Legislature(2015 - 2016)HOUSE FINANCE 519
02/17/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB224 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 224 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 17, 2016
1:32 p.m.
1:32:51 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:32 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Mike Hawker, Bill Sponsor; Julie Lucky,
Staff, Representative Mike Hawker; Representative Cathy
Tilton.
SUMMARY
HB 224 PERM FUND: INCOME; DISTRIBUTION; PFD;
HB 224 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson reviewed the agenda for the day. He
reminded members to turn off their cell phones.
1:33:49 PM
SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 224
"An Act relating to income of the Alaska permanent
fund; relating to the disposition of income of the
Alaska permanent fund; establishing and relating to
the distribution account; relating to the calculation
of permanent fund dividends; relating to the dividend
fund; and providing for an effective date."
1:33:49 PM
REPRESENTATIVE MIKE HAWKER, SPONSOR, introduced the
PowerPoint presentations: "HB 224 - Fiscal Plan: The
Common-Sense Solution." He understood the serious fiscal
challenge Alaska faced due to the decline in oil prices. He
did not envy the finance committee having to close a $3.5
billion deficit. He thought a permanent solution was
necessary.
Representative Hawker turn to slide 2: "Mission
Accomplished":
· Long-term balanced budget solution
· Increasing Permanent Fund balance
· Responsible and affordable level of future
dividends
· Strong budget reserves maintained
· A simple and common-sense structure
· No personal income taxes to pay dividends
Representative Hawker emphasized the state achieving a
long-tern balanced budget solution. He thought the state
could achieve an increasing Permanent Fund (PF) balance
truly protecting the PF. He believed the state could
maintain a system to provide a responsible and affordable
level of future dividends to the people of Alaska. He would
show committee members that his solution would help to
reconnect Alaskans to the budgeting decisions that the
legislature made. He suggested that if the legislature had
to ask the citizens of Alaska to support government
services there would be a direct result on the
legislature's ability to pay continuing dividends. He urged
the maintenance of a strong budget reserve to use to
stabilize the budget in the face of volatile revenue out
flows. He specified that the approach offered in HB 224 was
a very simple and straight forward structure. It was not
complicated and did not offer anything really new. It
respected the existing institutions in place and
particularly respected legislator prerogative in making
future budget decisions. He furthered that the numbers in
the legislation penciled out in a manner such that a
personal income tax would not have to be imposed on
Alaskans. He added that Alaska had experienced a wonderful
run with the vast oil and gas resources over many years
without the imposition of a personal income tax. It had
been an advantage for Alaska and he wanted to see it
preserved.
1:37:54 PM
Representative Hawker explained slide 3: "Structure":
· 4.5 percent statutory endowment from Permanent
Fund earnings
· Endowment proceeds first used to balance budget
· Any excess money split between dividends and
savings funds
· Savings funds used to stabilize the budget when
revenue swings
Representative Hawker reviewed the concept of a 4.5 percent
statutory endowment from the state's PF earnings. He
suggested that members were familiar with the endowment
management concept for the PF. The approach had been
recommended by the PF Board of Trustees to the legislature
since about 1998. The Permanent Fund had resolutions dated
in 2003 and 2004 supporting moving its management to an
endowment process. The bill could not offer a
constitutional amendment. It was a statutory approach where
each year 4.5 percent of the fund's value would become
available for appropriation.
Co-Chair Thompson acknowledged that Representative Kawasaki
had joined the meeting.
Representative Hawker went on to explain the second part of
the structure offered in the legislation. The bill stated
that the endowment proceeds of 4.5 percent or about $2
billion per year would have to be used to pay the state's
debt first. If there was any excess funding after balancing
the budget it would be applied to a dividend program. The
bill contained a mechanism that allowed the money that was
flowing to the dividend to be split between dividends and
to the state's savings accounts - either the Constitutional
Budget Reserve (CBR) or the Statutory Budget Reserve (SBR)
- to maintain those accounts at a certain level. He
suggested that money in savings would be available to help
stabilize the state's budget. He furthered that it was
important to maintain the savings accounts solely for the
purpose of always having a resource available in case of a
deficit.
1:40:39 PM
Representative Hawker scrolled to slide 4: "HB 224 Cash
Flow." He relayed that the graph presented a picture of the
bill and the cash flow path. He pointed to the upper left-
hand corner showing the principle value (corpus value) of
the PF. Next he highlighted the box denoting the earnings
reserve account (ERA). The statutory net income was
accounted for every year in the ERA. He added that every
penny in the ERA could be appropriated by a vote of 21
legislators in the House, 11 in the Senate, and the
signature of the governor. He explained that the purpose of
the statutory percent of market value (POMV) mechanism (the
endowment mechanism) would only move 4.5 percent of the
value of the PF including the ERA each year into a
distribution account (shown in the purple box on the
graph). At present there was about $7 billion or more
dollars in the ERA. He suggested that $7 billion of the
nearly $50 billion PF could be spent by a vote of the
legislature if it chose. He surmised that such a decision
would result in horrible consequences to the value of the
PF. The legislation was about protecting the fund's value.
The idea of the POMV calculated payout allowed for a steady
annual draw that was less than the long-term return on the
investment of the financial assets in the PF and inherently
inflation proofed the fund. He claimed that all major
endowment funds around the world used the POMV mechanism in
order to provide benefits to the beneficiaries of the
benevolency trust.
He continued to explain that each year the state would put
4.5 percent of the value of the fund into a distribution
account. The money would be used as much as necessary to
balance the state's general fund (GF) budget which included
both of Alaska's capital and operating budgets. He noted
that the chart flowed next to the GF budget. After
satisfying the deficit any remaining money would go into a
formula that would pay dividends. He reported that the
dividend formula in the current bill proposed putting an
indexed amount of dividends using a relatively small
dividend, minimally $250 per person indexed up to $2000 per
person, but it would be indexed on the amount of money the
state had in its savings account balances. If the balances
were significantly low, then the dividend would be lower
and more money would flow into the state's savings
accounts. If the savings accounts had high balances that
provided plenty of security and cushion for budget
uncertainties, then the state would pay a much higher
dividend and move much less money into the accounts.
Representative Hawker next pointed to the dotted lines
going from the CBR and the SBR back to the GF. The graphic
representation of the slide depicted the money in the
savings accounts always being available for appropriation
into the GF budget at the will of the legislature. He
reminded members that the difference between the CBR and
the SBR was that the CBR was established by the vote of the
people. The money that went into the fund came from all of
the state's various settlements on tax claims. For
instance, when there had been administrative procedures,
and litigation on major claims the resulting funds went
into the CBR. A three-quarter vote of the entire
legislature was required in order to spend those funds.
Once money was taken from the CBR the constitution required
that any excess GF be moved into the CBR to replenish the
fund at the end of the state budget cycle. The bill
maintained that the CBR would be replenished first, then
the remainder would go into the SBR (accessible with a vote
of 21 and 11).
Representative Hawker was proposing that the legislature
have a very serious discussion about its highest priority.
He wondered about the state's available financial resources
to meet that priority. He posed the question about whether
the highest priority was the Permanent Fund Dividend (PFD)
or paying the state's bills. The proposal suggested that
paying the state's bills needed to be the state's highest
priority. He opined that paying all of the state's bills
meant meeting all of the public services people expected
from the state. He opined that schools, roads, public
safety, and health and social services programs needed to
be the state's first priorities. Also, when the state had
excess wealth it would continue to be shared with the
people of Alaska.
Co-Chair Thompson acknowledged Representative Cathy Tilton
in the audience.
1:47:40 PM
Representative Wilson asked about the amount that had to be
repaid to the CBR.
Representative Hawker stated that in 2015 the legislature
appropriated $3.0 billion out of the CBR into the
retirement fund accounts against the unfunded actuary
liability. The legislature also authorized a draw of up to
$500 million for a deficit in the FY 16 budget. Currently,
the state had a liability to the CBR in the amount of $3
billion plus whatever was ultimately drawn to fill the FY
16 budget deficit.
Representative Wilson asked if $10 billion would have to be
placed into the CBR before any monies could be deposited
into the SBR.
Representative Hawker stated that it was only the amount of
money that the state had drawn from the CBR that had to be
repaid. It was not a fixed number. The Constitutional
Budget Reserve grew with the earnings on the money that was
in the CBR as well as any new deposits that went into the
account from future settlements. The legislature only had
to pay the CBR whatever the amount was on deposit. He would
be providing additional information in another slide
concerning how the CBR and the CBR balance could be
affected by the legislation.
Representative Gara complimented Representative Hawker for
his easy-to-understand presentation of HB 224. If the
circumstances were such that $2.5 billion (or 4.5 percent)
did not cover the budget deficit, he wondered if there
would be a minimum $250 PFD or if a dividend would not be
issued.
Representative Hawker responded that the way the bill read
was that if there was not enough money from the PF
endowment, a dividend would not be paid. It was similar to
a household meeting its budget; bills were paid first. If
the legislature adopted the mechanisms laid out in the bill
the state would continue to have a PFD program, to grow
balances in the CBR, and to grow balances in the PF.
However, he felt that the state would have to be willing to
make a couple of difficult decisions and to maintain fiscal
discipline in the future.
1:51:53 PM
Representative Gattis appreciated Representative Hawker's
reference to fiscal discipline. She wondered where fiscal
discipline fit into the legislation. She understood the
concept of not having money, therefore not spending it. She
pointed out that it was possible for the state to have
money without having fiscal discipline. For example, the
state could pay for programs but not payout the dividend.
She wondered how the state could have money without having
fiscal discipline and whether the state could save itself
from itself.
Representative Hawker stated that he would address
Representative Gattis' concerns as the presentation
continued.
Vice-Chair Saddler pointed out that the system was
predicated on fiscal discipline. He opined that the
legislature wanted to increase GF spending which would
result in the state not paying a dividend. He liked the
linkage proposed in the legislation of state services and
PFD's.
1:53:31 PM
Representative Hawker indicated his bill was part of a
larger fiscal plan. He suggested that an incentive needed
to be restored to be disciplined in the decisions the state
made. He indicated that his fiscal plan concept was simple.
He furthered that budgeting was not that complicated. He
thought that the legislature confused the public at times
as well as itself. He turned to slide 5: "Fiscal Plan":
· 4.5 percent statutory endowment from Permanent
Fund earnings used to balance budget
· Significant up-front reduction in government
spending
· Some new up-front taxes to share economic burden
of solution
· $1.4 billion appropriated in FY16 used to
guarantee dividends for next two to four years
· Future dividend amounts depend on legislative
decisions to hold spending down
Representative Hawker specified that there were four items
to consider in balancing the state's budget and determining
the level of appropriation. One of the questions to ask was
how much the state needed and wanted to reduce in the
current budget. The next question was about the number of
new taxes to impose. The third question concerned raising
new revenues. The last question had to do with how much of
the PF earnings or money from savings was required to fill
the budget gap. Legislators had the authority to choose to
balance the entire state budget from savings accounts of
which there was enough currently. He thought that
legislators recognized that fulfilling the budget from
savings was not the right thing to do. He argued that the
legislature had to look for something that created a more
sustainable means of dealing with the state's fiscal
circumstances.
Representative Hawker encouraged members to consider
adopting a 4.5 percent statutory PF earnings endowment
draw. He added that later in the presentation he would
detail how his plan would work. He also urged significant
upfront reductions in government spending. He emphasized
that the state was spending at an unsustainable rate. He
had used a different approach than that of the
administration and its consultants to determine the need
for about $1 billion of reductions in government spending.
Independently, he had concluded that about $900 million to
$1 billion needed to be cut from the state's current budget
in order to meet expenditures while maintaining a sustained
level of government based on anticipated revenues. Revenues
came in primarily from oil and gas and the investment
returns from the PF. He told of legislators in 1979 setting
aside some money into a rainy day fund. At the time, the
state had a large amount of money on hand generating income
that could ultimately replace the state's reliance on oil
and gas revenues from the North Slope. In the past the
state had tremendous wealth enabling the majority of
people's fiscal requests to be satisfied. However, with
declining oil production the state's fiscal circumstances
had changed. The state would have to make some very
difficult decisions concerning spending reductions. He
added that it would be important to inform the public about
why changes were being made especially since the state
would have to take money from the PFD. He opined that every
citizen of Alaska would want to see government spending
reductions before they would want to sacrifice losing all
or a portion of their PFD.
Representative Hawker asserted that, in general, the vast
majority of people in Alaska would oppose using the PF to
fund government until the state demonstrated its commitment
to reducing the size of government. Many of his
constituents understood the need to reduce the dividend but
expected the state to reduce the size of government. He
also thought new upfront taxes were necessary to share the
state's economic burden in the solution. He furthered that
sharing the burden was more equitable than taking it out on
one industry or cohort. He thought everyone should be at
the table. He reiterated that upfront reductions and an
added level of taxes would make for difficult decisions.
His financial model showed taking about $900 million out of
the budget.
2:00:33 PM
Co-Chair Neuman wanted to discuss what the legislature had
already done to reduce the budget. He relayed that over
$2.4 billion had been reduced from the budget over a 4-year
period, about a 30 percent reduction. In the previous year
over $440 million was reduced from the appropriations
budget. He commented that he was unsure of what additional
reductions could be made, as the legislature had looked
diligently. He remarked that the legislature would continue
to look for further reductions. He asked Representative
Hawker what budget baseline he used in creating his plan.
In the previous year the budget equaled about $5.2 billion.
Representative Hawker stated that he would address
Representative Neuman's question in the next slide. He
continued to discuss the fiscal plan encouraging members
incorporate it into budget decisions in the current year.
He highlighted reviewing the use of the PF endowment and
the continued reduction of expenditures. He opined that the
public did not think there were enough reductions made. He
relayed that what legislators did not see in the hallways
of the Capitol building was the silent majority of Alaskans
at home that wanted more reductions in the budget. He
relayed that in his 14 years of service in the legislature
he had seen a steady and consistent communication from
Alaskans encouraging budget decrements. He suggested that
the legislature needed to be listening to the silent
Alaskans. He continued that in making the transition to a
new budgeting priority, he thought it was important to
guarantee that the people of Alaska receive a certain
dividend for a certain period of time. At the same time the
state would need to demonstrate its commitment to increased
fiscal responsibility.
Representative Gara had worked under four separate sets of
finance chairs including Representative Austerman,
Representative Thomas, Representative Stolze,
Representative Hawker, and the current finance chairs. He
stated that every time the finance chair presented the
budget to the floor the speeches included a comment about
the budget being a responsible and lean budget. He had
voted for some of the budgets. Currently, the terminology
being used was that the budgets referred to as responsible
and lean that the previous several finance chairs passed
were considered blotted in the current day and that $1
billion needed to be cut. He did not think that both could
be true. He agreed that there had been significant cuts to
the budget. He thought a poll could be made to say whatever
someone wanted it to say. The poll he had done in his
district favored cutting only waste. He thought what people
meant when they advocated cuts was to cut waste.
2:05:22 PM
Representative Hawker responded that he had conveyed in his
presentation the public's perception of the state having a
bloated budget. It was a very real thing to people for the
state to take money out of their pockets and reduce their
PFD. He asserted that in order to change people's
perception of the state having a bloated budget the state
would have to demonstrate a certainty. He recalled giving a
couple of budget speeches on the floor using language that
included benevolency and frugality. The one word that was
left out of his floor speeches and of other floor speeches
was sustainable. The legislature had been aware that the
level of spending by the state was not sustainable. He
recalled a robust conversation concerning sustainability on
the House Floor in the previous year. He remarked that the
world had changed. Oil fields did not last forever. The
state's production had declined from about 1.2 million
barrels of oil per day to below 500 thousand barrels of oil
per day since he and Representative Gara had been elected.
He also mentioned a world glutton oil that Alaska had not
seen and Alaska's oil prices had dropped substantially. He
mentioned looking at $30 per barrel of oil, the world had
changed, and Alaska's budgeting process had changed. He
thought that the legislature had done the right thing under
the circumstances to the best of its ability. However,
today something had to be done differently.
Representative Gattis did not believe that polls were
necessary for Alaskans to understand that the state was not
taking in the same amount of money that it was spending.
She advocated cutting the budget to a point that the state
could afford. She appreciated the presenter speaking to the
subject because it was the elephant in the living room. She
reaffirmed that the state needed a budget it could afford.
She mentioned that in subcommittees there were a lot of
things that people wanted. It would be a struggle as the
budgets are closed out because in the past the state had
given a significant amount to a lot of people. She
furthered that the struggles would continue as time passed.
However, it narrowed down to considering what the state had
coming in and going out. She thought it was relatively
simple.
2:09:13 PM
Representative Edgmon had a different philosophy from the
previous speaker. He believed that in making very difficult
choices the legislature should be thinking about what the
state should look like in the future. It was not just about
spending and cutting, but also about what the legislature
envisioned for its great state in the next 50 years. In
going forward the legislature would have to make decisions
about what programs and services were essential. He opined
that choices needed to be made along the way. He supported
Representative Gattis' comments about having to reduce
spending and the size of government. He relayed that he
thought it was more complicated than just cutting
government based on the part of Alaska he represented. He
had to consider the services that were important in keeping
his smaller communities alive.
Representative Hawker commented that although legislators
represented different areas of the state with different
needs, universally he surmised that everyone agreed that
there was one economic pie that was only so big. The state
had to figure out how to live within its means. He noted
that Commissioner Hoffbeck was in the audience.
2:11:20 PM
Representative Hawker continued to talk about slide 5. He
wanted to further discuss the importance of guaranteeing
the people of Alaska a continued dividend at some level for
a transition period while the state demonstrated that it
was getting its house in order, figuring out how it could
live within its means. Some of the things to watch were the
low oil prices and whether they were systemic or if they
would have a quick recovery. The legislature could make
decisions in the immediate or foreseeable and coming years
based on the facts and circumstances of those years.
Representative Hawker noted that it was a data point for
everyone to keep in mind that in the previous year's budget
(FY 16) there was $1.4 billion set aside for paying PFD's
in the coming fall. In other words, each year when the
legislature passed a budget it forward funded the dividend
for the following year. He explained that the supplemental
budget bill that was offered by the administration repealed
that authorization. If the supplemental bill (HB 293/SB 167
- Short Title: APPROP: SUPP/CAP/OTHER APPROPRIATIONS,
Section 10) was passed the entire dividend in the amount of
$1.4 billion for the coming fall would be repealed. He
asked the committee to think about doing something other
than repealing the dividend. He suggested reappropriating
the $1.4 billion and spreading it out over the next 2 to 4
years. For example, if the state was to spread the money
over 2 years every Alaskan would be guaranteed $1 thousand
in the current year and the following year. In the
meantime, the legislature could continue to make decisions
based on facts and circumstances and the legislature's
abilities to get the state living within its means. If the
$1.4 million was spread out over a 4-year period the state
could guarantee a $500 dividend for the following 4 years.
He furthered that it would be a part of how the legislature
presented the idea to Alaskans conveying that it was a
transition time in which difficult decisions would have to
be made. In the future under the fiscal plan he was
proposing the level of future dividends beyond the
guaranteed dividend would be dependent upon the
legislature's ability to stimulate the economy, generate
revenues, limit spending, or impose additional taxes. The
proposal in front of the committee empowered the
legislature to make decisions into the future.
2:15:03 PM
Representative Hawker discussed the spreadsheet on slide 6:
"House Bill 224 - Fiscal Framework." He explained that the
packet contained more detailed information. The slide
represented the current time period through June 2026. He
highlighted the baseline deficit established (in the upper
section of the spreadsheet) if no changes were made to
budget in the current year and into the future. He noted
that the revenue line (Line 2) came from the Department of
Revenue (DOR) Revenue Sources Book and Line 2 out of the
Legislative Finance Division's (LFD) Fiscal Summary. He
pointed out the spending line which was also taken from
Line 11 of LFD's Fiscal Summary which included the
governor's proposed legislation to both raise money and
move the PFD around. He reported having taken those
elements out. He relayed that at the time he had walked
through his numbers with David Teal, Director, Legislative
Finance Division. He had also reconciled his numbers with
the Tax Division at the Department of Administration. He
had also reconciled his numbers with the folks at GCI who
had been doing their own modeling. Once the governor's
proposed legislation was removed from the numbers the state
had about a $3.5 billion deficit to start with. His numbers
emphasized both designated general funds (DGF) and
unrestricted general funds (UGF). The full spreadsheet in
the bill packet was annotated at the bottom with references
to where the numbers were derived and the associated
philosophy being applied.
Representative Hawker continued to discuss slide 6. He
pointed to the first column. He identified that $950
million [Line 6] needed to be removed from the budget based
on budget decisions. The Permanent Fund Endowment (4.5
percent) figure [Line 10: $2064 million] was provided by
DOR. The amount remaining, if any, after applying the
endowment monies to the deficit was the amount that would
be available for dividend appropriations. In the Fiscal
Framework spreadsheet he showed a reappropriation of the
existing money where the state could guarantee people a
dividend payout of $1000 for the following 2 years or $500
for 4 years. He pointed to the CBR balance at the bottom of
the spreadsheet. He estimated the starting point using a
suggestion from David Teal, the director of the Legislative
Finance Division. He used a $7 billion number for the CBR
balance as of the end of June 2016. The CBR balance
reflected an investment growth rate of 5 percent. It would
allow for continued growth of the CBR account. Historically
the account had a much higher rate of return than 5
percent. However, Representative Hawker used a more
conservative number. He also highlighted line 7 which
reflected a cumulative inflation of the budget of 2.5
percent each year. He selected the percentage rate
arbitrarily. By the time the percentage was accumulated out
into 2026 the state would increase its budget over $1
billion per year. The model effectively moved the state
into inflated dollars with the inclusion of line 7. The
Permanent Fund was a 4.5 percent endowment against the
earnings of the fund, real money coming back every year
against increasing costs to the state.
2:21:32 PM
Representative Hawker surmised that within the first 2
years following making some very difficult decisions the
state would return to a surplus position simply by using
the PF 4.5 percent endowment against the earnings of the
fund. While the state had a declining rate of oil
production, cost recovery could be seen using the numbers
published in the Revenue Sources book. The model created by
GCI used a fixed $50 per barrel number to determine revenue
- the model did not inflation proof. He asserted that his
model worked similarly and showed that the state would be
able to live within its means buy using a PF endowment. He
also pointed out that the CBR balance, since it would not
have to be used, would continue to grow and compound from
about $7 billion to approximately $10.6 billion using a 5
percent return.
Vice-Chair Saddler mentioned that Representative Hawker had
informed the committee that he was using the DOR Revenue
Sources Book currently predicated on $56 per barrel of oil
prices. Using the current oil price (about half of the
price used in the Revenue Sources Book) as the starting
point, he wondered about the tipping point going from
deficit to surplus. Currently, Representative Hawker
predicted it at the start of FY 19. He commented that while
many of the projections were modeled on the Revenue Sources
Book it seemed like every time someone asked about the
current day's prices rather than the forecasted prices.
2:23:50 PM
Representative Hawker replied that the component in the
revenue line for oil revenue at $55 per barrel in the
Revenue Sources Book was about $1.7 billion. At $30 per
barrel would drop the revenue number to about $1 billion
and would require an additional $700 million draw from the
CBR. He received the numbers he was sighting from the DOR
the previous day. They were the numbers the state was using
in its analysis; numbers from the economic modelers from
the DOR.
Representative Hawker indicated that the listed PFD numbers
were based on the surpluses in the spreadsheet. He noted
that there was nothing that would stop the legislature from
taking money from savings to add to the people's dividend
if the state was comfortable. He emphasized that he did not
want to see a headline that said, "Mike Hawker Proposes
killing your dividend." He did not purpose eliminating
Alaskan's dividends but recommended a "live within our
means" mechanism that always allowed future legislators the
ability to decide how much dividend was within the means of
the state. He mentioned that good things could happen as
well. He mentioned that Repsol/Armstrong had a find in the
Coville River Delta that the Department of Natural
Resources (DNR) could add 100 or more barrels of oil per
day to the state's oil production. It would be a 20 percent
increase from one field if it could get permitted.
Production from the field could potentially come online
within a couple of years and was not reflected in the model
he was currently reviewing.
2:26:08 PM
Representative Wilson asked why Representative Hawker was
using 4.5 percent. She wondered because of his
recommendation to also impose new taxes.
Representative Hawker responded that the model could work
after the first year taking $950 million along with a
balance of increased taxes and decreased expenses. He was
not advocating for additional new taxes every year but
encouraged making some difficult decisions upfront. He
noted his previous experience working with the PF
executives and the board of trustees in promoting a
constitutional endowment mechanism using 5 percent. The
returns over time would be sufficient to exceed the 5
percent as well as an inflation of approximately 3 percent.
Standard endowment fund draws tended to run between 4
percent and 5 percent. He backed down to 4.5 percent due to
shear conservatism. The mechanism for taking the draw off
of the funds was to mitigate the volatility of the fund
earnings the percentage was applied to the first 5 of the 6
preceding years. It was done to allow the fund to close its
budget year, get a completed audit, and get a complete and
accurate measurement of the fund's value. Currently, the
fund might not have its audit completed. In order to have a
cushion the first five of six years was used to ensure
there was a year in which the audit could be completed. In
looking at a historic timeframe mathematically it came
closer to a 4 percent effective draw off of the fund which
provided greater assurance that the fund continued to grow
and that it was adequately inflation proofed it. He
reiterated that the 4.5 percent was judgmental but were
based on sound mechanics and was consistent with
standardized financing approaches. He suggested that if
members considered the bill it would also provide for the
opportunity to get some professionals before the committee
to answer any questions.
2:30:15 PM
Representative Wilson referred to slide 5 asking about
taxation as an accompanying solution. She wanted to better
understand the additional taxation he mentioned.
Representative Hawker replied that the budget decisions had
to be made by the legislature. He had it listed as a single
line item on the spreadsheet, $950 million of overspent
dollars. In order to balance the budget $950 million had to
be reduced from the budget. The number was based on
expected future revenues and a sustainable draw from the
PF. He concluded that there was only one economic pie. The
administration's bill proposed $1 million in cuts and $900
million in new taxes. The administration's version of the
bill proposed $100 million in cuts and $900 million in new
taxes. He reviewed the numbers by starting with $6.1
billion and backing out approximately $1 billion for DGF
which took the number down to $5.1 billion. He then removed
$950 which took the number down again to $4.1 billion or
$4.3 billion.
Representative Wilson asked why he included new upfront
taxes rather than including a sustainable [budget] number,
4.5 percent or another percentage, in the fiscal plan. She
understood the options of reducing spending to a certain
level and implementing new taxes. She asked why spending
was not limited versus imposing new taxes.
Representative Hawker did not see a mandate for taxes in
the legislation. He guaranteed that all fiscal models had
flaws. However, the models reflected best estimates and
provided a large enough picture to make decisions. He
remarked that the numbers did interrelate. If the state
took a higher percentage of a POMV from the PF the state
could lower its need to be making some of the difficult
decisions the legislature currently faced. He thought that
using the more complicated and more detailed model he
provided to committee members would require the right mix
of upfront budget adjustments of about $750 million in hard
cuts. He believed that in order to get participation from
all sectors of the economy the state needed some additional
upfront taxes, about $200 million. He furthered that all of
the taxed sectors should be asked to contribute. The
administration suggested imposing $900 million in taxes and
cutting $100 million from the budget. It was a judgement
call of the legislature.
Representative Wilson discussed hearing from her
constituents that they wanted to control government
spending. She wondered if it was possible to include a
mechanism that would mandate the legislature to control its
spending. Although she appreciated Representative Hawker's
model, she thought it would be difficult for constituents
to believe that legislators would control spending at a
certain level. She thought it would be hard to sell it to
Alaska residents. She wondered if he had looked into
imposing a hard number or a percentage.
2:35:56 PM
Representative Hawker responded, "The answer is absolutely
yes." He better understood that Representative Wilson was
asking about some kind of a spending limit.
Representative Wilson responded in the affirmative.
Representative Hawker responded that because the
legislature wrote law a spending law could be placed into
statute. However, the limitation could always be changed by
a future legislature at any time. He thought that the
legislature had the power. The legislature also had the
ability to ignore statute. Some type of a more rigid
statement in legislation concerning the level of tolerable
spending could be implemented. He thought it could be
beneficial, but at the same time, it brought concern about
any future requirements. He knew of his district having a
very different perspective on the need for government spend
than Representative Edgmon's district, for example. In his
proposed legislation he tried to show what level of
spending the state could afford with its current resources.
He thought that in order to enforce a rigid spending limit
which could not be violated, a constitutional change would
be required.
Representative Wilson requested that Mr. David Teal provide
a calculation having to do with not being able to raise
spending by a percentage of reserves in one of his
presentations.
Co-Chair Thompson asked Representative Hawker if he had an
interactive model that could be used to see how different
tax numbers affected the bottom line.
Representative Hawker replied affirmatively. He mentioned
that it was very easy to use and any kind of scenario could
likely be modeled. He had just recently received a
fantastic matrix of data on oil prices. He had wanted to
make the model sufficiently sophisticated in order to be
able to discuss what it would look like under different oil
price scenarios.
Co-Chair Thompson invited anyone who might have a scenario
to run through should get them to Jane Pierson, his staff.
She would get Representative Hawker to do the modeling.
2:39:08 PM
Vice-Chair Saddler thought the legislation provide a way to
make the numbers work. However, he thought there was an
opportunity for leakage. He wondered about the forecast of
increased spending. He had noticed Representative Hawker's
more detailed model was based on 2.5 percent inflation. He
also asked if the Representative had factored in a
population increase. He liked that his model provided for a
guaranteed $1000 dividend. He thought people had an
expectation. He was concerned about poor optics with a
lower PFD amount. He also stated that Representative Hawker
claimed that it would be possible for the legislature to
appropriate money to bring the dividend level to whatever
the legislature decided. It also appeared that it would
need to come from the Constitutional Budget Reserve
requiring a 3/4 vote and would cost extra. Also, if there
was leakage the legislature could certainly raise the
spending limit to whatever it wanted. He concluded that it
would depend on the legislature's fiscal discipline. He
opined that it always came down to the discretion,
integrity, judgement and the decisions of the legislature.
He asked if the legislation allowed for any capital
spending.
Representative Hawker replied that Vice-Chair Saddler's
response had identified that decisions had to be made and
certain presumptions had to be in play. The approach he was
offering in the legislation created an affirmative
incentive for future legislators to make wise decisions, to
hold down budgets, and not to increase spending; it all
flew into the dividend. He was not guaranteeing a number
for a dividend, but rather showing how, based on spending
patterns, the state could still balance its budget with a
POMV and maintain a dividend program. If legislators were
willing to hold to a more rigid spending cap, the money
would go straight to the dividend. If the state budgeted
several new programs, the money would come out of the
dividend. He opined that the state had a dysfunctional
fiscal system. He suggested that everyone that moved to
Alaska cost more money to the state because of the services
that needed to be provided including schools and roads. His
model demonstrated that the state could still offer an
almost Utopian existence for Alaskans. He furthered that
Alaska had reached a point where it could no longer
continue to have unrestricted PFD's as well as the Utopian
existence where people did not have to pay for the services
they consumed.
2:43:06 PM
Vice-Chair Saddler commented that the dis-synchronicity had
been workable because of oil prices being so high in the
past. He wanted to know what kind of conditions were
necessary for money to flow back into the dividend. He
wanted to see additional modeling to determine how much
funding would end up available for dividends. He
reemphasized that the legislature had made responsible
decisions to reduce spending, to save the state's windfall
profits, and to make long-term structural changes limiting
spending. He believed the state had a spending cap at
present; the increases in the budget were predicated on
$2.5 billion indexed to inflation and population. He
thought these measures were currently in statue but
remarked that they were not very affective. He opined that
the legislature would have to be careful in making
structural changes and it would be up to the legislative
body's personal discipline to adhere to them.
Representative Hawker believed that the spending cap
Representative Saddler was referring to existed in the
constitution. He furthered that in the constitution there
was a spending limit. However, it was formulated in such a
manner that it was ineffective.
Vice-Chair Saddler admitted that it was not solely
Representative Hawker's responsibility to come up with a
fiscal plan that solved all of the state's fiscal problems.
He wondered about capital spending within in his fiscal
system.
Representative Hawker replied that what was included in the
legislation was the capital spend levels in the current
budget (about $200 million). The inflation factor of 2.5
percent cumulative growth was the generic provision in his
model that anticipated there would be spending, growth, and
needs. The point of the model was to show the larger
assumptions and parameters in order to make decisions. He
added that the CBR balance continued to grow in his model -
a potential source for capital funding. His model contained
a very conservative oil production forecast inherent in the
Revenue Sources Book. There would be a 20 percent increase
in production as a result of the Repsol development on the
North Slope that could substantially change the state's
revenue picture. A gas line in place by 2025 or 2026 could
be the state's future. The state had a way to bridge to the
future without having to completely reconstruct or re-plumb
its whole system and continue to respect the institutions
of the state. He thought Alaskans would be able to fully
trust the PF and the limits and controls inherent in the
CBR. He opined that the state did not have a budget crisis
in Alaska. The state had $60 billion in savings with a
population of 700 thousand. He argued that the state did
not have a fiscal crisis but rather had a management
challenge figuring out the state's resources, how much
money could be generated from them, and how to meet the
needs of the public.
2:47:54 PM
Representative Guttenberg agreed that the legislature
needed to have an economist provide an analysis. He spoke
of being involved with a high school class using an
interactive spreadsheet. One of the solutions was to focus
balancing the numbers rather than looking at any related
impacts.
Representative Hawker explained that the number
Representative Guttenberg was referring to was the $201
million appropriation for capital budget spending each
year.
Representative Guttenberg asked whether the number was
negative.
Representative Hawker responded that the model [Spreadsheet
entitled: HB 224 - Fiscal Framework Simplified Ten Year
Fiscal Model] was structured such that the revenues were
positive numbers. The expenditures were negative numbers.
The capital budget baseline of $201 million was the
anticipated baseline capital spend.
Representative Guttenberg pointed to the following line
dealing with refundable tax credit adjustments. He noted
the Fall 2015 Revenue Sources Book. He wondered about the
difference between the most recent version of the revenue
sources book and the 2015 book.
Representative Hawker replied that the Fall 2015 Revenue
Sources Book was the most current version.
Representative Guttenberg commented that a CBR vote did not
have to add anything.
Vice-Chair Saddler responded that it did not have to.
Representative Guttenberg responded that it was up to more
than one group of people. He furthered that a CBR vote did
not have to be additional money to the budget.
Co-Chair Thompson asked Representative Guttenberg to
explain his question.
Representative Guttenberg stated that to get a CBR vote it
did not necessarily mean the budget would be larger than it
was prior to the CBR vote.
Co-Chair Thompson remarked that he did not know if the
legislature needed a three quarter vote if it was not
bigger than it was before.
2:50:41 PM
Representative Edgmon thanked Representative Hawker for a
shorter presentation because it gave members plenty of room
to discuss things freely. He referred to a slide in the
governor's presentation that discussed the benefits of a
non-POMV approach in that it offered a fixed-draw
(Sovereign Wealth Concept). He thought that the fixed draw
concept allowed for the fund to grow appreciably more than
with a POMV approach. He wanted to hear from Representative
Hawker about why it would not be the case from his
perspective.
Representative Hawker wanted to be very careful about
criticizing the approach offered by the governor, as it was
a valid concept. His was a competing concept that was
different and much simpler. Respecting the state's current
constitutional constructs of the PF and the budget reserve
funds, he did not look at the larger legal question about
whether the proposal would cause issues with the PF
earnings reserve account to be characterized as GF and have
to be swept into the CBR each year. His bill avoided the
legal questions raised. As far as the draw from the PF
there was a huge body of financial management science and
successful practice and tradition across many benevolent
funds in the world where a similar practice was in place.
His proposal would put a very specific limit on the draw
each year. There had been other bills referred to as the PF
protection act but the only thing that truly protected the
PF was limiting the draw and using the best contemporary
financial management practices through an endowment
mechanism. He stated that the fact that the state co-
mingled a bunch of money under the earnings reserve in
other proposals and then recalibrated how much money that
was in any given year did not provide a great deal of
assurance that the mechanism itself did not inherently
allow over-spending. His key point about preserving the
integrity of the existing PF structure and using the 4.5
percent endowment draw was that the state had the greatest
possible assurance that the value of the fund was protected
so that it was not overdrawn.
Co-Chair Thompson mentioned that the finance committee
would be hearing from David Teal who would be making a
presentation comparing the three scenarios.
2:54:53 PM
Representative Edgmon commended Representative Hawker for
his work in the legislature. He noted that Senator McGuire
had said in the previous day's meeting that she was freed
up due to not running for reelection. He referred to a
slide from the governor's presentation that talked about
what would happen if the legislature did not take any
action in the current session. One of the four bullet
points on the slide indicated that the state's credit
rating would be at risk and could also damage Alaska's
economy if the legislature did not do anything. He asked
Representative Hawker to comment. He thought the
representative was the perfect individual to ask.
Representative Hawker addressed Representative Edgmon's
comment about speaking freely because of not running for
reelection. He pointed out that the mechanism and concept
he had previously offered in 2003. At the time the
legislature had burnt through about $5 billion of a $7.5
billion PF balance. At the then current cash burn rate the
state had 2.5 to 3 years of money left in the account. At
present, if the state did nothing the state had about 2 to
2.5 years left. He commented that the wheel had come full
circle. He pointed to a document in the bill packet called
"Components of Sustainable Fiscal Policy for Alaska." The
document contained the philosophy he was asking the
committee to embrace. He reported publishing the 5 point
fiscal plan in April 2003 and had stood behind it ever
since. He thought it was the foundational philosophy that
as a legislature needed to maintain. Item 1 started with
the legislature's responsibility to promote real economic
development in the state providing a stable investment
climate and job security. Item 2 was that the legislature
had to control the cost and growth of government.
Specifically, the legislature needed to be mindful that
every single decision that was made affected the lives of
individual Alaskans. Item 3 was to manage the PF to protect
its real value over time - endowment method management of
the fund for making money available for the budget while
providing a substantial individual dividend and a
contribution to the cost of public services.
Representative Hawker continued to item 4. He recommended
structuring the state's general revenue system for a
balanced budget at mid-range oil prices that minimized
personal taxes and respected local governments' revenue
structures. The state's entire revenue structure needed to
be based on mid-level oil prices and the legislature needed
to determine a sustainable level of spending based on
revenues. He reported that item 5 was to maintain a budget
reserve fund for fiscal stability which could be drawn from
at times of lower than average oil price cycles and
restored when prices were higher.
Representative Hawker moved on to respond to Vice-Chair
Saddler's second line of questioning. He agreed with
Governor Walker's conclusions that the legislature needed
to act immediately. He believed there was an urgency
particularly with the ratings agencies. He relayed that
both the state's debt ratings agencies and the overall
state securities analyst ratings agencies were looking for
the legislature to take affirmative action in the current
year. In the following week some state employees would be
traveling to New York to do presentations for the various
representatives from the investment banking community. The
three bills would be the focus of the presentation and
would represent the items the state was looking at
implementing as a demonstration of its good faith and
intent to restore a functional, stable, durable, long-range
solution to the state's fiscal problem. He reemphasized the
need for the legislature to act boldly in the current year.
He spoke of a quote by J.F. Kennedy that there were costs
and risks to every bold course of action. The costs and
risks paled in comparison to the costs and risks of
comfortable inaction.
Co-Chair Thompson asked Representative Hawker if he wanted
to provide a sectional analysis of the bill.
Representative Hawker was happy to indulge the wishes of
the committee. He added that the sectional analysis was
very easy to follow. He noted that he would be happy to
come back to the committee anytime to discuss the detail of
HB 224.
Co-Chair Thompson asked Representative Hawker to present
the sectional analysis.
Representative Hawker deferred to his staff, Julie Lucky.
3:03:58 PM
JULIE LUCKY, STAFF, REPRESENTATIVE MIKE HAWKER, viewed the
sectional analysis of HB 224. She reported that Section 1
of the bill adopted the statutory endowment method for
determining how much was distributable per year from the PF
earnings. It was 4.5 percent of the average market value of
the balance of the fund for the first 5 of the preceding 6
fiscal years. Section 2 of the bill basically prioritized
the use of the annual payout - the 4.5 percent annual
payout. It also stated that the amount used from the PF
earnings would be used before a personal income tax was
assessed on state residents. She relayed that Section 3 of
the bill provided the language that allowed the transfer of
the money from the PF earnings into the distribution
account.
Ms. Lucky continued to convey the sectional analysis.
Section 4 of the legislation reflected a technical change
required to deal with the Amerada Hess funds. She reported
that Section 5 of the bill was the dividend calculation.
There were not a lot of changes in the dividend calculation
or the method of calculation. However, the amount of money
the calculation was based on would come from the 4.5
percent POMV payout into the distribution account. Monies
in the distribution account would first be used to fill any
deficit in the budget and the remaining funds would be
placed into the dividend account (the orange box on the
waterfall slide).
Vice-Chair Saddler referred to the bubble chart and
summarized the flow from the ERA (4.5 percent POMV payout
to the distribution account and then into the GF. He
wondered about the purpose of a distribution account when
the POMV payout could be directly distributed into the GF.
Representative Hawker responded that the definition of the
distribution account was to facilitate the management by
the state agencies involved. It was defined as an account
within the GF. The money was, in fact, being directly
deposited into the GF. The rest of the bill was about
allocation as the money was appropriated.
Vice-Chair Saddler commented about the limits of the
diagram.
Representative Hawker added that the indexing of the
progressive dividend which depended on how much savings the
state had in the bank was a concept suggestion in the bill.
3:07:32 PM
Ms. Lucky continued with a brief review of the sectional
analysis. She explained that Section 6 described the cap
which was based from $250 to $2000. It was indexed on the
combined value of the CBR and the SBR. There was also a
statement that relayed that in any year that an income tax
was assessed the amount of the dividend would be zero. It
reflected a policy call that income tax should not be used
to pay dividends.
Representative Hawker included the provision in the bill to
encourage serious debate in the legislature. It was his
personal opinion that it would be wrong to assess a working
Alaskan's income, take their income away from them, and
indiscriminately redistribute it to everyone else. The
point of the bill was to show that it was not a necessary
policy in order to achieve a sustainable working budget.
Ms. Lucky thought Section 7 of the bill best described the
waterfall diagram. It established a distribution account,
and codified the "waterfall" concept. The section
encapsulated how the annual distribution from the PF would
be placed into statute. She also pointed to Page 5, Line 6-
18, subsection d to the statement that nothing in the
section prohibited the legislature from making an
appropriation to the dividend fund established under
AS.43.23.045 from a source other than a distribution
account. If the legislature chose to make a policy call to
increase the dividend there was nothing in the bill that
would keep that from happening.
Representative Hawker mentioned the example of re-
appropriating the money that was currently set aside for
dividends and using it to pay a higher level of dividends
in the immediate future.
Ms. Lucky explained that Section 8 was a simple repeal of
the inflation proofing of the PF. Moving to the endowment
or POMV concept made the inflation proofing language
unnecessary. The last section of the bill, Section 9,
established an effective date of June 30, 2016.
3:10:16 PM
Representative Gattis thanked Representative Hawker and
expressed her appreciation for his succinct presentation.
She also thanked Ms. Lucky.
Vice-Chair Saddler asked if the legislation included a
provision to reappropriate $1.4 million to guarantee the
$1000 dividend for the following 2 years or if a
supplementary legislation would be required.
Representative Hawker explained that the reappropriation
required an appropriations bill. His bill was strictly a
policy bill.
Co-Chair Thompson thanked the presenters for their
presentation and indicated that the bill would be brought
back before the committee for comparisons likely in the
following week.
HB 224 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson reviewed the agenda for the following
day. The committee would be hearing an update on the Alaska
LNG Project.
ADJOURNMENT
3:12:17 PM
The meeting was adjourned at 3:12 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB224 Background Information.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB224 Chart.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB224 Sectional Analysis.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB224 Simplified Fiscal Model.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB224 Sponsor Statement.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 224 NEW FN DOR TT 2-15-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 224 NEW FN DOR PFD 2-15-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB224 Presentation 02 16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 224 NEW FN DOA VCCB 2-16-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 224 NEW FN DOA VCCB 3-22-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 303 NEW FN DOA VCCB 3-22-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 303 |
| HB 224 NEW FN DOA VCCB 3-22-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 224 |
| HB 245 NEW FN DOA VCCB 3-22-16.pdf |
HFIN 2/17/2016 1:30:00 PM |
HB 245 |