Legislature(2007 - 2008)HOUSE FINANCE 519
02/12/2008 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB347 | |
| HJR28 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 347 | TELECONFERENCED | |
| + | HJR 28 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 12, 2008
1:55 P.M.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 1:55:19 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas Jr.
MEMBERS ABSENT
Representative John Harris
ALSO PRESENT
Representative Ralph Samuels; David Teal, Director,
Legislative Finance Division
TESTIFIED VIA TELECONFERENCE
Tamara Cook, Director, Legislative Legal and Research
Services, Juneau
SUMMARY
HB 347 An Act relating to the regional cruise ship impact
fund; and establishing the Regional Cruise Ship
Impact Fund Advisory Committee and prescribing its
duties.
HB 347 was SCHEDULED but not HEARD.
HJR 28 Proposing an amendment to the Constitution of the
State of Alaska relating to the production tax
revenue fund, dedicating a portion of the
petroleum production tax to the fund, and limiting
appropriations from the fund.
HJR 28 was HEARD & HELD in Committee for further
consideration.
1:56:19 PM
HOUSE JOINT RESOLUTION NO. 28
Proposing an amendment to the Constitution of the State
of Alaska relating to the production tax revenue fund,
dedicating a portion of the petroleum production tax to
the fund, and limiting appropriations from the fund.
REPRESENTATIVE RALPH SAMUELS, SPONSOR, commented that saving
surplus cash that Alaska is receiving from the high oil
prices is the most important consideration legislators can
discuss this session. HJR 28 would put before the voters,
the opportunity to save a large portion of that money, while
maintaining the ability to provide for essential government
services such as education, transportation and public
safety. The bill gives the voters the opportunity to create
an endowment established as a separate fund in the State
treasury and providing a cash flow mechanism into
perpetuity.
If the idea is supported by a majority of voters, all of the
"windfall profits" or the money gained as a result of the
progressivity feature of Alaska's severance tax - AS
43.55.011(g), would be deposited into an endowment fund.
The fund would then spin off 4.5% of its total value into
the General Fund, which could be used for government
services. The endowment concept is widely accepted as the
methodology for large scale endowments ranging from the Ford
Foundation to Yale University. There will be a time when
the State needs the progressivity money & dollars
constitutionally mandated would go into the account, setting
up a pay-out mechanism of about 5% and providing a steady
cash flow from the account. There would only be one pot of
money invested over time and which, hopefully would generate
about 8% profit, while paying out about 5%.
Representative Samuels urged that the Committee think long-
term, which is imperative for the economic health of the
State. Passage of HJR 28 would put the issue of the
constitutional amendment before the people of Alaska, which
mandates that those funds go into the account until January
1, 2015. After that, it becomes legislative prerogative
whether to put money into the account. The legislation
provides for an approximate six year window in which, the
money would be constitutionally placed into the fund. The
cash flow provides for generations to come and would
constitutionally protect the "seed-corn".
Representative Samuels spoke to the cash flow payout that
would happen in five years. He referenced the handout
provided by the Legislative Finance Division (LFD)
indicating the revenue flow: "HJR28-Setting up a Production
Tax Revenue Fund and POMV Payouts". (Copy on File). In the
first five years, the amount would automatically be
reinvested. The assumption is, for that period, there would
sustain a cash flow to pay for the State's finances, which
would provide an opportune time to build up the fund. The
cash flow mechanism would spin-off the money as indicated in
column 1 of the handout. A cash flow would exist into
perpetuity. He claimed that HJR 28 was the best long-term
savings plan on the table. If the funds were placed into
the Constitutional Budget Reserve (CBR), eventually, when
needed, it would be politically easier to spend than
attempting to address revenue sources. He urged that a long
term mechanism be put in place.
2:01:45 PM
Representative Samuels addressed the 5% payout, patterned
after the Permanent Fund Dividend (PFD). He requested that
the departments address payout considerations. The original
recommendation was 4.5%; the House Judiciary Committee
raised that amount to 5%. The 5% is standard for a
constitutional mandate and having no pay-out the first five
years.
2:02:57 PM
Vice-Chair Stoltze asked if the Mental Health Trust had been
used as a pay-out type model. Representative Samuels
responded that he had chosen 4.5% because back-up
information stipulates that overtime, a 5% pay-out could
deteriorate the strength of the fund. He recommended a pay-
out between the 4% - 5% range; he believed that 4% would be
safer. He recommended a five-year rolling average so that
the Legislature could determine the cash flow into the
General Fund.
2:04:17 PM
Representative Samuels opposed tying-up how the cash flow
works and removing the decision making power from the
Legislature.
2:05:07 PM
Co-Chair Meyer discussed consolidating the State's many
savings accounts into one. He noted sub accounts contained
in the Alaska Housing Finance Corporation (AHFC), the
Capital Budget Reserve (CBR) and the Capital Income Fund,
too mention a few. He asked if HJR 28 intended to allow
consolation of other saving funds. Representative Samuels
advised that the Legislature could choose to appropriate any
money they saw fit into the fund. The Constitution states
that the windfall profits, associated with the progressive
feature of the tax system, would have to be placed into the
fund for 5 years, as mandated. The Legislature could also
choose to appropriate other monies into the fund.
Representative Samuels supported taking the CBR dollars,
changing the language and the payout method. The time to
make that change would be over the next several years, when
funds are not needed. There are various mechanisms to do
that. He emphasized that the more the fund is capitalized
now, the stronger the cash flow would be when the funds are
tapped.
2:07:33 PM
Representative Nelson mentioned discussions in the Senate on
the number of legislators needed to sign off for use of the
CBR and changing the amount from ¾ to 2/3. She asked if HJR
28 intended to recommend numbers needed to tap the fund.
Representative Samuels advised that if the payout was
changed, the dollars would go into the General Fund and
there would be no percentage vote. The money would
automatically come into the General Fund. The payout method
would be structurally changed in the proposed legislation.
2:09:17 PM
Co-Chair Meyer asked what department would manage the fund.
Representative Samuels replied the Department of Revenue and
that the management fees would come out of the earnings.
Representative Nelson asked if the fund would be inflation
proofed. Representative Samuels explained, overtime, it is
assumed that it would make 8%, spending 5%, and
automatically inflation proofed.
Representative Gara asked if the proposed legislation would
change the ¾ vote on the CBR. Representative Samuels
explained that the original version of the bill established
a sub-account in the CBR; people worried about having two
different funds. The fund proposed would be completely new.
He maintained that money would be saved. The manner in
which the bill is structured has nothing to do with the CBR.
It would be a new account and windfall profits would be
placed into it; the CBR would be left alone.
2:11:54 PM
Vice-Chair Stoltze pointed out that by a ¾ vote, the
Legislature could decide to put the CBR into the proposed
account. Representative Samuels replied that could happen,
however, realized it could turn into a political issue.
Vice-Chair Stoltze appreciated the innovative work
accomplished with the endowment. Representative Samuels
advised as it is currently written, the money would go to
the Department of Revenue to invest. He did not believe an
enabling statute was needed for the management. During a
lower payout, the fund could be safer from inflation.
Federal statutes require that charitable foundations spin-
off 5% of the money. Vice-Chair Stoltze understood that
inflation proofing was part of the formula, which makes it
work and is inherent in the plan. Representative Samuels
affirmed.
2:14:20 PM
Representative Crawford indicated his excitement, however,
anticipated problems with the approach in attempting to
combine the proposal with the CBR. Representative Samuels
agreed.
Representative Crawford supported the concept of a State
savings account. He favored having a majority vote rather
than the ¾ vote. He anticipated in future years, the amount
saved would be used; he did not want it to be an automatic
withdrawal.
Representative Samuels explained that initially, language
was included to require the vote. That language was removed
during the committee process; he questioned if that could
create a political problem. The intent of the bill is to
create cash flow. The dollars could be reappropriated back
into the fund itself. He hoped to avoid the political
consequences on budget issues. He reiterated that the
savings account is meant for a long-term cash flow.
2:17:08 PM
Representative Crawford wanted to see a debate, addressing
the simple majority vote; he hoped that party politics would
not get in the way.
Representative Joule recalled that the first attempt to
address the situation was in 1976 with the creation of the
Permanent Fund. In 1990, another attempt was made, creating
the Constitutional Budget Reserve (CBR). He observed the
creative ways the Legislature has found to "park" dollars.
He noted he was divided on the issue, which does not address
the unintended consequences. He anticipated it could create
a steady-stream funding, but didn't think that possible.
2:21:15 PM
Representative Samuels agreed with comments made by
Representative Joule, however, pointed out that if the
proposal is implemented, the options are to place money into
the CBR and then eventually spend it. He maintained that in
fifteen years, the money would be available, yet the cash
flow mechanism would not be to the State. The political
downside by taking action brings the day closer to the
discussion of when the revenue sources dwindle. He observed
that the proposed methodology is used around the world for
creation of endowments. Representative Joule hoped that the
results could be attained.
Representative Gara asked the intended formula for the out-
years, when the State does not know the price of oil, the
surplus or deficit. He inquired if there was access to that
information. Representative Samuels observed the
information from LFD indicates the initial deposit of
approximately $1.5 billion dollars. After that, the
projected price & production forecast decreases from 400
million to 200 million in August 2015. If the price of oil
drops, the numbers will decline as the progressive amounts
drop. He did not foresee many problems in the next five
years. He suggested that either the Department of Revenue
or the LFD address the numbers.
Representative Gara requested the figures of the projected
budget deficit and/or the surplus over the next few years.
Representative Samuels offered to provide those numbers at
the next meeting.
2:26:17 PM
Representative Hawker commented that if HB 125 is passed, it
requires that each year, the Administration present a 10-
year projection. He worried about the "hostage negotiation"
currently happening on the Senate side.
Representative Hawker discussed the amendment sunset.
Representative Samuels explained that as production
declines, it is likely the State will need the wind-fall
profit. He hoped that for the next five years, dollars will
be placed into that savings account. After that time, it is
not be imperative the money is used; it then becomes a
legislative prerogative to determine the use.
Representative Hawker noted for the record, he was not
comfortable with that interpretation. Representative
Samuels stated that eventually, there will be a 7.2%
production decline and unless the price goes up more than 7%
a year, revenue will drop.
2:29:04 PM
Vice-Chair Stoltze wondered if a 2/3 majority vote could be
achieved, adding that the proposed language would do no
damage, yet would provide more public confidence.
Representative Samuels asked if Vice-Chair Stoltze was
proposing that for tapping into the cash-flow money. Vice-
Chair Stoltze thought the process was simple.
Representative Samuels agreed the language had been written
appropriately placing the dollars into the General Fund.
Whatever the verbiage regarding the cash-flow, the point is,
the more complicated it is, the worse it can become. He
maintained that the Legislature is the appropriating body
and should decide how those funds are placed. It is solely
a cash-flow mechanism; the more complicated it gets, the
less desirable it becomes. Right now, the proposal is only
for an endowment. He agreed with the assessment recommended
by Vice-Chair Stoltze to keep it simple.
2:32:19 PM
Representative Thomas questioned why the change was proposed
to come before the voters. Representative Samuels indicated
concern on how to access the funds if it was not a vote by
the people. He thought that creating a statutory fund could
make it easier to access.
In response to comments made by Vice-Chair Stoltze,
Representative Samuels explained that the principle of the
Permanent Fund exists because the Legislature chooses to
place money into the corpus. He encouraged members to think
long-term. He thought that the proposal could equalize
State revenue overtime.
2:34:24 PM
Representative Kelly agreed there are interesting elements
to the bill; however, anticipated criticism from the voters
that the legislation was an attempt to access the Earnings
Reserve Account. He asked the unintended consequences.
2:36:23 PM
Representative Samuels responded that was "purely a
political" question. He reiterated that passage of the bill
is the right thing to do. When addressing the Permanent
Fund, we are addressing people's dividends; whereas, HJR 28
only addresses State government money. He maintained that
the correct thing to do is to set up an endowment. If the
bill fails by the vote of the people, then there is no harm
done; however, if the Legislature can get it implemented, it
sends a good message to the public that there is a cash flow
mechanism that works.
Representative Kelly agreed with comments made by
Representative Samuels. He recommended that the legislation
tie in with the other 10-year proposed plans. He noted that
HJR 5 provides a spending control on the revenue stream. He
was encouraged by the work done by Representative Samuels.
Representative Joule asked if the bill would be moved at the
meeting. Co-Chair Meyer said no. Representative Joule
noted the FY2015 anticipated balance of $100 million
dollars. He asked to see where dollars are currently
"parked" in the system and how it could be better built
upon.
2:40:51 PM
Representative Samuels advised that LFD had provided a
spread sheet indicating a roll of 100% the first day of the
CBR. In 2015, it would spin-off $155 million dollars; when
restructuring the CBR with a payout methodology, $340
million dollars will be spent. He thought that would be the
same spin-off that a 4% sales tax statewide would generate.
He did not know of any State accounts with a $4.5 billion
dollar balance amount.
Representative Joule acknowledged that the State currently,
does put dollars away. A percentage of the oil revenues are
put into the Permanent Fund. Every year, the value of that
money is protected at 3%. As the fund grows, the percentage
gets bigger. The value of the fund is protected. He
emphasized the State will be saving and that is good.
2:44:08 PM
Co-Chair Meyer recalled that the revenue sharing bill SB 72,
requires 6% of the progressivity. There could be
complications if that bill passes from the House Finance
Committee on 2/14/08.
Representative Gara mentioned the legendary battles over
passage of the CBR and getting the ¾ vote. Spending money
on one end and then placing it into savings, it could still
be there in the CBR. There will be a fight over getting the
¾ vote. He did not imagine the proposed bill would change
spending patterns.
Representative Samuels responded that passage of the bill
would "speed up the day that there will be discussion"
regarding where the revenue comes from. Referencing the
chart, in the first year not counting the dollars placed
into the CBR, the State would receive $123 million dollars;
in 2034, there could be up to $500 million dollars in that
account. If the dollars only go into the CBR, there will be
a fight and the money will be spent and the $500 million
will not spin off. He argued that HJR 28 proposes a better
plan for the long-term; however, it might be more painful to
achieve that goal.
Representative Gara referenced the handout and that under
the proposed legislation, $20 million dollars would be taken
out of the General Fund and placed into the Petroleum Tax
Fund (PTF). If that year is an even year, in the proposed
bill, there could be a $400 million dollar deficit, which
would require the Legislature to go to the CBR to acquire
the funds required for the PTF.
2:48:23 PM
Representative Samuels affirmed that in the transition year,
there could be some problems. He recommended placing the
entire CBR into that fund & phasing it in. He acknowledged
that there are different ways to look at it and that each
way has a trade-off.
TAMARA COOK, (TESTIFIED VIA TELECONFERENCE), DIRECTOR,
LEGISLATIVE LEGAL AND RESEARCH SERVICES, JUNEAU, offered to
answer questions of the Committee.
2:49:55 PM
Representative Crawford believed that taking the dollars off
the table and saving them for future spending is a good
plan, which saves for the future. He hoped to see the CBR
turned into an endowment. He noted approval for the
proposal.
Representative Kelly agreed that there would be more funds
available to place up-front. He recommended that as much
money as possible be placed into the fund during the high
years. He suggested that the expenditure column be
reconstructed so that if not spent, it could be reinvested.
Representative Samuels agreed it could be reinvested, but
would be decided by the Legislature. The fear is that
making a separate vote to appropriate, problems could occur
breaking the savings account. In drafting the bill,
Representative Samuels had attempted to avoid politics and
urged that the State let the money work for itself.
2:53:33 PM
Representative Kelly favored placing the CBR into the fund,
including with a ten year plan to improve the State's
savings.
Representative Samuels noted that he had intended to speak
with each of the members, however, timing issues made it
impossible. He wanted to understand the Committee member's
comfort-level with including the CBR into the proposal. He
requested amendment recommendations be made for the proposed
bill.
2:55:18 PM
PUBLIC TESTIMONY CLOSED.
Co-Chair Meyer noted that there could be future testimony on
changes made but only by invitation.
2:55:54 PM
Representative Gara worried about establishing a formula for
the constitution based on only the known dollars for the
next few years. The money time-line, consideration should
be made including future the gas and oil taxes with
inflation. He asked if $2 billion dollars this year could
be placed into the fund and not now worries about the out-
years.
Representative Samuels thought that scenario would depend on
how much is placed in each year. Placing the $4 billion
dollars currently in the CBR and adding another $4 million
during the next few years, could work with not tying it to
the Constitution. He worried that future legislatures might
not appropriate the money into that fund. The political
benefit is to have the dollars available, creating a middle
ground. There will always be a fear of the price of oil
staying high and production dramatically dropping, which
would be the worse case scenario and the Constitution
requiring that the funds be placed in.
2:59:25 PM
Representative Gara referenced the LFD estimate, including
the numbers between now and 2015. He asked what those
totals would total in today's dollars. He proposed that all
those funds be estimated for the year and factoring in the
time-value, not creating a formula for the Constitution.
Representative Samuels agreed that mathematically that could
roughly achieve the same place.
Vice-Chair Stoltze recalled a previous year process. He
addressed the issue of the CBR, placing it into the
Constitution so that the public can decide if the existing
system is better or not than what is being proposed.
Representative Samuels did not object to including the five
year consideration. If the entire CBR is not phased out in
the first year, he thought it would be mute. Vice-Chair
Stoltze believed he and Representative Samuels were on the
same page.
3:02:24 PM
Representative Crawford looked forward to seeing the
benefits of the proposed action and hoped that the next
generation could also experience those benefits. He
recommended that the CBR be included plus 50% of the State's
surplus dollars over what was spent last year & including
inflation. He reiterated support for the legislation.
Representative Kelly confirmed that the bill captures
production tax on oil and gas with any progressivity piece.
Representative Samuels replied, in the original legislation,
the exact sight was quoted regarding tax collected; the
House Judiciary Committee did not approve of a statutory
inclusion reference in a constitutional amendment, so hence,
it includes only the description. The constitutional
imperative ends in five years.
Representative Kelly noted that presently, it is handled on
the barrel of oil equivalent (BOE) and asked if that would
be continued. He thought it could flow well into the
future. Representative Samuels believed it could stop the
flow in. In the net profit system, anything above the base
rate would go into it.
3:05:50 PM
Representative Thomas mentioned his personal retirement
account and the discipline needed for making the deposit
into those accounts. He maintained that any investing
requires flexibility.
Representative Kelly advised that no young person who has
put money away for retirement ends up criticizing the person
who made the recommendation.
3:08:56 PM
Representative Gara asked when the Committee could
anticipate hearing testimony from the LFD and the Department
of Revenue.
Co-Chair Meyer stated that HJR 28 would be HELD in Committee
for further consideration.
ADJOURNMENT
The meeting was adjourned at 3:09 P.M.
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