Legislature(2019 - 2020)BUTROVICH 205

03/07/2019 03:30 PM Senate STATE AFFAIRS

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03:32:44 PM Start
03:33:21 PM SB23|| SB24
04:40:53 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Heard & Held
Scheduled but Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB  23-APPROP:SUPP. PAYMENTS OF PRIOR YEARS' PFD                                                                    
                 SB  24-PFD SUPPLEMENTAL PAYMENTS                                                                           
3:33:21 PM                                                                                                                    
CHAIR SHOWER  announced the consideration  of SENATE BILL  NO. 23                                                               
"An Act  making special appropriations from  the earnings reserve                                                               
account  for  the  payment  of   permanent  fund  dividends;  and                                                               
providing for an effective date." and                                                                                           
SENATE BILL  24 "An  Act directing the  Department of  Revenue to                                                               
pay dividends to certain eligible  individuals; and providing for                                                               
an effective date."                                                                                                             
He   encouraged  the   public   to  send   written  comments   to                                                               
senate.state.affairs@akleg.gov.   He   welcomed  Mr.   King   and                                                               
Commissioner Designee Tangeman to the witness table.                                                                            
3:34:25 PM                                                                                                                    
EDWARD KING,  Chief Economist, Office  of Management  and Budget,                                                               
Office of  the Governor, Juneau,  stated that the purpose  of the                                                               
presentation  was to  respond to  questions  the committee  asked                                                               
during  the last  several hearings.  The first  question was  how                                                               
does  the forecast  relate to  historic performance.  He directed                                                               
attention to the graphic on slide  3 that shows how the permanent                                                               
fund balance and the percentage  return of the permanent fund has                                                               
changed over time.                                                                                                              
3:35:32 PM                                                                                                                    
At ease                                                                                                                         
3:35:39 PM                                                                                                                    
CHAIR SHOWER reconvened the meeting.                                                                                            
MR. KING  turned to slide  4, "Alaska Permanent  Fund Corporation                                                               
History  and Projection."  He explained  that  he translated  the                                                               
numbers  from slide  3 into  an excel  spreadsheet and  added the                                                               
projections and statutory  net income going forward.  The idea is                                                               
to show how the projection  compares to the historic performance.                                                               
He  highlighted that  the  projections appear  to  be within  the                                                               
range of historic performance.                                                                                                  
MR.  KING said  the fund  generates revenue  two ways.  First, is                                                               
from income  streams such as  dividends on stock,  lease payments                                                               
from  buildings,  and bond  interest  from  fixed income  assets.                                                               
These are  realized earnings that  go directly into  the earnings                                                               
reserve and can  be appropriated by the  legislature. Second, the                                                               
fund  generates revenues  from the  purchase of  assets that  are                                                               
sold  for more  than the  purchase price.  For example,  an asset                                                               
that  is  purchased for  $100  million  and appreciates  to  $120                                                               
million on the marketplace is  booked as an unrealized gain until                                                               
the asset  is sold. When the  fund sells the asset,  $100 million                                                               
returns to the principal account  and the $20 million appreciated                                                               
amount goes to the earnings reserve.                                                                                            
Responding to a question from  the chair, Mr. King explained that                                                               
the  accounting return  is the  change in  the total  fund value,                                                               
including the realized and unrealized  gains. For example, a $100                                                               
million  asset  that is  now  worth  $120  and has  generated  $5                                                               
million  in  income  is  worth  $125  million  -  $5  million  in                                                               
regularized  income  and $20  million  in  unrealized gains.  The                                                               
increase in  total value is  25 percent and the  statutory return                                                               
is 5  percent. If the asset  earns zero income the  next year and                                                               
is sold for $120 million,  the realized earnings are $20 million.                                                               
The fund made  20 percent on the investment last  year and it was                                                               
realized  this  year.  He  said  that's  the  difference  between                                                               
accounting returns and statutory returns.                                                                                       
MR. KING  related that the  three components of the  fund include                                                               
$40 billion  in principal funds,  about $7 billion  in unrealized                                                               
gains, and  about $17 billion  in realized gains that  is sitting                                                               
in the earnings reserve.                                                                                                        
3:41:09 PM                                                                                                                    
SENATOR REINBOLD  said it would helpful  to know the mean  and if                                                               
there  are  things  on  the  state,  national,  or  international                                                               
horizon that may  affect the investments in the  future. She also                                                               
asked him to  comment on a presentation that was  given this last                                                               
weekend that  talked about  the effect that  taking the  PFD will                                                               
have on the earnings reserve and  education funding in the next X                                                               
number of years.                                                                                                                
MR.  KING deferred  the  first  question to  next  slide. To  the                                                               
second  question, he  said  when you're  talking  about the  fund                                                               
health it's  tempting to say  the balance  is X and  forget about                                                               
the unrealized gains that will  eventually go into the balance of                                                               
the earnings  reserve. The  DOR models  calculate the  income and                                                               
realization and how those realizations move, he said.                                                                           
CHAIR SHOWER asked  for a layman's explanation of the  way the $4                                                               
billion in earnings are calculated.                                                                                             
3:46:23 PM                                                                                                                    
MR.  KING  first  provided  an  explanation  of  different  asset                                                               
classes and  how the  different assets  generate income,  how the                                                               
fund transitions  between assets,  the five-year  conversion rate                                                               
to roll  over an asset,  and when unrealized gains  are converted                                                               
to  realized gains.  He subsequently  explained  that about  $1.8                                                               
billion  of   the  earnings  come  from   income  from  interest,                                                               
dividends, and rents.  The rest of the earnings  are projected to                                                               
be $2.1  billion for a total  of just under $4  billion. He noted                                                               
that the FY2019 projected earnings  will be updated next week and                                                               
will reflect the poor stock  performance in October and November.                                                               
Nevertheless, he  still believes  the total  earnings will  be in                                                               
the $3 billion to $4 billion range for FY2019.                                                                                  
SENATOR MICCICHE asked him to  talk about the billions of dollars                                                               
it would  cost to sell [the  assets with unrealized gains]  for a                                                               
statutory return.                                                                                                               
MR.  KING  responded that  part  of  portfolio management  is  to                                                               
convert assets  and the conversion  ratio is normally in  the 4-5                                                               
year range. He cited the example  of buying a house and living in                                                               
it for 5  years before cashing out the equity  and buying another                                                               
house. He asked Senator Micciche to clarify the question.                                                                       
SENATOR  MICCICHE  said   he  was  trying  to   help  the  public                                                               
understand why unrealized  gains are beneficial in  the long term                                                               
for the earnings of the fund.                                                                                                   
3:48:54 PM                                                                                                                    
BRUCE  TANGEMAN, Commissioner  Designee,  Department of  Revenue,                                                               
Anchorage,  responded  that  the Permanent  Fund  Corporation  is                                                               
tasked with  growing the permanent  fund and providing  a certain                                                               
amount of liquidity for state  government through the Senate Bill                                                               
26  POMV (percent  of market  value) calculation.  This gave  the                                                               
corporation  more stability  because  they  know their  liquidity                                                               
needs and  are able to  deploy more  assets into the  market than                                                               
the last few years when the POMV was only under debate.                                                                         
CHAIR SHOWER asked for a simple explanation.                                                                                    
COMMISSIONER DESIGNEE  TANGEMAN said  the permanent  fund balance                                                               
dropped to about $60.4 billion by  the end of December [2019] and                                                               
it's recovered  to about  $65 billion.  "So you  see some  of the                                                               
swings where just  a couple months can really drive  it down, but                                                               
it can  recover quite  well, too,  now that  it's a  pretty large                                                               
corpus." he said.                                                                                                               
SENATOR  MICCICHE  said it  might  be  easier to  understand  the                                                               
difference  between  realized  and unrealized  gains  by  talking                                                               
about the purchase  and sale of a  house. If you buy  a house for                                                               
$200,000  and  it's now  worth  $400,000,  the difference  is  an                                                               
unrealized  gain  that has  no  spendable  value. If  you  borrow                                                               
against the difference in equity or  you sell the house, the gain                                                               
is realized.                                                                                                                    
MR. KING agreed with the explanation.                                                                                           
He  added  that  slide  4  is intended  to  illustrate  that  the                                                               
accounting  return  is  much more  volatile  than  the  statutory                                                               
return.  The chart  shows  that over  the life  of  the fund  the                                                               
accounting return (gold bars) has a  high of 25 percent and a low                                                               
of  -18 percent,  whereas the  statutory return  (green bars)  is                                                               
much less volatile.  For example, $10 billion in  gains or losses                                                               
in one year  includes appreciated or depreciated  assets that are                                                               
not realized until  the asset is sold. Those gains  and losses do                                                               
not sit in  the earnings reserve. Until the assets  are sold, and                                                               
the  gains  and losses  are  realized,  they  do not  affect  the                                                               
earnings reserve.  He said  he believes that  the only  reason to                                                               
calculate the less volatile statutory  return is to calculate the                                                               
CHAIR SHOWER  offered an analogy  with [Warren]  Buffet's comment                                                               
that  he didn't  lose any  money  when the  stock market  crashed                                                               
because he didn't sell anything.                                                                                                
3:53:36 PM                                                                                                                    
MR.  KING  pointed   out  that  2009  was   the  worst  financial                                                               
correction in  the 40-year  history of  the fund.  The accounting                                                               
return was -18 percent and the statutory return was -9 percent.                                                                 
He turned to slide 5  that illustrates the frequency distribution                                                               
of historic  accounting returns. He  pointed out that  90 percent                                                               
of  the time  fund returns  have run  between -3  percent and  20                                                               
percent.  Over  40 years  the  returns  were  in excess  of  20.5                                                               
percent just two  times and less than -3 percent  just two times.                                                               
The  fund has  returned between  10 percent  and 15  percent most                                                               
often and between  5 percent and 10 percent the  next most often.                                                               
The simple average of the  returns is 9.665 percent. The standard                                                               
deviation,  which  shows  the  range   of  volatility,  is  7.872                                                               
percent.  That  means  that  over time  the  permanent  fund  has                                                               
performed phenomenally well, he said.                                                                                           
3:56:29 PM                                                                                                                    
SENATOR REINBOLD asked  if he believes the returns  over the next                                                               
5 years will average 5 percent.                                                                                                 
MR. KING  replied the  expectation in the  marketplace is  that a                                                               
correction  is  going to  happen.  Most  advisors are  suggesting                                                               
returns  over the  next 5  years in  the 6  percent to  7 percent                                                               
range.  He warned  that while  nobody knows  when the  correction                                                               
will occur, more  money is lost in the stock  market by trying to                                                               
predict when a  correction will happen than is made  in any other                                                               
way. He said the corporation is  doing what it can to prepare and                                                               
that's why the projected return is 6.55 percent.                                                                                
SENATOR MICCICHE noted  that over the long term,  even before the                                                               
1929 depression,  the market return  has been  fairly consistent.                                                               
He questioned the  wisdom of a sovereign adjusting  for the short                                                               
term  and asked  if it's  like  trying to  time an  unpredictable                                                               
MR. KING deferred to the commissioner.                                                                                          
COMMISSIONER  DESIGNEE  TANGEMAN  said  he  didn't  believe  huge                                                               
corrections are  being made at  the permanent fund  regarding the                                                               
percent of  liquidity, what is  set aside,  and what is  in fixed                                                               
income and  private equities.  The goal continues  to be  to grow                                                               
the  fund, albeit  with  the  knowledge that  ups  and downs  are                                                               
3:59:22 PM                                                                                                                    
SENATOR COGHILL joined the committee.                                                                                           
CHAIR SHOWER  asked if the  board plans to readjust  its strategy                                                               
now that the POMV model has been adopted.                                                                                       
COMMISSIONER  DESIGNEE TANGEMAN  replied  he  didn't believe  the                                                               
strategy would change, but they now  have a better idea about how                                                               
much cash  can be deployed  into the existing  asset allocations.                                                               
He highlighted that the $3 billion  POMV is a fairly small amount                                                               
compared to $65 billion fund.                                                                                                   
MR. KING  turned to the graphic  on slide 6, "APFC  Returns" that                                                               
illustrates the  change in  value of a  $100 investment  based on                                                               
APFC  historic  returns.  He  clarified  that  the  historic  and                                                               
projected means are geometric, not  arithmetic. To illustrate the                                                               
geometric  calculation   he  provided   an  example  of   a  $100                                                               
investment that  returns 50  percent the first  year. $150  is in                                                               
the  account at  the end  of the  year. The  next year  the asset                                                               
experiences  a 50  percent loss  or half  of $150.  The geometric                                                               
mean shows $75 in  the account at the end of 2  years, which is a                                                               
negative 25 percent  return or negative 12.5 percent  a year. The                                                               
arithmetic  mean for  the same  example  would show  $100 in  the                                                               
account at the end  of 2 years, or zero return.  The $50 gain the                                                               
first year  is offset by the  $50 loss the second  year leaving a                                                               
zero return.                                                                                                                    
CHAIR SHOWER  described the  corporation projections  as somewhat                                                               
MR. KING responded that his  interpretation is that at some point                                                               
in the  next 5-10  years, the  corporation expects  a significant                                                               
negative return.  He cautioned against interpreting  the graph to                                                               
mean that the geometric mean will  be 6.55 percent every year for                                                               
the next 10 years.                                                                                                              
4:04:16 PM                                                                                                                    
MR.  KING addressed  Senator Micciche's  question  about how  the                                                               
fund  performs under  various spending  assumptions. He  reminded                                                               
the committee that during the  first hearing he talked about what                                                               
the  6.55 percent  return looks  over time  using the  assumption                                                               
that the  legislature follows all  the existing laws.  Under that                                                               
scenario, passing SB 23 does  not significantly affect the fund's                                                               
risk exposure. He said Senator  Micciche appropriately asked what                                                               
the  ERA  balance  would  look   like  under  different  spending                                                               
assumptions, with and  without SB 23. The chart on  slide 8 shows                                                               
what happens to  the fund if the legislature does  not follow the                                                               
POMV and  covers the  deficits with  unstructured draws  from the                                                               
The gold  line represents the  fund performance over time  with a                                                               
$3 billion  UGF budget  and the dotted  gold line  represents the                                                               
same assumption  with SB 23  in place. The $2  billion difference                                                               
reflects the  amount coming  out of the  fund and  distributed to                                                               
the people. The  green line represents a $3.5  billion UGF budget                                                               
and the  green dotted line represents  that budget with SB  23 in                                                               
place. The next  two scenarios represent a $4  billion UGF budget                                                               
and a $4.5  billion UGF budget, with and without  SB 23 in place.                                                               
The  $1  billion  and  $1.5  billion  overdrafts  illustrate  how                                                               
quickly the earnings  reserve account is depleted and  that it is                                                               
accelerated with the passing of SB 23.                                                                                          
SENATOR MICCICHE said he assumes  the chart uses the 6.55 percent                                                               
MR. KING said yes.                                                                                                              
SENATOR MICCICHE  mentioned the  modeling he  did that  looked at                                                               
UGF going  down instead of up  and highlighted the danger  if: 1)                                                               
spending is  higher than  projected and  the earnings  reserve is                                                               
relied on to  make up the difference; and 2)  being unable to get                                                               
a 3/4 vote  on the CBR, which puts more  pressure on the earnings                                                               
reserve. He said  the smallest reduction in the  budget he looked                                                               
at was $300  million and that depletes the fund  by 2027 or 2028.                                                               
He urged people  to think about the fact  that unstructured draws                                                               
or additional spending depletes the  ERA earlier, which will also                                                               
complicate the  payment of any  dividends. He asked  Mr. Tangeman                                                               
if he disagreed.                                                                                                                
COMMISSIONER DESIGNEE  TANGEMAN replied,  "We can all  agree that                                                               
the full budget, the full  dividend, and the full backpay creates                                                               
a problem."                                                                                                                     
SENATOR MICCICHE  asked if the  assumptions on slide 8  include a                                                               
2.25 growth rate for inflation.                                                                                                 
MR. KING said that's correct.                                                                                                   
4:10:11 PM                                                                                                                    
SENATOR COGHILL asked if the $3  billion UGF and $3.5 billion UGF                                                               
spending assumptions include the full dividend payment.                                                                         
MR. KING  replied the  dividend payment is  in addition  to those                                                               
SENATOR COGHILL commented that he would need to factor that in.                                                                 
CHAIR SHOWER asked Mr. King to expand the explanation.                                                                          
MR. KING  replied some people  wonder whether the  permanent fund                                                               
payments are  considered unrestricted general fund  payments. The                                                               
question  was  whether  or  not   the  $3  billion  UGF  spending                                                               
assumption includes the  PFD payment. The answer is  that the PFD                                                               
payment is in addition to the $3 billion.                                                                                       
SENATOR KAWASAKI asked if the  $3 billion UGF spending assumption                                                               
includes [the POMV draw under] Senate Bill 26.                                                                                  
MR.  KING replied  he turned  off  the POMV  calculation in  this                                                               
scenario  to show  how  the health  of the  fund  is affected  by                                                               
SENATOR KAWASAKI  asked what  the anticipated  POMV draw  is this                                                               
year under Senate Bill 26.                                                                                                      
MR. KING replied it's about $2.9 billion.                                                                                       
SENATOR KAWASAKI referred  to the Fall 2018  Revenue Forecast and                                                               
asked if  he agrees that under  the Senate Bill 26  scenario, the                                                               
POMV draw  will be between  $3 billion  and $3.8 billion  for the                                                               
next ten years.                                                                                                                 
COMMISSIONER DESIGNEE TAGAMENT said that's correct.                                                                             
SENATOR  KAWASAKI  asked  if  the  graph  demonstrates  that  the                                                               
earnings reserve balance is constantly drawn down.                                                                              
4:13:01 PM                                                                                                                    
MR.   KING   clarified  that   the   gold   bar  represents   the                                                               
legislature's desire to  spend $3 billion UGF when  there is $2.2                                                               
billion  in UGF  revenue and  a draw  from the  ERA makes  up the                                                               
difference.  There's room  to do  that in  the current  structure                                                               
under  the POMV,  he said,  but not  in a  $4.5 UGF  scenario. He                                                               
reiterated  that the  graphic looks  at  the health  of the  fund                                                               
under the different scenarios without factoring in the POMV.                                                                    
CHAIR SHOWER  asked how he  would respond  to the people  who ask                                                               
why  it  wouldn't  work  to start  with  Governor  Walker's  $4.8                                                               
billion budget.                                                                                                                 
4:14:31 PM                                                                                                                    
MR. KING  pointed to the  black line  and explained that  in that                                                               
scenario the goal of the legislature  is to spend $4.5 billion in                                                               
UGF expenditures.  Revenue in the  current year is  $2.2 billion,                                                               
which  leaves $2.3  billion that  needs to  be paid  somehow. The                                                               
graphic represents what  happens to the ERA if  that $2.3 billion                                                               
and  the  full $1.9  billion  dividend  comes  out of  the  fund.                                                               
Logistically it's possible to draw  $4.2 billion from the ERA, he                                                               
said,  but it  will eventually  be depleted.  When that  happens,                                                               
just current year returns are left to spend.                                                                                    
CHAIR SHOWER  observed that the  ERA is depleted faster  with the                                                               
full PFD payments.                                                                                                              
4:17:04 PM                                                                                                                    
SENATOR MICCICHE  said it's  important to point  out that  in all                                                               
four scenarios the  ERA is depleted about two  years earlier when                                                               
the full  dividend and the payback  is paid as opposed  to paying                                                               
just the dividend and not the payback.                                                                                          
COMMISSIONER  DESIGNEE  TANGEMAN  said that's  correct,  but  the                                                               
governor's  complete  package,  which  includes  a  significantly                                                               
decreased  budget, accepts  SB 23  without depleting  the ERA  by                                                               
SENATOR MICCICHE  pointed out that  the $3 billion UGF,  which is                                                               
fairly close to the governor's, erodes  the ERA with or without a                                                               
MR.  KING suggested  moving  to  the next  slide  to clarify  the                                                               
COMMISSIONER  DESIGNEE TANGEMAN  highlighted that  while the  ERA                                                               
balance is going down, the permanent  fund corpus is up over $100                                                               
SENATOR MICCICHE said  he understands that but  regardless of the                                                               
permanent fund's projected  growth, the ERA will  erode with 6.55                                                               
percent earnings and that is the account the PFD is paid from.                                                                  
MR. KING responded  that part of the calculus is  that every year                                                               
money is transferred  from the earnings reserve  to the principal                                                               
account, so  the ERA balance  is going  down, but the  total fund                                                               
balance is not.                                                                                                                 
SENATOR  MICCICHE asked  if he  agrees that  while the  permanent                                                               
fund  continues to  grow, the  ERA continues  to be  eroded under                                                               
this scenario.                                                                                                                  
MR. KING answered that the money  that is moved from the earnings                                                               
reserve  to the  principal account  for inflation  proofing could                                                               
remain  in the  ERA and  you wouldn't  see the  decline, but  the                                                               
legislature could spend it.                                                                                                     
COMMISSIONER DESIGNEE TANGEMAN clarified that the answer is yes.                                                                
4:21:43 PM                                                                                                                    
SENATOR  KAWASAKI  asked  if   the  graph  represents  inflation-                                                               
adjusted dollars.                                                                                                               
MR. KING  replied they're  nominal dollars,  but inflation  is an                                                               
important factor in protecting the  principal balance. That's why                                                               
money is  moved to the principal  account. He said slide  9 shows                                                               
the fund balance increasing under  the four scenarios and for the                                                               
most  part it's  growing with  the  rate of  inflation. The  line                                                               
would be  just slightly  inclined if  the numbers  were inflation                                                               
SENATOR  MICCICHE asked  if the  fund  is growing  with the  6.55                                                               
percent earnings assumption as opposed to inflation.                                                                            
MR. KING replied  the fund does not grow from  the projected 6.55                                                               
percent earnings if  the legislature appropriates a  full PFD and                                                               
withdraws what it legally can under current law.                                                                                
CHAIR  SHOWER  commented  that   it  only  grows  from  inflation                                                               
MR. KING agreed that the principal account grows with inflation.                                                                
4:23:38 PM                                                                                                                    
MR.  KING turned  to slides  10-13 and  explained that  they show                                                               
three  different  scenarios  that  come  out  of  a  Monte  Carlo                                                               
simulation.  The  numbers  are  generated  from  the  probability                                                               
distribution the  fund uses to  show what the future  looks like.                                                               
He  clarified  that  none  are  more likely  to  occur  than  the                                                               
unrealistic 6.55  percent return every  year for the  next decade                                                               
or two.                                                                                                                         
In Scenario 1, the randomly  generated numbers show that over the                                                               
next  10  years the  accounting  returns  mostly fall  between  5                                                               
percent and 10 percent, although the  return in one year was more                                                               
than 20 percent  followed by a deep  correction. The distribution                                                               
mimics  history   just  as  DOR's  probability   distribution  is                                                               
intended to do.                                                                                                                 
On  the  right  the  green  line   shows  that  as  long  as  the                                                               
legislature limits  draws to the  POMV, the fund is  growing. The                                                               
green  dotted line  applies SB  23  and reflects  the $2  billion                                                               
that's paid  out of the fund.  The black line scenario  shows how                                                               
overdraws on  the account  change the  performance and  health of                                                               
the fund.                                                                                                                       
4:27:01 PM                                                                                                                    
MR.  KING said  Scenario 2  shows a  less rosy  picture. In  2020                                                               
there were  poor returns,  an average  projected return  in 2021,                                                               
and a  deep -12  percent correction the  next year.  The earnings                                                               
reserve  is  depleted in  this  scenario,  even  if the  POMV  is                                                               
followed,  but it  doesn't  quite run  out even  with  SB 23.  He                                                               
reminded the  committee that in  the first hearing he  said there                                                               
aren't many scenarios where the  earnings reserve almost runs out                                                               
and SB 23 causes it to run out.                                                                                                 
CHAIR SHOWER asked  what the UGF assumption is  for the different                                                               
MR. KING replied the spending assumption  for the ad hoc draws is                                                               
$4.8 billion in FY19 and  it grows with inflation and population.                                                               
He pointed out  that trying to fund that size  budget and getting                                                               
these  returns causes  the  earnings reserve  to  run out  faster                                                               
under  SB 23.  However, the  principal of  the fund  continues to                                                               
earn money,  so the  earnings reserve starts  to recover  in this                                                               
scenario. Thus it's  hard to say what failure means,  he said. Is                                                               
it failure at  any point, at the  end, because of SB  23, or some                                                               
other factor?                                                                                                                   
4:29:42 PM                                                                                                                    
MR. KING turned  to Scenario 3 that beats  the fund's projections                                                               
nearly  every year  through 2029  and grows  to over  40 billion.                                                               
With SB 23 the fund grows to  about $37 billion. If the full FY19                                                               
budget is funded in this scenario, the fund balance stays flat.                                                                 
4:30:29 PM                                                                                                                    
SENATOR MICCICHE  expressed appreciation for the  information and                                                               
commented that  it's clear that  if everything goes fine  with SB
23 and SB  24, then everything will be  fine. However, everything                                                               
won't be  fine without reductions.  He said it's helpful  to take                                                               
it to that basic level to  understand why the bills are receiving                                                               
such careful evaluation. He asked if that is a fair statement.                                                                  
MR. KING replied that's a very  fair statement. He added that DOR                                                               
runs the  Monte Carlo simulations  to see how often  one scenario                                                               
comes up  versus another  and to understand  what the  risk looks                                                               
like.  But  it's  clear  that  withdrawing  more  money  than  is                                                               
currently allowed increases the likelihood of a bad outcome.                                                                    
SENATOR COGHILL  commented on the importance  of the assumptions,                                                               
the  POMV, and  inflation proofing,  all of  which he  would take                                                               
into account.                                                                                                                   
COMMISSIONER  DESIGNEE  TANGEMAN  said  this  administration  has                                                               
chosen to limit risk by  starting with the available revenues and                                                               
building the  budget from  there. Starting  with the  FY19 budget                                                               
and allowing  it to  run increases the  risk profile  and reduces                                                               
the options over the coming years.                                                                                              
4:33:45 PM                                                                                                                    
MR. KING  explained that  an assumption he  built into  the model                                                               
was  that the  legislature would  follow the  law. However,  that                                                               
might not  be a good assumption  if the ERA balance  runs low and                                                               
the legislature  decides to  prolong the balance  of the  fund by                                                               
not inflation  proofing the  fund or  not paying  a full  PFD. He                                                               
acknowledged that the legislature  could also prolong the balance                                                               
by  asking  the  corporation  to sell  an  unrealized  gain.  The                                                               
legislature has that prerogative, but  that will impact the fund,                                                               
he said.                                                                                                                        
SENATOR COGHILL expressed appreciation for the reminder.                                                                        
4:35:14 PM                                                                                                                    
CHAIR SHOWER commented  that the committee spent an  hour to say,                                                               
"It depends." He asked if he was wrong.                                                                                         
MR. KING replied you're not wrong.                                                                                              
CHAIR SHOWER  said there really  aren't a lot of  options between                                                               
reducing the dividend or reducing  spending or adopting some type                                                               
of tax. What happens next depends, he said.                                                                                     
4:35:43 PM                                                                                                                    
MR. KING said the last two  slides address questions that come up                                                               
frequently when the  payback is discussed. He  clarified that the                                                               
governor views the  money in the fund as excess  to what the fund                                                               
value  should  be. From  that  perspective,  these would  not  be                                                               
losses, he said, they'd be returns to normal.                                                                                   
He said  many people have asked  what impact SB 23  would have on                                                               
the future POMV. The answer is  that removing money from the fund                                                               
results in  it earning less  and the balance gets  smaller. "Five                                                               
percent of  a smaller number is  a smaller number." The  chart on                                                               
slide 15  shows how that  plays out.  The full effect  isn't seen                                                               
for  a few  years  because  of the  five-year  averaging, but  it                                                               
eventually stabilizes  and the POMV  calculation is  $130 million                                                               
less than it would have been if the money was left in the fund.                                                                 
MR. KING  turned to slide  16 that shows the  impact of SB  23 on                                                               
the PFD. The additional payments  the next three years reduce the                                                               
balance which means  that dividends will be  lower thereafter. He                                                               
noted that the  breakeven point for receiving the  back pay comes                                                               
after 30 years.                                                                                                                 
SENATOR  MICCICHE added,  "For context,  you're  talking about  a                                                               
Department of  Public "Safetyish"  difference on the  POMV draw."                                                               
He  pointed out  that  the  numbers on  slide  16  can also  vary                                                               
dramatically  in the  scenario  of continuous  budget growth  and                                                               
unstructured  draws. He  continued, "We're  going to  do what  we                                                               
can. We've  got a  challenging mix in  the legislature.  This can                                                               
vary dramatically  because that impact  can hit much  earlier and                                                               
cause somewhat  dramatic reductions.  This can  vary dramatically                                                               
because  that impact  can  hit much  earlier  and cause  somewhat                                                               
dramatic  reductions  or the  elimination  of  the dividend  much                                                               
earlier than when  you start seeing the impact in  this chart. So                                                               
again,  if  everything   goes  well,  this  will   be  great.  If                                                               
everything  doesn't it  will have  a fairly  dramatic impacts  on                                                               
future dividends as well as will  every other aspect of the state                                                               
MR. KING  responded that the numbers  on slide 16 are  an average                                                               
of the  infinite number of  possible futures. He  thanked Senator                                                               
Micciche for the comments and said he agrees.                                                                                   
CHAIR  SHOWER commented  that  life  is a  risk.  He thanked  the                                                               
He held SB 23 and SB 24 in committee.                                                                                           

Document Name Date/Time Subjects
SSTA OFFICIAL AGENDA .pdf SSTA 3/7/2019 3:30:00 PM
SB 23 TL - Senate President.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB0023A.PDF SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB23 Sectional.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB 24 TL - Senate President.pdf SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SB0024A.PDF SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SB24 Sectional.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SB 24 Fiscal Note.PDF SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SB 23 and 24 presentation.pptx SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB 24
DOR S STA Letter.2.26.2019.pdf SSTA 3/7/2019 3:30:00 PM
DOR response to committee
SB23 Follow up to SSA.3.6.2019.pdf SSTA 3/7/2019 3:30:00 PM
SB 23
Leg. Legal Memo on SB 24.pdf SSTA 3/7/2019 3:30:00 PM
SB 24