Legislature(2015 - 2016)HOUSE FINANCE 519
04/19/2016 08:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB245 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 245 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 19, 2016
8:35 a.m.
8:35:37 AM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 8:35 a.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
David Teal, Director, Legislative Finance Division; Randall
Hoffbeck, Commissioner, Department of Revenue; Craig
Richards, Attorney General, Department of Law; Angela
Rodell, Executive Director, Alaska Permanent Fund
Corporation.
SUMMARY
HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 245 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson discussed housekeeping.
8:36:16 AM
HOUSE BILL NO. 245
"An Act relating to the Alaska Permanent Fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska Permanent Fund;
relating to the earnings reserve account; relating to
the Alaska Permanent Fund dividend; making conforming
amendments; and providing for an effective date."
Co-Chair Neuman MOVED to ADOPT the proposed committee
substitute for HB 245, Work Draft (29-GH2859\I). There
being NO OBJECTION, it was so ordered.
8:37:24 AM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, stated
that he would be focusing on the cash-flow related changes
in the newly adopted bill version I. He spoke to the
document, "Cash Flow under HB 245, Legislative Finance
Division," which discussed cash flow by bill section:
Sec 7
Reduces royalties dedicated to the Permanent Fund from
new oil fields (post 1980) from 50% to the
constitutional minimum of 25%. That increases general
fund revenue by about $50m annually depending on the
price of oil.
Sec 8
Deletes the definition of income available for
distribution. That formula was based on earnings
during the preceding 5 years.
Sec 9
(b) Replaces the earnings-based "available for
distribution" formula in section 8 with a POMV
calculation. The nominal payout to the general
fund is 5.25%, but the effective payout will be
about 4.8% (in the long-term) if the Permanent
Fund corporation's projections regarding real
earnings of 5% and inflation of 2.25% are
realized. The effective payout is lower than the
nominal 5.25% payout because the payout is based
on the average balance during the past 6 years.
Mr. Teal noted the chart under Section 9 that showed how
the POMV was computed; the table computed the FY17 payout,
the year-end balance looked back 6 years - FY 17 would use
the FY11 through FY15 balance.
8:42:15 AM
Mr. Teal explained that the 5.25 percent payout on the 6
year lookback average would be $2.4 billion, which when
divided by the FY16 balance, resulted in a payout of 4.6
percent. That percentage would move through the years and
stabilize at approximately 4.8 percent.
8:42:43 AM
Vice-Chair Saddler asked why the calculation was based on 5
of the preceding 6 years and not simply the last 5 years.
Mr. Teal replied that the provision existed so that
legislators would be aware at the beginning of the
legislative session how much money was available.
8:43:53 AM
Vice-Chair Saddler asked whether any unintended
consequences would result from the 1 year gap.
Mr. Teal replied in the negative. He related that a higher
nominal payout percentage could be used without actually
paying the money out and failing to keep pace with
inflation.
8:44:57 AM
Representative Gara asked why a flat percentage payout
amount had not been used in the equation.
Mr. Teal acquiesced that it was clear that the computation
appeared to be based on a flat percentage, but it was based
on earnings, which was a volatile revenue stream. The
equation could be stabilized by having a moving average.
Using a method that relied on balances, rather than
earnings, would stabilize cash flow immensely for both
dividends, and for payout. He noted that the model
reflected flat dividends, which was the result of using a
moving average of balance instead of the interest earnings.
8:47:47 AM
Representative Gara asked whether the percentage used was
based on the last 5 years of the earnings on the fund.
Mr. Teal stated that it was not. He explained that the
current formula used earnings, the bill would change that
to the use of the balance. He said that this major
difference would stabilize the payout, both to dividends
and to the General Fund.
8:48:29 AM
Representative Wilson wondered whether the legislature
could cap the dividend without instituting the changes
proposed in the legislation.
Mr. Teal replied in the affirmative.
Representative Wilson hypothesized that rather than
implementing the changes proposed in the bill the
legislature could simply cap the dividend payout.
8:49:51 AM
Mr. Teal responded that the legislature could appropriate
on an annual basis to do what the bill intended. The
difference was that the bill laid out a plan, rather than
acting on an ad hoc basis. He relayed that the legislature
had not spent from the Earnings Reserve Account (ERA) in
the past, and that doing so would be a significant change.
He warned that a plan of action needed to be laid out
before the decision was made to spend from the ERA, in
order to maintain the safety of the Permanent Fund. He
believed that the bill was referred to as the Permanent
Fund Protection Act because, while it removed earnings from
the Permanent Fund, the fund would be shielded from being
overdrawn.
Representative Wilson recognized the separation of the
corpus of the fund from the ERA. She asked whether leftover
funds from a capped dividend could be used directly in the
state budget. She expressed confusion that there were two
separate conversations occurring about the use of the
Permanent Fund.
Mr. Teal indicated that the legislature could just simply
reduce the PFD payout in the first year, which would reduce
government expenditures by $700 million. He thought that
the concept of the bill was that the state would begin to
draw money from the earnings reserve to fill the current
fiscal gap. He stated that the $700 million reduction would
be insufficient; the ERA balance, and the earnings of the
fund itself, could supply a payout of approximately $2
billion annually to the General Fund. He lamented that
under either scenario the state would still face a deficit.
He thought that the administration's motivation behind the
bill was that if the deficit was going to be filed by
taking money from the ERA, then the account would decline.
He warned that the decline would result in the eventuality
that the reserve would no longer fund government - revenue
would need to be raised or severe cuts to government would
need to be implemented. He thought that the plan attempted
to plan for the future sustainability of the fund by
determining the amount that could be drawn from the ERA,
while still maintaining the real value of the Permanent
Fund. He asserted that the governor's intent was that the
bill would be accompanied by raising of additional revenues
and cuts to expenditures. The fiscal gap was too big to
fill by any one solution.
8:56:48 AM
Representative Wilson felt that she was witnessing a "shell
game." She thought that the public should understand that
the bill was essentially a tax.
Co-Chair Thompson noted that Representative Paul Seaton,
Randall Hoffbeck, Commissioner, Department of Revenue,
Craig Richards, Attorney General, Department of Law, and
Angela Rodell, Executive Director, Alaska Permanent Fund
Corporation were in the gallery and available for
questions.
8:58:07 AM
Representative Munoz asked what would happen to the
dividend calculation when oil prices were higher and the
POMV was no longer withdrawn.
Mr. Teal asked her to restate her question.
Representative Munoz asked what happened to calculation
when the POMV went to zero.
Co-Chair Thompson believed that her question would be
answered further in the presentation.
8:58:55 AM
Mr. Teal continued with his presentation:
(c) Ensures that 20% of the payout goes to dividends.
Under the Spring forecast, that will be about $500 to
$600 million annually. The remaining 80% of the payout
is subject to a dollar for dollar reduction as oil
revenue rises above $1.2 billion (adjusted for
inflation). The impact of the payout limit is:
1. Zero when oil is below about $75/bbl. ($75 oil
generates about $1.2 billion in production taxes and
royalties (after reserving 20% of royalties for
dividends).
2. The payout is reduced by a dollar for every dollar
of oil revenue (less the 20% portion of royalties that
goes to dividends) between $1.2 billion and about $3.1
billion. The reduction occurs at oil prices between
about $75/bbl and $100/bbl as shown in the graph
below.
3. When oil prices are above about $100/bbl, the POMV
payout is reduced to zero and additional oil revenue
is spendable. General fund revenue available to spend
will be lower (relative to revenue without a limit) by
about $2 billion.
Mr. Teal stated that payout limit scenarios were
illustrated on the bar graphs on Page 2. He said that the
bars at the bottom of the boxes represented non-volatile
revenue, which included taxes and fees that did not depend
greatly on the price of oil. He added that the revenue
included corporate income tax for oil companies, so it
increased with oil prices, but was considered non-volatile.
He furthered that the green line on the left hand chart
represented the $2 billion payout, which was not expected
to be reduced in the future; however, the chart reflected
only FY17 numbers. He said that as the Permanent Fund grew
the 5.25 grew as well, which meant that in 10 years the
payout could grow from $2 billion to $2.5 billion.
9:03:04 AM
Representative Gara proclaimed that the state budget would
be unsustainable until a reliable source of revenue was
established. He highlighted some of the consequences of
cuts to the budget like the flat funding of schools and the
meager capital budget. He contended that no member of the
committee would be able to secure funds for projects that
were important to their constituency (he specifically
mentioned the Knik Arm Crossing) because the state had no
money to spend. He spoke to the charts on Page 2, and
lamented that the scenario on the right would not fund a
capital budget. He preferred the chart on the left. He
labeled the chart on the right a "pathway to austerity." He
reminded the committee that financial patterns were
cyclical, and that the legislature should be debating
austerity measures and not the administration.
Co-Chair Neuman called a point of order. He argued that
letters from the Department of Transportation and Public
Works had indicated that completing the Knik Arm Crossing
would not cost the state any additional dollars.
Co-Chair Thompson interjected that the committee was not
debating specific projects.
Co-Chair Neuman agreed.
Representative Gara attempted to clarify his remarks.
9:06:39 AM
AT EASE
9:07:01 AM
RECONVENED
Mr. Teal agreed that some people could view the chart on
the right as a pathway to austerity. He suggested that it
could also be a pathway to sustainability. He explained
that $5 billion on the left chart could be reached at
$90/bbl. However, the right chart showed that oil would
need to be at $110 in order to reach $5 billion. The entire
point of the provision in the bill was to establish a
revenue limit, which would then limit expenditures. He said
that the prior draft of the bill had elicited two responses
from Governor Walker; one was to inflation proof the fund,
and the other was to recognize the importance of a revenue
limit. He thought that the revenue limit that the
administration and the division had arrived at would work
and was flexible. He asserted that he legislature could
make the limit work however they wished, but it would not
change the fact that the revenue in the Spring Forecast
would still leave the state with a deficit. He thought that
the question should be whether the proposed plan in the
bill should be executed independently, or should it be
rolled in with revenue measures and expenditure cuts. He
understood that rolling everything together could be more
complicated, and suggested that executing the plan alone
would allow for a based to be established, and for the
state to know how much revenue was available; the state
would also be able to establish how much of a gap remained,
and could then focus the debate on whether the remaining
gap was filled with expenditure reductions or revenue
enhancements. He warned that to try to do all three at the
same time would result in too many levers moving at once.
9:10:10 AM
Co-Chair Thompson indicated that there had been discussions
about limiting the level of government by creating funding
restraints for future legislatures.
9:10:44 AM
Representative Wilson wanted to see a spending cap in the
model.
Mr. Teal replied that the bill would limit volatile revenue
and would flatten available revenue at $4.1 billion. He
said that the revenue limit would leave the state with
deficits; even as the state was reducing the POMV payout,
withdrawals from the constitutional budget reserve (CBR)
would be required, which would require a supermajority vote
and would exert downward pressure on the budget.
9:12:04 AM
Representative Wilson asserted Mr. Teal was incorrect. She
spoke again of putting a revenue cap in the bill. She said
that the Fairbanks Northstar Borough had a cap that limited
spending. She suggested adding a revenue cap into the
actual operating budget.
Mr. Teal stated that there had been a great amount of
debate on the issue. He rebutted that while the payout from
the POMV could be capped, the ERA would still be available,
which would allow for more than the cap to be spent. He
explained that if rules were to be set in statute, and
followed, the proposed plan would prove to be a revenue
cap. He stated that there was not a cap until oil reached
$75/bbl, the cap would be in place from $75/bbl to
$100/bbl, after that the POMV would be zero and any revenue
above $100/bbl would become spendable. He said that a
spending limit could be implemented, but that the
legislative legal services had advised that there was
already a constitutional spending limit, and any limit
imposed that was stronger than the one that already existed
would be in conflict with the Constitution. He shared that
the problem with the constitutional spending limit was that
it had never affected spending; the limit simply did not
work, and the computations had always exceeded the amount
of expenditures that the legislature had made. He said that
although the revenue from the payout could be limited, a
future legislature could not be bound to by the limitation
of expenditures.
9:14:59 AM
Representative Wilson asked what the constitutional
spending limit was for the coming fiscal year.
Mr. Teal responded that the limit was based on 1981
expenditures, inflated by the cost performance index (CPI)
and by population growth, and was typically several billion
dollars more than any proposed budget.
Representative Wilson voiced that the Constitution needed
to be changed.
Vice-Chair Saddler queried whether payout of less than 5.25
was an attempt at inflation proofing.
Mr. Teal responded that the payout could not be computed
for any year except for FY17 using the numbers available in
the document. He referenced the box on Page 1, the years
FY11 through FY16 were the first 5 of the preceding 6 years
that would be used to calculate the numbers for FY17. He
reminded the committee that the balances before FY 17 were
past balances, the current balance was higher, and the
payout was 4.62 percent of the current balance. He believed
that there was stability in looking back 5 years.
9:18:35 AM
Representative Gattis referred to the notion that one
legislature could not bind future legislatures. She asked
whether the revenue limit had been modeled.
Mr. Teal responded that the revenue limit had been modeled,
but that the modeling had never worked because the Spring
Forecast did not have oil prices high enough to generate
the revenue required to trigger the limit.
9:19:52 AM
Representative Pruitt explained that the Spring Forecast
had not forecasted prices above $75, which was why the
modeling could not be done.
Mr. Teal indicated that Representative Pruitt was correct.
He added that the revenue limit had been designed to hold
revenue down at sustained high prices and to respond to a
one-year spike. He said that the problem that the division
faced in the modeling was that under the Spring Forecast,
the state was nowhere near reaching the limit. He added
that if the price of oil went up in a year, then the
reserves would also increase because they would not be
spendable.
9:22:02 AM
Representative Gattis stated that her desire to reduce
spending outweighed her ability to embrace the legislation.
Mr. Teal said that even with the POMV and forecast prices
the available revenue would never go up beyond $4.1
billion. He stated that having the $4.1 available meant
that there would always be pressure to spend no more than
that, to do so would use up reserves and put the state back
in the position that it now faced. He relayed that the
limit would not change how the money was spent, but would
change where the financial burden would be felt because of
the spending choices.
9:23:39 AM
Mr. Teal moved on to Section 10:
Sec 10
(e) Allows an appropriation from the earnings
reserve account (ERA)-where Permanent Fund
earnings accumulate-to the general fund. The
allowable appropriation is reduced by the payout
limit if oil prices are sufficiently high. The
amount of this appropriation that is reserved for
dividends is unaffected by the payout limit.
(f) Outlines an inflation proofing methodology.
If the ERA balance is "comfortably high"-defined
as four times the maximum allowable payout-then
the excess balance may be appropriated to the
Permanent Fund principal.
Mr. Teal pointed out that subsection (e) would establish
the revenue limit, and made clear that 25 percent of the
payout would be reserved for dividends; 20 percent reserved
for dividends would not be reduced as oil revenue rose. He
spoke to subsection (f) and noted that the inflation
proofing methodology would differ from the current method
by making it so that the state did not inflation proof
until the ERA balance was high enough to make people
comfortable that future payouts were not in danger. He said
that when the balance was more than 4 years-worth of
payouts the excess would be transferred to the principal of
the fund, this would serve as inflation proofing. He added
that the revenue limit was tied in because as the payout
form the ERA balance was restricted at higher oil prices,
the balance would grow and trigger inflation proofing
transfers.
Mr. Teal discussed Section 11:
Sec 11
Provides for dividends comprised of
1. 20% of the POMV payout described in section 8
(AS 37.13.140(b)). This amount is not reduced by
the payout limit in AS 37.13.140(c)
plus
2. An amount equal to 20% of prior year royalties
deposited in the general fund.
Mr. Teal explained that the projections for dividends were
relatively stable at approximately $1000.
Co-Chair Thompson understood that the way that the bill
presently read, Alaska residents would receive dividends of
$1000, over the next three years, but that number could
fluctuate.
Mr. Teal answered that the dividends would increase as oil
prices increased. He shared that production decline had
been built into the model and that royalties would
nominally affect the amount of the dividend. He said that
the real impact on dividends came from the POMV payout. The
reserve balance would rise with oil prices, increasing the
Permanent Fund balance; as interest rates increased and
earnings rose, the Permanent Fund balance would go up.
Therefore, 5.25 percent payout would go up, and the 20
percent of that that went to dividends would increase. He
communicated that the model was responsive to oil prices
and to earnings rates.
Vice-Chair Saddler asked how adjustments to the states take
of oil production taxes affected the model.
Mr. Teal answered that as taxes on oil increased, the
volatile revenue would increase, resulting in more money at
any given oil price, which meant that the limit would kick
in earlier. Dividends would also increase.
Representative Gara did not believe that the current bill
version would result in a balanced state budget.
9:32:08 AM
Representative Wilson wondered how the legislation would
financially impact Alaskan residents.
Mr. Teal responded that the economic impact could not be
projected by the model or any of the cash flow charts. He
believed that the intent of the legislation was to protect
dividends. He warned that without the legislation, or
something similar, deficits would increase by $2 billion.
He asserted that the real concern should be the financial
impact of not passing the bill. He said that not passing
the bill would result in a $3 billion shortfall, rather
than a $1 billion shortfall, which would have greater
economic impact. He relayed that a $3 billion shortfall
would drain reserves quickly, and having no reserves would
make maintaining current spending levels impossible.
9:34:19 AM
Representative Wilson felt that it was the responsibility
of the legislature to understand the fiscal impact of the
bill.
Mr. Teal responded that there were three major levers
available to address the deficit and he believed that it
would take a combination of all three in order to fill the
deficit.
Co-Chair Thompson invited the administration to the table.
He asserted that it was not Mr. Teal's responsibility to
speak on behalf of the governor.
Mr. Teal relayed that the projected economic impacts of
various actions on families of various sizes could be found
at http://www.legfin.akleg.gov/. He contended that the bill
did not address expenditure reductions or revenue
enhancement, which were the other two levers in the overall
fiscal plan. He said that implementing the bill would
reveal how much of the financial problem remained, which
could help determine whether the remaining problem should
be addressed by expenditure or by revenue.
Co-Chair Thompson reinforced that if the legislature did
nothing, and things continued at the status quo, the
reserves would run out in four years and there would be no
dividend.
Mr. Teal responded affirmatively. He warned that there
would be no reserves available in 3 to 4 years which would
force the state to revisit the idea of cutting expenditures
and/or raising taxes by a combination of $4 billion. He
said that the bill would lower the deficit that would need
to be filled, to $1 billion.
9:39:40 AM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
stated that Gunnar Knapp had made it very clear that that
state should use the earnings of the Permanent Fund to help
fund government.
Representative Wilson argued that the legislature was not
going to be inactive on the budget. She felt that the ideas
that had been presented to fill the gap had not been
presented clearly so that the economic impacts could be
studies by the legislature. She felt that levers in the
governor's overall plan existed in "silos."
Commissioner Hoffbeck responded that specific modeling on
how each lever would economically affect Alaskan families
was not yet available. He contended that the various levers
put for the by the governor were being considered as a
total, overall package. He said that one problem that the
administration faced was people holding on to the hope that
government spending would rise back to past spending
levels, and that the financial crisis would be short-term.
He stated that DOR's Spring Forecast was consistent with
what other oil price forecasting agencies had forecasted.
He stated that the only way that the state would fill the
budget gap was by making reductions in government spending,
using funds from the ERA, and exploring additional revenue
sources.
9:43:55 AM
Mr. Teal clarified that the model was designed to run the
results of any combination of levers, and was capable of
merging results. He stressed that the bill only spoke to
one of the levers. He hoped that the committee would
consider that the bill could not contain revenue measures
or appropriation changes; the single subject rule and the
inability to combine appropriation bills with bills of
substance allowed for only one topic to be addressed at a
time. He explained that the bill attempted to maximize use
of Permanent Fund earnings in a sustainable way.
9:45:19 AM
Representative Kawasaki understood that the bill was the
largest part of the overall fiscal plan proposed by the
administration. He shamed previous legislatures for not
reigning in spending. He spoke to the great things that had
been done when oil was at $100/bbl. He asked whether the
revenue payout limit would hamper the ability of the
administration to positively impact the state.
Commissioner Hoffbeck thought it was important to look at
the trigger points within the model. He said that the limit
would not kick in until oil hit $70/bbl, and at that point
there would be a reduction in the draw from the earnings
reserve. He said that as a commitment to the people of
Alaska, when oil prices became more robust the draw on the
earnings reserve would be reduced.
9:49:00 AM
CRAIG RICHARDS, ATTORNEY GENERAL, DEPARTMENT OF LAW, added
that when oil prices returned to the level where the state
had a sustainable budget, money would not be drawn for
expenditures that were above a sustainable level.
9:50:03 AM
Representative Edgmon understood that draws from the
Permanent Fund would cease when oil reached $70/bbl, but
that that was predicated on $4.1 billion spending.
Commissioner Hoffbeck replied in the affirmative.
9:51:02 AM
Representative Edgmon understood that the bill was a
component of a multi-year plan. He asserted that there were
political components in terms of revenue enhancements. He
contended that the "reordering of Alaska's fiscal reality"
could not happen in one legislative session. He asked Mr.
Teal to respond to his comments.
Mr. Teal retorted that he could not speak to the political
elements of the comments. He referred to the document "LFD
Fiscal Model"(copy on file) He said that there were
expenditure reductions built into the model that the state
had already reached, and that the model reflected a decent
representation of the FY17 budget, without taxes. He said
that if further expenditure cuts were not made, or if
additional revenue was not added, the state would continue
to have deficits. He said that to some, the deficit
problems needed to be immediately addressed - while others
point out that reserves continue to grow, and the interest
earnings on those reserves was sufficient to fill the gap
without reducing the reserves. He asserted that holding
expenditures flat was unrealistic. He stated that as fiscal
gaps went up, reserves would go down, the CBR combined with
the earnings reserve had a lifespan of approximately 7
years before they were exhausted. He said that there were
many arguments at play; the future was uncertain. He opined
that all that could be shown was what was considered to be
a reasonable projection of the future. He said that each
legislator had to judge how essential it was to do
everything this year, or whether the problem could wait a
year or longer.
9:55:02 AM
Representative Edgmon felt that an interactive model that
revealed the impacts of the governor's proposed revenue
enhancements would be helpful to the committee. He spoke to
possible changes in oil tax credits that could also alter
the model numbers. He wondered whether interactive modeling
could be made available in order to help with decision
making.
Co-Chair Thompson remarked that when the model was live in
Excel, revenue variables from sales tax, income tax, and
motor fuel tax could be modeled. He shared that as each of
the taxes were increased the amount of draw on the CBR
would be reduced.
Mr. Teal responded in the affirmative.
9:57:19 AM
Representative Gara felt that the revenue cap discussion
was coming late in the game. He offered his interpretation
of what would happen if the bill passed. He pontificated on
oil tax legislation.
Co-Chair Thompson interjected that the committee had
discussed the issue and had agreed on the revenue cap in
order to limit the growth of government.
10:00:02 AM
Mr. Teal agreed that it was late in the session to have the
discussion. He said that the revenue limit had been a
primary part of the governor's original bill, and that he
had objected to the rewrite because both the volatility
limit and the revenue limit, had been left out of the bill.
10:00:46 AM
Representative Gara felt that more cuts were going to be
necessary, which would result in further loss of jobs. He
wondered why version I of the bill was better than the
previous version.
Commissioner Hoffbeck noted that the current version of the
bill was not much different than the previous version. He
said that the current version would give the state more
flexibility, and included $400 million in oil and gas tax
cuts and credits, and $450 million in new revenues. He
contended that taxes and expenditure cuts would be
addressed in other legislation.
10:03:21 AM
Vice-Chair Saddler asked whether the state would gain form
building up the corpus of the Permanent Fund, or suffer a
net loss of 1 to 1, if the state did not inflation proof at
the 100 percent level of the CPI for several years.
Mr. Teal responded that inflation proofing was more of a
philosophical idea than financial or technical. He
communicated that from a modeling and earnings perspective
it made no difference whether the money was in the ERA or
the Permanent Fund. He qualified that money sitting in the
ERA could be spent, and once the inflation proofing
transfer was made, that money went into the corpus and
could never be spent. He urged that in a time of downturn,
the ERA balance should be comfortably high, able to weather
several years of poor returns and low oil prices, while
still providing a payout. He stressed that from a modeling
perspective it made no difference whether the state
inflation proofed or not.
Vice-Chair Saddler countered that if there was a difference
in the management of the different funds, having money in
the corpus invested more aggressively for the long-term,
could be a benefit. He thought that it could be beneficial
for the state to invest at a higher return.
10:06:31 AM
Mr. Teal responded that the two accounts comingled for
investment purposes. He pointed out to the committee the
provision in the bill that called for moving management of
the CBR to the Permanent Fund. He explained that it would
operate similar to the Mental Health Trust Fund, and be
managed by the Permanent Fund. He furthered that dividends
and the payout would not be effected. The Permanent Fund
would be allowed to take the CBR, which was currently
invested at approximately 2 percent, and invest it as the
Permanent Funds was invested, earning 7 percent. The result
would be several $100 million per year in potential
earnings, while also allowing for the co-management of
liquidity.
10:08:09 AM
Vice-Chair Saddler asked whether the chart on page two of
the document, "Cash Flow under HB 245 version I", presumed
the effectiveness of 400 percent rollover.
Mr. Teal replied that as the limit kicked in, the state
would spend less from the ERA. He acknowledged that the 400
percent and inflation proofing were related. He imparted
that the chart wasn't meant to offer projections after FY
17.
10:09:22 AM
Representative Guttenberg remarked on Mr. Teal's extensive
exposure to, and knowledge of, policy debates. He felt that
without a constitutional amendment not much could be "taken
off the table." He admitted to being supportive of past
POMV efforts. He verbalized that there were a variety of
ways to view the issue. He wondered whether Mr. Teal could
ruminate on the actions of past legislators and whether
they had exercised discipline in their decision making.
Mr. Teal replied that the situations had varied. He offered
that in many cases the legislature followed the rules that
were set down in statute. He furthered that legislators
were very powerful people in the sense that they did not
have to follow rules. He used the Public Education Fund as
an example, which until recently had never been used for
anything other than education. He added that the PCE fund
had been left alone in the past and was now being eyed for
excess earnings. He relayed that legislators had the power
to take PCE funds and pay for a new ferry if they wanted
to. He said that the Constitution prevented the legislature
from dedicating revenue, which gave the legislatures of
Alaska a lot more power than in other states. He noted that
the legislature had saved a lot of money over time, and the
money had been designated and had followed its designation.
He countered that the legislature had taken endowments for
science and technology and had done away with them. He
concluded that actions had varied over the years but that
the legislature had been good about following the rules,
given the fact that it was not bound to them.
10:14:19 AM
AT EASE
10:30:22 AM
RECONVENED
Co-Chair Thompson invited Angela Rodell to testify before
the committee.
10:31:02 AM
Representative Kawasaki spoke to Section 7 of the bill. He
asked whether every field would eventually be called a "new
oil" field, as there would no longer be pre-1980, old oil
fields. He wondered whether the evolution worried the
corporation.
10:31:48 AM
ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, explained that the bill restored the
constitutional requirement of 25 percent limit. She said
that the legislature had always chosen to save more than
the 25 percent; the bill restored the constitutional limit.
Attorney General Richards interjected that with 50 percent
for the new, post 1980 oil the relative contribution had
been 30 percent. He stated that the vast amount of current
production on the North Slope occurred from Prudhoe Bay,
Kaparuk, and Alpine, which would likely remain the case
through the life of the North Slope.
10:32:56 AM
Representative Kawasaki he asked whether the drop in
percentage would allow the Permanent Fund to continue to
grow as it had been under 50 percent.
Ms. Rodell informed the committee that the fund's royalty
income under current statutes was approximately $25 million
per month. She said that the change outlined in Section 7
would not significantly affect the fund.
10:34:11 AM
Co-Chair Thompson queried a gradual reduction in the
dividend over the next few years from $2000 to $1000. He
thought that a model of the drop could be helpful.
Commissioner Hoffbeck wanted to see whether such modeling
affected the fund. He said that a $1000 dividend, versus a
$1500 dividend, would be equal to $350 million in savings.
Vice-Chair Saddler understood that one intent of the
legislation was to reevaluate the use of earnings. He asked
how the intent should be interpreted by the average
Alaskans.
Attorney General Richards replied that he read the intent
it both ways; that in three years the legislature should
revisit the question of using earnings, and that the plan
should be evaluated for performance after 3 years of
operation.
10:36:36 AM
Vice-Chair Saddler probed the return percentages on the
ERA, the corpus, and on the CBR.
Commissioner Hoffbeck responded that the corpus of the fund
and the ERA had the same investment portfolio. He said that
the CBR was currently invested more conservatively, and had
always been invested for safety and liquidity. He shared
that the current years returns had been comparable because
neither fund had made much money. He stated that the way
the CBR was currently invested, long-term investment
returns going forward would be substantially lower.
Vice-Chair Saddler requested the actual numbers for each
fund.
Commissioner Hoffbeck would have to go back to his report
for the information.
Ms. Rodell said that the 10 year forecast for both the ERA
and the Permanent Fund was 6.9 percent.
Vice-Chair Saddler queried the return expected on the CBR.
Commissioner Hoffbeck replied that as it was currently
invested, long-term would be roughly 2 percent.
Representative Kawasaki asked how the CBR would be managed
if it were swept into the Permanent Fund.
Ms. Rodell answered that it would be invested like the ERA
and the mental health trust account; however, the
management of liquidity requirements would necessitate the
corporation, the board of trustees, and DOR to establish a
plan.
10:40:00 AM
Representative Kawasaki asked whether all funds would be
overseen by the same managers.
Ms. Rodell replied that part of it would depend on what
made sense considering how the CBR was invested. She said
that she did not wish to inadvertently cause losses by
getting out of investments through the transfer mechanism.
She said that all involved parties were looking to maximize
returns and minimize the costs.
10:40:49 AM
Representative Gara spoke to different payout level that
had been discussed over the years. He asked whether there
was much of a difference between a 5.25 percent and a 4.8
percent payout, given that the royalties were going into
the Permanent Fund.
Ms. Rodell responded that the royalties were becoming a
smaller and smaller portion of the fund each year, and did
not provide the cushioned income that they once did. She
said that the bulk value of the fund was from investment
earnings. She relayed that she was not sure how much of a
cushion mineral royalty deposits would provide to the fund.
She said that the deposits were important to the fund, and
were required under the constitution, but were a relatively
small portion of the fund.
10:43:17 AM
Representative Gara asked whether having a 4.8 percent
payout, rather than a 5.25 percent payout, would make a
difference in the safety of the fund.
Ms. Rodell responded that every time that the payout
percentage was lowered it extended the life of the fund.
Representative Gara asked whether the 5.25 payout was a
safe level of payout given the returns on the fund.
Ms. Rodell took comfort in the fact that the percentage
would be reviewed and could be adjusted in the future.
10:43:49 AM
Co-Chair Thompson wanted to know whether the governor
supported the current version of the bill.
Attorney General Richards stated that the administration
supported the bill. He added that including a mechanism for
inflation proofing and the revenue limit had been viewed as
favorable. He mentioned that there were some technical
issues with how the revenue limit was currently drafted in
the bill, but nothing substantive. He said that the bill
accomplished the goal of maintaining the real value of the
Permanent Fund; the 5.2 percent was right on the line, but
had been shown in the modeling as sustainable. He furthered
that the POMV approach to the payout was reasonable and
that the amount of money that would come out of fund for
dividend and the General Fund was within the range of the
governor's expectations.
Co-Chair Thompson pondered the other pieces of the
governor's fiscal plan.
Attorney General Richards deferred to Commissioner
Hoffbeck.
Commissioner Hoffbeck felt strongly that revenue measures
would be necessary in order to stabilize Alaska's economy.
10:47:11 AM
Co-Chair Thompson asked whether the plan assured stability.
Ms. Rodell noted that nothing in the bill would affect the
core mission or purpose of the corporation. She said that
the corporation had been set up to manage the Permanent
Fund and nothing in the bill affected the corpus of the
fund. She stated that there were added responsibilities
with the management of the CBR, but that the corporation
already managed the mental health trust and was familiar
with the management of money. She asserted that nothing in
the bill affected how the corporation did the business of
maximizing the value of the fund.
10:48:23 AM
Co-Chair Thompson asked whether additional personnel would
be needed to make the management shift.
Ms. Rodell responded that DOR would still be responsible
for managing the assets of the Retirement Management Board,
which took up a considerable amount of effort on the part
of Treasury Division staff. She stated that the CBR was a
much smaller fund to manage and it did not appear that
additional personnel would be necessary to make the shift.
Commissioner Hoffbeck concurred with Ms. Rodell. He felt
that the cash management aspect of the shift would take
additional work, but may not require additional staff.
10:50:08 AM
Representative Wilson spoke to confusing between utilizing
the ERA, versus HB 245. She relayed to the committee that
her constituency did not want the Permanent Fund dividend
to be touched. She asked whether the administration planned
to better explain to the general public how the legislation
would affect the dividend, and the effects of the other
parts of the overall fiscal plan.
Commissioner Hoffbeck replied that the administration had
been having the conversation with the public since June of
2015. He stressed that communication would continue for as
long as it was necessary to get the legislation passed.
Representative Wilson argued that the governor's message
was not reaching her constituency. She worried that the
other parts of the governor's plan could have negative
effects on various industries in the state. She felt that
industry had already suffered more under the fiscal climate
than the state. She contended that the governor's original
budget had not reflected any savings, and that there was a
big difference between a revenue cap and a spending cap.
Commissioner Hoffbeck responded that the governor's goal
was to establish a long-term, sustainable budget. He said
that the governor was committed to continuing to look at
areas where government could deliver services more
efficiently, and more cheaply. He insisted that reducing
the size of government alone would not solve the problem,
additional revenue sources outside of the oil and gas
industry, and the Permanent Fund were necessary to solve
the problem.
10:54:01 AM
Representative Wilson asked why the surplus 400 percent
funds from the ERA would go back into the corpus, rather
than be distributed to Alaskan residents.
Commissioner Hoffbeck stated that as the money was moved
back into the corpus it would grow the corpus of the fund,
and the returns associated with that larger fund would grow
the size of the dividend.
10:54:54 AM
Attorney General Richards stated that the value of the
Permanent Fund would be preserved for future generations.
He added that inflation proofing was critical to the plan
because otherwise the corpus would not grow over time and
there would be no guarantee that the Permanent Fund would
be available for the next generation.
Representative Wilson stated that she philosophically
disagreed with the bill. She believed that the bill would
take a lot from Alaskan residents while providing little in
return.
Co-Chair Thompson countered that taking no action would
heighten the risk of the dividend disappearing completely
within the next four years.
10:55:53 AM
Representative Gara expressed concern that cutting the
dividend would disproportionately affect low income
Alaskans. He asked whether the plan would fit within the
core mission of the corporation if the draw were 5.25
percent.
Ms. Rodell responded affirmatively.
Representative Gara opined that explaining the budget to
the general public required a multifaceted approach. He
argued that the small, established policy groups that the
administration had communicated its budget plan with
represented a very small section of the general public. He
lamented that Governor Walker had not held town hall
meetings for people unaffiliated with policy groups to get
information about the state budget.
Commissioner Hoffbeck responded that the administration had
held a substantial number of meetings; typically, town
halls were hosted by legislators. He said that
representatives from DOR had accepted every invitation to
speak on the issue. He pointed out that there was a
significant television campaign. He shared that the most
recent Rasmuson Foundation poll indicated that over 90
people in the state recognized that there was a fiscal
problem.
10:58:57 AM
Representative Gara appreciated the commissioner's
response. He indicated that very few constituents attended
the town hall meeting in his district. He maintained that
the governor needed to connect with residents who were
unaffiliated with any policy group.
11:00:23 AM
Co-Chair Thompson asked what the Alaska Permanent Fund
Board thought of the POMV method.
Ms. Rodell stated that the board had drafted a resolution
for a constitutional amendment supporting utilizing the
POMV payout of the fund. She said that the board would not
take a formal position because the bill would not affect
the management of the fund.
11:01:17 AM
Vice-Chair Saddler mentioned the exemption of the
corporation from the state's procurement code in Section 3.
He queried why some groups would be exempt and some would
not.
Ms. Rodell responded that the language had been designed
after the exemptions been created for the Alaska Retirement
Management Board. She stated that the request by the board
of trustees was to be able to react quickly to investment
opportunities. She explained that there was sometimes due
diligence around investment opportunities that required the
hiring of experts that were not fiduciaries to the fund.
The language would allow for the professionals to get to
work immediately on investment decisions. She noted that
the section would require the corporation to adopt
regulations similar to state regulations, and that the
corporation continued to work under the preview of
Legislative Budget and Audit, which meant that it could
answer any questions before that committee.
11:03:34 AM
Vice-Chair Saddler understood that the corporation wanted
to be exempt from the procurement code and planned to adopt
regulations similar to the code. He asked whether the goal
of rapid response to investment could be met by including
the exemptions in d, e, and f of AS 36.30.
Ms. Rodell thought that the biggest issue with the current
state procurement code was the timing. Substantial time was
built into procurement for protest, notice, and application
periods. She offered a personal example of the 8 weeks it
took her to procure an executive recruiter to help look for
a new Chief Investment Officer.
Vice-Chair Saddler expressed continued discomfort with the
language in the section.
Ms. Rodell replied that the language was intended to make
room to speed up the procurement timeframe.
Co-Chair Thompson surmised that 8 weeks to hire a Chief
Financial Officer was excessive and costly.
Ms. Rodell answered in the affirmative.
Vice-Chair Saddler asked why the exemption in subsection
(a) had not been excluded.
Ms. Rodell asked where Vice-Chair Saddler was reading the
information.
Vice-Chair Saddler pointed to Page 3, line 7:
Notwithstanding any other provisions of this
subsection, the Alaska Permanent Fund Corporation
shall comply with the five percent preference under AS
36.30.321(a) and the requirement that contracts for
legal services be approved by the attorney general
under (d) of this section.
He added that there were also 5 percent preferences for
other Alaskan groups in paragraphs (d), (e), and (f).
Ms. Rodell replied that she could not speak to how the bill
was drafted. She thought that the language was meant to
recognize the corporation in the same way as the Alaska
Retirement Management Board and Alaska Housing Finance
Corporation (AHFC).
Co-Chair Thompson recommended Vice-Chair Saddler direct the
question to the Division of Legislative Legal.
HB 245 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson discussed housekeeping. He recessed the
meeting to the Call of the Chair [Note: the meeting never
reconvened].
ADJOURNMENT
11:07:18 AM
The meeting was adjourned at 11:08 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 245 4 17 16 PF Model v I.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 Sectional version I.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 Version I changes from version N.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 Public Testimony.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 04.20.16 APFPA Handout - Summary.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 04.20.16 APFPA FAQs.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 04.20.16 Alaska Permanent Fund Protection Act.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 DOR Letter.PDF |
HFIN 4/13/2016 1:30:00 PM HFIN 4/19/2016 8:30:00 AM |
HB 245 |
| HB 245 PFUND Protection Act HFIN CS.pdf |
HFIN 4/19/2016 8:30:00 AM |
HB 245 |