Legislature(2023 - 2024)SENATE FINANCE 532
03/21/2023 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB107 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 107 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE BILL NO. 107
"An Act relating to the Alaska permanent fund;
relating to income of the Alaska permanent fund;
relating to the amount available for appropriation and
appropriations from the earnings reserve account;
relating to the permanent fund dividend; and providing
for an effective date."
9:03:21 AM
KEN ALPER, STAFF, SENATOR DONNY OLSON, discussed the
presentation, "Senate Bill 107; Percent of Market Value
Split / Permanent Fund Dividend" (copy on file). He pointed
to slide 2, "What Does SB107 Do?"
Establishes a split for the annual "Percent of Market
Value" draw
• The split would be 75 percent for the General
Fund, and
25 percent to pay Permanent Fund Dividends
When SB26 passed in 2018, establishing the POMV
formula for using Permanent Fund earnings, the bill
did not update the 1980s dividend formula. SB107 would
replace that formula.
The Senate Finance Committee has addressed this topic
several times:
• The version of SB26 that passed the Senate in
2017 included a "75/25" split.
The split was removed by the bill's Conference
Committee.
• SB103, from 2019, included a "50/50" split
• SB199, from 2022, included a "75/25" split
• SB53, from 2022, included a smaller dividend
that increased to a "50/50" split once a certain
amount of new revenue was received
9:05:53 AM
Mr. Alper highlighted slide 3, "Why is this necessary?"
• The Permanent Fund was initially set aside for when
oil would no longer be able to cover all budgetary
needs.
• Not having a PFD formula creates uncertainty in the
budgeting process.
o The POMV was passed in part to stabilize the
state's revenue.
o If the dividend amount is unknown until late in
session, the remaining POMV draw going to the
General Fund is also unknown.
o Without knowing how much revenue is available,
it is difficult to make budget decisions.
Mr. Alper addressed slide 4, "Why is this necessary?
(continued)"
• A PFD based on a percentage of the POMV adds
stability to both the budget and the dividend
o The POMV is based on the overall value of the
Permanent Fund, which is relatively stable and
predictable.
o In contrast, the current statutory dividend
formula is based on Permanent Fund earnings,
which are much more volatile.
o If the general fund portion of the annual POMV
payout is "whatever is left" after funding a
volatile dividend, all that revenue volatility is
transferred to the general fund- compounding
fiscal uncertainty.
Co-Chair Olson looked at slide 3, and noted that the
Permanent Fund was initially set aside for when oil revenue
would not be able to cover all budgetary needs. He remarked
that for a long time in the recent past, oil revenue has
not covered the states budgetary needs. He stressed that
the Permanent Funds earnings, or the Earnings Reserve
Account (ERA), has covered the budgetary needs.
Mr. Alper replied that before the passage of SB 26 in 2018,
the ERA was not used for general government. He stated that
rather than funding the PFD, the earnings went to a few
Permanent Fund management related tasks. He stressed that
the CBR would cover the needed government funding.
9:10:27 AM
Mr. Alper pointed to slide 5, "Why 75 / 25?"
It is fiscally prudent
This table is from OMB on February 20th • Next year's
"Governor's amended" budget is $433 million in
deficit.
• That's before:
o Fixing Community Assistance
o Basic deferred maintenance
o Any legislative additions to the capital budget
o Any adjustment to education funding
o Any bills that pass with fiscal notes
• There are no available savings pools to draw from. A
CBRF draw requires a supermajority vote which hasn't
occurred since 2020
Mr. Alper addressed slide 6, "Other Unmet Budget Needs":
Slide is from Legislative Finance on February 7th
It details over $13 billion in current state
obligations
To summarize:
o Pension obligations $7.1b
o Capital and maintenance needs $4.4b
o Debt service $1.6b
Mr. Alper looked at slide 7, "Why 75/25 (continued)":
Later this week we'll see several fiscal updates,
which will be mostly negative:
• The price of oil is trending several dollars
below the Fall forecast for FY2024 of $81 / bbl.
DOR uses the "futures" market to set the price
forecast
• Production is also trending a bit below
forecast
• The combined impact will likely reduce FY24
revenue by a few hundred million
• Although the Willow project will produce
substantial tax revenue in the future, during the
period of major construction spending it will
result in several years of substantial negative
cash flows.
The net effect of these will likely result in about a
$1 billion shortfall
• Oil price forecast for future years are also
likely to be adjusted downwards
• Weak current-year earnings will reduce the size
of future POMV draws
9:16:26 AM
Co-Chair Olson queried the approximate shortfall with the
Willow Project.
Mr. Alper replied that the total capital spend would
probably be around $5 billion. He stated that the price of
oil needed to be high enough to be above the minimum tax
crossover. He stated that then all the spending would
reduce the owners profits.
Co-Chair Olson wondered whether the profit and shortfall
would be equally distributed over the period of time.
Mr. Alper replied that the Department of Revenue (DOR)
would provide a presentation related to the question.
Mr. Alper addressed slide 8, "The 75/25 Scenario Was the
Most Stable and Balanced":
This is a Legislative Finance slide from Feb. 7
We will see this and similar scenarios with the
updated forecast information on Friday
Co-Chair Olson wondered how that would affect a person who
relied on the PFD for basic necessities.
Mr. Alper replied funding a larger dividend would be
overdrawing the Permanent Fund, which would result in
future overdraws of the fund.
9:21:37 AM
Senator Bishop asked about the American Rescue Plan Act
(ARPA) overdraw.
Mr. Alper shared that the slide showed the tail-end of the
approximately $1 billion that the state received from the
pandemic relief funds. The remainder of that money was used
to balance the FY 23 budget.
Senator Kiehl asked about the impact on 75/25 split on the
PFD and how it compared to the ten- or fifteen-year
average.
Mr. Alper replied that at 75/25, the PFD in the current
year would be $1350, which was roughly in alignment with
the historic average.
Co-Chair Olson stressed that the previous years PFD
included an energy rebate.
Mr. Alper agreed, and stated that the actual statutory
construction of the PFD in the budget was that there be a
50/50 PFD.
9:25:30 AM
Co-Chair Hoffman felt that the decision to finally decide
the PFD split was the most important piece of legislation
to stabilize government and spending. He noted that there
was awareness that the amount of the PFD was politically
and emotionally charged. He stressed that the number
continued to be north of what the legislature eventually
decided. He noted that many people felt that the current
formula believed that it was state law, and that they were
obligated to that money. He felt that the current
legislation was a good starting point. He stressed that the
current session should result in a final decision.
9:31:13 AM
Co-Chair Stedman noted that the 50/50 concept went back
several decades. He remarked that the split between the
citizens and the treasury resulted in the state reinvesting
its share over many years. Thereby, allowing the Permanent
Fund to increase substantially. He noted that the savings
component was mandated by not taking the share in the past.
9:36:43 AM
Senator Bishop remarked that the $9 billion deposit was a
result of the states reinvesting of its 50 percent share.
Mr. Alper highlighted slide 9, "Sectional Analysis":
Sec. 1. Repeals the current formula the describes the
"amount available for distribution" as 21 percent of
the past five year's Statutory Net Income. Amends the
current 5 percent Percent of Market Value (POMV)
statute to confirm that the appropriation may not
exceed the amount in the Earnings Reserve Account.
Sec. 2 Modifies the Permanent Fund Dividend statute,
from being based on 50 percent of the former "21
percent of earnings" formula, to being based on 25
percent of the annual Percent of Market Value draw.
Sec. 3 Conforming language to clarify that the annual
inflation proofing of the Permanent Fund principal is
by legislative appropriation.
Sec. 4 Conforming language related to the exclusion of
Amerada Hess earnings from both the POMV and dividend
calculations.
Sec. 5 Conforming language related to the exclusion of
Mental Health Trust earnings from the POMV and
dividend calculations.
Sec. 6 Conforming language related to the annual
appropriation to the dividend fund.
Sec. 7 Conforming language repealing sections no
longer needed due to the elimination of the former
statutory formula and the new language in Sec. 3.
Sec. 8 Immediate effective date ensuring the changes
impact the Fall 2023 dividend.
9:40:02 AM
Co-Chair Stedman stressed that the Permanent Fund would
have an adjustment on its earnings for FY 23, which would
reduce the statutory dividend calculation.
Co-Chair Hoffman understood that a 50/50 split would not
currently work for the state. He noted that decisions would
address how to get to a different split. He stressed that
the conversations would be difficult, but the solution
needed to work for everyone. He felt that in order to come
to a solution, there would be very hard financial
conversations and decisions.
Senator Wilson wondered whether the proposal would prohibit
an additional energy fund rebate in the future.
Mr. Alper remarked that it would not, because the
legislature controls the appropriations.
Senator Merrick wondered whether the POMV was a spending
cap.
Mr. Alper replied that it was a revenue cap and could be
broken, but it was not recommended, and stated that by
extension was a spending cap.
Co-Chair Olson asked whether there was a fiscal note
attached to the bill.
Mr. Alper replied that there was a zero fiscal note from
DOR related to implementation.
9:44:31 AM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
presented, "Fiscal Modeling: SB 107; Senate Finance;
Committee Scenarios" (copy on file). He pointed to slide 2,
"Outline":
• Review of Senate Finance Committee Modeling
Assumptions
• Constitutional Budget Reserve Target Balance
• SB 107 Deterministic Model Using Committee
Assumptions
• Review of LFD Probabilistic Model
• SB 107 Probabilistic Model Using Committee
Assumptions
9:45:43 AM
Mr. Painter addressed slide 3, "Review of Committee
Modeling Assumptions":
Revenue Assumptions
LFD's baseline revenue assumptions are the
Department of Revenue's Fall Revenue Forecast.
This assumes $81 oil in FY24, following futures
market thereafter.
DNR oil production forecast projects that
Alaska North Slope production will increase from
503.7 thousand barrels per day in FY24 to 543.3
thousand barrels per day in FY32.
• For the Permanent Fund, we use Callan's return
assumption of 7.00 percent total return in FY23 and
7.05 percent thereafter.
Mr. Painter highlighted slide 4, "Review of Committee
Modeling Assumptions (cont.)":
Spending Assumptions
• For agency operations, assumes that the FY24
Governor's budget including amendments through 2/14
grows with inflation (2.50 percent).
• For statewide items, assumes that all items are
funded to their statutory levels in FY24 and beyond.
This includes School Debt Reimbursement, the
REAA Fund, Community Assistance, oil and gas tax
credits.
• For the capital budget, assumes a $400 million
capital budget in FY24, growing with inflation
thereafter (2.50 percent).
• For supplementals assumes $50.0 million per year.
This is based on the average amount of supplemental
appropriations minus lapsing funds each year.
• For Permanent Fund Dividends, assumes 25 percent of
the POMV draw is appropriated for dividends based on
SB 107.
Senator Wilson wondered whether there was a better number
for future modeling.
Mr. Painter replied that the $50 million was based on the
average amount of supplemental appropriations after
considering lapsing funds each year. He stated that each
year there were two adjustments that were used to move from
the original budget to the actual budget.
Senator Wilson queried the historical average of the
capital budget.
Mr. Painter replied that it varied greatly due to
fluctuations in revenue.
9:49:32 AM
Co-Chair Stedman asked for an analysis of the historic
capital budget from the recent 20 years, and separate out
the federal match.
Mr. Painter replied that he would provide that information.
Mr. Painter discussed slide 5, "Evaluating Risk:
Constitutional Budget Reserve Target Balance":
• $500 million is needed for cashflow. How much is
needed as a shock absorber? Alaska does not have a
formal reserves target. OMB told this committee that
they are targeting $2 billion in the CBR.
• A challenge in Alaska is that we do not have a
structurally balanced budget to start with, so
reserves are needed not just as a shock absorber but
also to fill structural deficits.
• Many states do have formal reserves targets. For
example, Minnesota targets a reserves level such that
there is a 95 percent probability that the budget
could be funded for the next two years based on
projected revenue volatility.
• Applying the Minnesota rule to Alaska, based on a
hypothetical budget that balances at projected revenue
for FY24, Alaska would need a CBR balance of $3.5
billion.
Co-Chair Olson wondered why there was a $1 billion
difference between the Office of Management and Budget
(OMB) model and the $3.5 billion Minnesota model.
Mr. Painter replied that the $500 million was baseline
funding to pay the bills covering the within year
volatility. The next page would cover the between year
volatility.
9:55:05 AM
Mr. Painter pointed to slide 6, "Senate Finance Baseline
Budget 25 percent of POMV to PFD."
Mr. Painter displayed slide 7, "Probabilistic Modeling":
• LFD has two versions of the fiscal model: a linear
model which assumes that revenue matches DOR's
forecast, and a probabilistic model that shows the
impact of revenue volatility
• The probabilistic model allows for variation in
three variables:
Oil prices (using a range centered on DOR's
forecast)
Oil production (using the range between DNR's
"high" and "low" production forecast)
Permanent Fund investment returns (using the
ranges developed by Callan for APFC)
• This leaves out potential variation in non-oil
revenues and inflation
Mr. Painter highlighted slide 8, "Example: 25th Percentile
Result":
• Example of a single case, for which 25 percent of
total cases see greater overall deficits.
• Example case has average oil price of $67.20 and
average Permanent Fund return of 7.4 percent.
9:59:19 AM
Mr. Painter addressed slide 9, "Senate Finance Budget 25
percent of POMV to PFD." He noted that the median surplus
deficit numbers were similar to the linear model.
Senator Merrick stated that in Article 9, Section 16 of the
Alaska Constitution addressed appropriation limits, with at
lease one-third reserved for capital projects and loan
appropriations. She wondered whether the legislature always
complied with that requirement.
Mr. Painter replied that the legislature had not always
complied with that requirement. He stated that the limit
was ambiguous with the calculation.
10:05:12 AM
Co-Chair Olson wondered whether there was ever a challenge
by Alaska to that non-compliance.
Mr. Painter replied, not to my knowledge.
Co-Chair Olson asked what the current Attorney General
opinion was on the subject.
Mr. Painter replied that the current opinion was based on
an interpretation of the constitution, and the conflicting
constitutional responsibilities of the legislature to fund
state government and comply with the limit.
10:05:43 AM
Co-Chair Stedman asked for a review and commentary with the
historic capital budget presentation.
Mr. Painter agreed to provide that information.
Senator Kiehl surmised that the presentation did not
include additional funding for public schools.
Mr. Painter agreed, because it was based on the governors
amended budget, which did not include fiscal notes for
legislation.
Senator Kiehl stressed that funding education was in
Article 7, Section 1 of the constitution.
Co-Chair Olson discussed housekeeping.
SB 107 was HEARD and HELD in committee for further
consideration.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB107 POMV split initial presentation 3-21-23 final.pdf |
HW&M 5/8/2023 6:00:00 PM SFIN 3/21/2023 9:00:00 AM |
SB 107 |
| SB 107 Opposition Allegrezza.pdf |
HW&M 5/8/2023 6:00:00 PM SFIN 3/21/2023 9:00:00 AM SFIN 4/12/2023 9:00:00 AM |
SB 107 |
| SB 107 DOR ASD 031723.pdf |
HW&M 5/8/2023 6:00:00 PM SFIN 3/21/2023 9:00:00 AM SFIN 4/12/2023 9:00:00 AM |
SB 107 |
| SB 107 LFD SB 107 Presentation SFIN 3-21-23.pdf |
HW&M 5/8/2023 6:00:00 PM SFIN 3/21/2023 9:00:00 AM SFIN 4/12/2023 9:00:00 AM |
SB 107 |
| SB 107 sectional analysis 3.21.23.pdf |
SFIN 3/21/2023 9:00:00 AM SFIN 4/12/2023 9:00:00 AM |
SB 107 |
| SB107 sponsor statement 3.21.23.pdf |
SFIN 3/21/2023 9:00:00 AM SFIN 4/12/2023 9:00:00 AM |
SB 107 |