stedman asked regarding the calculation that would determine how much money would be deposited into the ACIF. 9:44:24 AM Mr. Ecklund replied that a representative of the Alaska Permanent Fund Corporation, Department of Revenue could best answer that question; however, he understood that "the earnings on this subaccount would be calculated the same way as the earnings of the rest of the Permanent Fund". Senator Stedman asked whether "any smoothing mechanism" would be incorporated or whether an annual calculation would be automatically moved into the account. He surmised that the calculation would be conducted at the conclusion of each fiscal year, as that would provide the information to the Governor in time to incorporate it into his budget proposal that is due by December 15th of each year. Mr. Ecklund confirmed that the funding transfer would not occur until the end of the fiscal year. The amount could be estimated earlier. Co-Chair Green asked whether it would be possible to calculate this year's amount based on last year's actual performance. That would assist in removing the estimation factor. Mr. Ecklund supported estimating the amount rather than basing it on last year's performance; the amount would be easier to pinpoint as the end of the fiscal year nears. Approximately $30,000,000 has been the recent historical range. Co-Chair Green concluded therefore that the range of estimation, at this point, is pretty narrow; there might be a deviation range of $2,000,000 or $3,000,0000 from the actual amount. She questioned "whether the forecasting could be that close". Mr. Ecklund affirmed that it could. 9:46:39 AM Senator Stedman ascertained that this process would differ from that of estimating oil prices, which are based on such things as volume and price. When "operating within the portfolio confines of the Permanent Fund, it depends on their buying and selling, profit taking or losses, and then dividend income". He asked why, for budgetary purposes, a one-year lag time had not been proposed. That would allow any money that might remain in the ACIF to be utilized rather than swept. Were the amount based on the prior year, it, in its entirety, could be appropriated. 9:48:09 AM Mr. Ecklund responded that the Governor's capital budget proposal included $340 million of AH bonding. "It appears that that is not going to happen" and different sources were identified with which to fund the capital budget. This proposal is one area that the House of Representatives accepted. Senator Stedman rephrased his question. The question was not in regards to "the mechanics" utilized this year; it "is more of a policy decision" as to whether there might be the desire to "put forth mechanisms within the budgetary process to get a higher predictability of the revenue stream that we are going to be working with". Imbedding a one-year delay on this proposal would provide exact figures as opposed to dealing with fluctuating market conditions and other influences. Doing so would provide "a cleaner budgetary cycle". 9:50:30 AM Co-Chair Green asked whether the bill might contain "that retroactivity", as she noted that Sec. 4, page two lines 27 through 30 of the bill specifies that Sections 1-3 of this bill are retroactive to July 1, 2004. Therefore, half of the year would be "a look-back". Mr. Ecklund replied that, "the bill does contain a retroactivity clause that would allow the FY 05 earnings to be used in the FY 06 capital budget". Co-Chair Green understood therefore that the FY 05 amount would be an "actual" amount. Mr. Ecklund stated that it would be "very close" to being actual. Co-Chair Green understood that were $60,000,000 allocated to FY 06 capital projects through this process, the Legislature would be able to review the actual FY 05 fiscal year amount, and, were the actual amount to be $2,000,000 less than anticipated and appropriated, they would be able to utilize a mechanism to "repair" that funding shortfall issue. Either a project would not be furthered or it might be addressed through a supplemental request. The latter would not be preferred. She stated that some flexibility might be available. 9:52:44 AM Co-Chair Green voiced uncertainty as to whether a one-year look- back had been discussed. She stated that the interest would remain in the AH account until withdrawn to fund a project. 9:53:28 AM Mr. Ecklund remarked that the earnings would flow into the capital income fund, and from there, they would flow to whatever appropriation the Legislature had specified, such as the capital projects proposed in the Governor's FY 06 capital budget. Were sufficient funds unavailable to fund the entirety of the projects specified for FY 06, a supplemental request could be provided. In addition, ACIF FY 07 deposits could be used to fund previously authorized projects. There would be methods to fully fund a capital project in the FY 06 budget. Co-Chair Green expressed therefore that "the shortfall" could be corrected. 9:54:37 AM Senator Stedman understood "the backfill mechanism" options. However, "it's a policy call" as the Legislature could fund projects with funds from the year 2010. The question is whether "we want" to develop a budget based on an estimate of projected funds subject to financial market volatility, with "the potential" to backfill the allocation "or do we want to work with a number certain". He stated that it would be easier to develop a budget with a "number certain". 9:55:46 AM Co-Chair Green asked whether the legislation would require that the entirety of the interest earnings deposited into the ACIF must be utilized. Mr. Ecklund responded in the negative, the amount "would be subject to appropriation". Co-Chair Green asked whether it might be possible for the "number certain" approach, as suggested by Senator Stedman, to encounter an under-funding situation. Mr. Ecklund affirmed that the Legislature could specify an amount of $100,000,000, and only $20,000,000 might be earned. 9:56:35 AM In response to a question from Co-Chair Green, Senator Stedman voiced that he had no further comments. He had made his point. Senator Dyson asked to language in the Sponsor's Statement [copy on file] that professes that ending the inflation proofing of the AH principal would "maintain a static balance in the AH principal". To that point, he asked whether "any unrealized gains as the result of the growth of the value of what ever instruments that money is invested in" would remain in the AH principal account. 9:57:49 AM Mr. Ecklund responded that the current $424,000,000 Amerada Hess principal balance is the static amount being referenced. He was unsure as to how the account would be affected by unrealized gains or losses. A representative of the Alaska Permanent Fund Corporation would best respond to the question. Senator Dyson expressed that the reference to "maintaining a static balance" should not prohibit the account from growing and appreciating due to inflation proofing and "prudent investments over time". Mr. Ecklund explained "the current practice with the Amerada Hess subaccount" by stating that the account consists of its earnings and an inflation-proofing amount, as determined by the Permanent Fund Corporation. Once the earnings are determined, the inflation- proofing amount is subtracted from the earnings amount, and the earnings balance is deposited into the subaccount. This is required by Statute, as none of the subaccount's earnings could be used in the calculation of the Dividend. Therefore, the subaccount has experienced growth by both its earnings and the inflation proofing. Mr. Ecklund stated that this bill "would freeze the principal amount for accounting purposes at $424,000,000. The inflation proofing amount that is applicable to the $424,000,000" would be deposited into the other portion of the Permanent Fund principal rather than into the AH subaccount. Senator Dyson clarified that his question pertained to "the value" of the AHS rather than to its earnings or the inflation-proofing calculations. Continuing, he commented that the fund might appreciate due to its investments; therefore, he was asking for assurance that the increasing value of the fund that might result from its own investments would not removed from the account "to be spent". Mr. Ecklund assured that the fund's "unrealized gains and unrealized losses are not included in the calculation of principal". Senator Dyson acknowledged. [Co-Chair Wilken assumed chair of the meeting.] 10:01:50 AM Senator Stedman asked the reason that the State would take an asset at, for example, the $424,000,000 level and not inflation-proof it. That would serve to erode the level at, for example, three-percent a year. Inflation-proofing the account "would not affect the rest of the Permanent Fund anyway because this is a separate [indiscernible] entity." Halting the inflation-proofing of the AH subaccount and instead depositing that money into the Permanent Fund would serve to over-inflate an already over-inflated account, and would serve to reduce the purchasing power of the AH subaccount over time. Every year the account "would go backwards". He could not "understand the conceptual long-range goal here". 10:03:20 AM Mr. Ecklund stated that the House of Representatives had discussed inflation-proofing the sub-account. The Governor's proposal had not included inflation-proofing the subaccount. The House decided that in an effort to not diminish the total value of the principal of the Permanent Fund, the subaccount would be included in the amount upon which the total inflation proofing calculation would be calculated. The question is whether the desire would be to grow the subaccount, which could not be used for dividends, or, as proposed, to spin off money to be used for any valid public purpose. That would be a policy call. Senator Stedman warned that a short-range view of the issue could be "easily captivating". The Governor presented a concept that has been altered. The long-range ramifications of the proposal should be considered. [NOTE: Co-Chair Green resumed Chair of the Committee.] 10:04:44 AM Senator Stedman avowed that a slow erosion of the subaccount's purchasing power would not be desired. Inflation-proofing the account would not have any affect, as the inflation dollars are already being calculated, and therefore, instead of crediting the inflation-proofing into the Permanent Fund, which is already inflation proofed, the money should be credited to the principal of the AH subaccount to, "at least, keep the purchasing power constant over time". Inflation-proofing this account would be an easy fix. He warned that it is "conceptually easy to walk away from inflation proofing, but, absent this endeavor, there would be "substantially less capital available to us" in ten years. 10:06:00 AM Senator Hoffman ascertained therefore that the question would be whether to continue the buying power of the AH subaccount or to enhance the calculation of the Dividend, by crediting the inflation-proofing money into the Permanent Fund corpus rather than into the AH subaccount. Senator Stedman responded that the answer to that question would depend on whom you ask. Numerous people would be concerned about protecting the Permanent Fund and their Dividend. Senator Stedman stated that the AH money "today ? is a virtual subaccount of the Alaska Permanent Fund and has never had an affect on the Dividend calculations". Were the desire to redirect the earnings from the AH settlement, which is an "entity that does the State no good at all other than a growing pot of money", in a similar manner to how the State uses the earnings of the Permanent Fund, while continuing to inflation proof the AH subaccount, would "at least" hold "its purchase power constant over time". He did not anticipate this being an issue to most of the people in the State. Senator Dyson viewed an investment that does not exceed the rate of inflation as "a lousy investment". "What we have been calling inflation proofing is just kind of supplemental income to increase the principal." Therefore, his question would be to the reason that the State should inflation proof investments as opposed to just making wise investments that ought to, traditionally, double the CPI [consumer price index]." 10:08:26 AM Co-Chair Green asked Rob Carpenter of the Division of Legislative Finance to explain, among other things, how the amount of interest earned on the AH Settlement would be calculated under this legislation. ROB CARPENTER, Fiscal Analyst, Division of Legislative Finance, understood that some of the Committee's concerns revolve around the issues of how not inflation proofing the AH subaccount would affect it, and "that the income stream would be very flat because the principal amount would not change". "The principal idea behind" the current AHS process "is to avoid a change in the actual amount of the Dividend", as no part of the AH subaccount is factored into the Dividend calculation. "Therefore, any inflation-proofing of the AMS portion will reduce future Dividends". Co-Chair Wilken understood that Senator Stedman's desire would be to, rather than contributing, for example, the entire eight percent earnings, or $32,000,000, on the approximate $400,000,000 subaccount balance into the ACIF to support public purposes, three percent of that amount would be retained to inflation-proof the AH subaccount and the five-percent balance, or $20,000,000 would be provided to the ACIF. Such action would continue to maintain the purchasing power of the AH subaccount. Senator Stedman has identified the need for there to be a policy call regarding whether the AH subaccount should be a static account in terms of dollars or in purchasing power. 10:11:23 AM Senator Stedman responded that Co-Chair Wilken's interpretation is "very close" to his intent. The desire would be that in ten years, the equivalent purchasing power would be available "to work for us". Co-Chair Wilken concluded therefore, that the discussion has returned to Senator Dyson's question regarding the definition of static: static in terms of purchasing power or static in terms of dollars. Mr. Ecklund stated that the House had discussed this issue. "In rough numbers", inflation proofing "the AH subaccount with its own earnings" would provide a payout of approximately $21,000,000 rather than the full $30,000,000 to support public purposes. The effort being undertaken "was to fund as many capital projects as possible" using as many funding sources as possible, including utilizing the money that might be provided by this legislation. This proposal could be adopted and revisited in the future. 10:12:43 AM Senator Dyson communicated his difficulty in "integrating the answers" that have been provided. It would appear that the $400,000,000 plus money would appreciate in value, and have increasing purchasing power and increased earnings without being inflation proofed. 10:13:27 AM Mr. Carpenter reviewed the manner in which the Permanent Fund currently works. The AH, the entire ERA (Earnings Reserve Account), and the principal are all invested through the Permanent Fund's asset allocation. They have both "an unrealized and a realized earnings flow. The realized earnings stream is their statutory net minus the Am Hess which then goes back into the Am Hess principal" along with all its earnings. Mr. Carpenter continued that this bill would flow the entire realized earnings associated with the AH subaccount balance of $425,000,000 into the capital income account. There would be no inflation proofing. Any realized earnings would be paid out. "There could be an accounting of unrealized gains associated with that Am Hess portion, but the way the principal of the Permanent Fund works, that just a part of the Permanent Fund unrealized earnings"?. "The principal of the Permanent Fund is just an accounting notion; whereas the market value of the Permanent Fund is far in excess." 10:14:42 AM Senator Dyson asked the reason why the unrealized gains of the Amerada Hess could not stay with the Amerada Hess principal and therefore would be an appreciated [indiscernible due to cough]". 10:15:05 AM Mr. Carpenter stated that this would be possible; "it would be a matter of structuring it that way". 10:15:16 AM Co-Chair Green stressed the fact that the bill contains "all 'may' language". It would not require that this action must be taken each year. It simply states that the Legislature "may provide money to the Capital Income Fund". Mr. Ecklund appreciated that clarification. In response to Senator Stedman's concerns, he noted that, through the inclusion of the term "valid public purpose", the Legislature could choose to reappropriate money in the ACIF back into the Amerada Hess subaccount. Co-Chair Green reiterated that this legislation would not establish "a mandate"; there would not be an automatic process. Any use of the funds must proceed through the budgetary process. A valid public purpose must be demonstrated. Mr. Carpenter commented in regards "to the cash flow from the Fund". He pointed out that because most capital projects could not be completed within one year, a shortfall in ACIF funding allocated for a specific year, might not be that critical. "The revenue would seem to fall into place in future years." Co-Chair Green affirmed that "the State generally leaves money on the table each year"; capital money is not entirely spent each year as reflected by the fact that the budget contains money from previous years' allocation that have lapsed. "Some of those projects never even got started" or were only halfway completed. Co-Chair Green ordered the bill to be SET ASIDE. AT EASE 10:17:14 AM / 10:20:52 AM CS FOR HOUSE BILL NO. 187(FIN)(efd fld) "An Act relating to money deposited into the Alaska permanent fund as a result of the settlement of State v. Amerada Hess; relating to the Alaska capital income fund and to deposits of income from State v. Amerada Hess settlement money into the Alaska capital income fund." The bill was again before the Committee. Co-Chair Wilken moved to report the bill from Committee with individual recommendations and accompanying fiscal notes. There being no objection, CS HB 187(FIN)(efd fld) was REPORTED from Committee with zero fiscal note #2 dated April 26, 2005 from the Department of Revenue. 10:22:03 AM
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