Legislature(2017 - 2018)HOUSE FINANCE 519

02/02/2017 01:30 PM House FINANCE

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01:31:26 PM Start
01:32:22 PM HB61
03:08:40 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      February 2, 2017                                                                                          
                         1:31 p.m.                                                                                              
1:31:26 PM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Foster called the House Finance Committee meeting                                                                      
to order at 1:31 p.m.                                                                                                           
MEMBERS PRESENT                                                                                                               
Representative Neal Foster, Co-Chair                                                                                            
Representative Paul Seaton, Co-Chair                                                                                            
Representative Les Gara, Vice-Chair                                                                                             
Representative Jason Grenn                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Dan Ortiz                                                                                                        
Representative Lance Pruitt                                                                                                     
Representative Cathy Tilton                                                                                                     
Representative Tammie Wilson                                                                                                    
MEMBERS ABSENT                                                                                                                
Representative Steve Thompson                                                                                                   
ALSO PRESENT                                                                                                                  
Randall Hoffbeck, Commissioner, Department of Revenue.                                                                          
HB 61     PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS                                                                                 
          HB 61 was HEARD and HELD in committee for further                                                                     
Co-Chair Foster addressed the meeting agenda.                                                                                   
HOUSE BILL NO. 61                                                                                                             
     "An Act relating to the Alaska Permanent Fund                                                                              
     Corporation, the earnings of the Alaska permanent                                                                          
     fund,  and the  earnings  reserve account;  relating  to                                                                   
     the  mental  health  trust fund;  relating  to  deposits                                                                   
     into the dividend  fund; relating to the  calculation of                                                                   
     permanent  fund  dividends;   relating  to  unrestricted                                                                   
     state   revenue   available   for   appropriation;   and                                                                   
     providing for an effective date."                                                                                          
1:32:22 PM                                                                                                                    
RANDALL  HOFFBECK,   COMMISSIONER,  DEPARTMENT   OF  REVENUE,                                                                   
provided  a PowerPoint  presentation  titled "Permanent  Fund                                                                   
Protection   Act"  (copy   on  file).   The  Permanent   Fund                                                                   
Protection Act was  a key part of the governor's  fiscal plan                                                                   
to resolve  the state's  budget deficit.  He referred  to two                                                                   
companion  documents:   a  white  paper  called   The  Alaska                                                                   
Permanent Fund  and the Permanent  Fund Protection  Act dated                                                                   
January  2017  (copy on  file)  and  a single  page  document                                                                   
titled Permanent  Fund Protection Act dated January  31, 2017                                                                   
(copy on file). He addressed slide 2 of the presentation.                                                                       
1:35:31 PM                                                                                                                    
Commissioner  Hoffbeck  moved  to  slide  3  and  provided  a                                                                   
presentation  overview. He addressed  the problem  facing the                                                                   
state on slide 5:                                                                                                               
   1. Low oil revenues                                                                                                          
   2. Persistent deficit                                                                                                        
   3. Diminished budget reserves                                                                                                
Commissioner  Hoffbeck elaborated  on slide  5. From  2014 to                                                                   
2017,  the state was  in a  "low oil  price environment."  He                                                                   
thought this  was the new norm.  He spoke to the need  for an                                                                   
alternative  revenue  source  in  order  to  avoid  depleting                                                                   
savings. He  moved to slide 6  and spoke to low  oil revenue.                                                                   
From  2005  to 2014,  over  90  percent of  the  undesignated                                                                   
general  funds (UGF)  revenues came  from petroleum.  Between                                                                   
2012 and  2015, oil  revenue had  fallen 88  percent or  $7.8                                                                   
billion. He  spoke to the net  impact of lower oil  prices on                                                                   
slide 7  titled "Deficit Spending."  Although the  UGF budget                                                                   
had  been  cut   by  44  percent  since  2013,   the  deficit                                                                   
persisted.  The  state had  used  its  savings to  cover  the                                                                   
deficit,  leaving only  one more  year in  which such  action                                                                   
would  be possible.  He pointed  to the blue  dashed line  on                                                                   
the  graph,  representing  the  UGF budget,  the  yellow  bar                                                                   
representing  the UGF  revenue  displayed the  aforementioned                                                                   
sharp  drop,  and  the  red  hatch   marks  representing  the                                                                   
overall deficit.  He provided detail  about the chart  on the                                                                   
slide.  Revenues  had  dropped  due to  decreased  price  and                                                                   
production.  Long before the  state ran  out of the  deficit,                                                                   
it would run out of savings.                                                                                                    
1:39:34 PM                                                                                                                    
Commissioner  Hoffbeck moved  to slide  8 titled  "Diminished                                                                   
Budget Reserves."  In 2013 the state had about  $16.3 billion                                                                   
in  the  combined  Statutory Budget  Reserve  (SBR)  and  the                                                                   
Constitutional Budget  Reserve (CBR).  For the end of  FY 17,                                                                   
he projected  $4.6 billion,  and $2.1 billion  at the  end of                                                                   
FY 18,  which  would be  the  last  budget  year to  rely  on                                                                   
savings  before  they were  depleted.  The status  quo  would                                                                   
mean the state  would run out  of time. He spoke to  the need                                                                   
to  save money  in the  CBR for  unexpected expenditures,  to                                                                   
meet  budgetary  expectations  in  a  given year,  and  as  a                                                                   
liquidity bank in  order to pay the state's bills  on a daily                                                                   
basis. The  best way  to do this  was to use  the CBR  as the                                                                   
liquidity  portion for  the Permanent  Fund Earnings  Reserve                                                                   
to pay back as  gains are realized so the fund  is not forced                                                                   
to realize gains artificially to cover cash draws.                                                                              
1:41:36 PM                                                                                                                    
Commissioner Hoffbeck  addressed the question of  how to best                                                                   
solve  the  fiscal   crisis  with  a  sustainable   draw  and                                                                   
dividend  on slide  9. He turned  to slide  11 and  addressed                                                                   
the Permanent  Fund structure,  which included the  principle                                                                   
($39.4  billion  non-spendable  funds plus  $4.7  billion  in                                                                   
unrealized   gains),  and   the   earnings  reserve   account                                                                   
($8.6 billion),  which  was  available  for  expenditure.  He                                                                   
directed  attention  to  slide   12  and  addressed  how  the                                                                   
Permanent Fund worked.  He referred to statutory  net income,                                                                   
which included  realized gains from dividends,  fixed income,                                                                   
real  estate investments,  sold equities,  and anything  that                                                                   
generated  cash  on  an  annual basis;  it  flowed  from  the                                                                   
principle of the  fund to the Earnings Reserve  Account (ERA)                                                                   
for a  total of  about $3  billion annually.  He explained  a                                                                   
five-year   average  was   used  to   determine  the   amount                                                                   
available  for appropriation.  Half of  that amount paid  the                                                                   
dividend.  The  remainder  was used  to  inflation-proof  the                                                                   
Permanent Fund.                                                                                                                 
1:44:30 PM                                                                                                                    
Commissioner   Hoffbeck  moved  to   slide  13  titled   "The                                                                   
Permanent Fund:  Earnings." He shared the money  generated by                                                                   
the   fund  far   exceeded  oil   and  gas   tax  and   other                                                                   
unrestricted  revenues. He  stated  it was  unlikely the  oil                                                                   
price  would  exceed   earnings  from  the  fund,   with  the                                                                   
exception of  a few anomalous  years. The Permanent  Fund was                                                                   
the  state's largest  asset and  would continue  to be  going                                                                   
into the  future. He  addressed the problem  on slide  14. He                                                                   
detailed  that  absent  change, the  earnings  reserve  would                                                                   
also be depleted  by 2023. It would create  a situation where                                                                   
the  state could  not  pay the  bills  or pay  the  dividend.                                                                   
Something more forward-looking was needed.                                                                                      
1:46:25 PM                                                                                                                    
Commissioner  Hoffbeck  spoke to  slide  16 titled  "Why  Use                                                                   
Permanent Fund  Earnings?" The  current UGF budget  was about                                                                   
$4.2  billion, which  created a  $2.8 billion  budget gap  in                                                                   
FY 18.  He  addressed  potential  tools to  address  the  gap                                                                   
including  a motor  fuel  tax increase,  another  broad-based                                                                   
tax  increase,  a  corporate income  tax  increase,  oil  tax                                                                   
credit reform,  and maximum  proposed cuts  of $750  million.                                                                   
The items  totaled $1.6  billion. The  only thing capable  of                                                                   
solving  the  total  problem  was  using  earnings  from  the                                                                   
Permanent Fund.                                                                                                                 
Representative Wilson  asked which of the options  fell under                                                                   
current  or  future  proposed   legislation.  She  asked  for                                                                   
clarification on the items listed on slide 16.                                                                                  
1:49:12 PM                                                                                                                    
Commissioner  Hoffbeck replied  the motor  fuel tax bill  was                                                                   
currently  in play.  There  was no  broad-based  tax bill  at                                                                   
present.  The  corporate  income  tax  legislation  had  been                                                                   
prepared by  the governor and  another related bill  had been                                                                   
proposed by Vice-Chair  Gara. As he understood  it, the House                                                                   
was talking about  introducing a bill related to  oil and gas                                                                   
tax  credit  reform. The  cuts  proposed  item was  based  on                                                                   
modelling. The cuts  proposed on the slide used  the Senate's                                                                   
1:50:23 PM                                                                                                                    
Commissioner Hoffbeck  moved to  slide 17 titled  "How Should                                                                   
We  Use  the Permanent  Fund?"  He  referred  to  significant                                                                   
discussion  about the  reason  for the  establishment of  the                                                                   
fund. He  read language from  the ballot initiative  that had                                                                   
established  the constitutional  amendment for the  Permanent                                                                   
     "This   proposal,   if   approved,   would   amend   the                                                                   
     Constitution   of    the   State   of   Alaska    by   …                                                                   
     establish[ing]  a  constitutional  permanent  fund  into                                                                   
     which  at least 25  percent of  all [mineral  royalties]                                                                   
     received by  the State would  be paid. The  principal of                                                                   
     the  fund  would  be  used   only  for  income-producing                                                                   
     investments  permitted by  law and  the income from  the                                                                   
     fund  would be  deposited  in the  general  fund of  the                                                                   
     State   and  be   available  to   be  appropriated   for                                                                   
     expenditure  by the State  unless otherwise  provided by                                                                   
Commissioner  Hoffbeck  highlighted that  the  constitutional                                                                   
language  does not include  availability  of the income  from                                                                   
the fund for  appropriation for expenditure, but  had been on                                                                   
the ballot initiative.                                                                                                          
Co-Chair  Foster   recognized  Representative   Kawasaki  had                                                                   
joined the meeting.                                                                                                             
Commissioner  Hoffbeck moved  to slide  18 and addressed  how                                                                   
the  state  should use  the  fund.  He  stated the  fund  was                                                                   
intended   to  be   multi-generational  and   needed  to   be                                                                   
sustainable over  the long-term; the  fund needed to  grow at                                                                   
the  rate of  inflation  at a  minimum.  The  fund needed  to                                                                   
provide  a dividend.  As  long as  the  earnings reserve  was                                                                   
being utilized as  a conduit for the cash  for appropriation,                                                                   
the  account  had to  be  able  to bridge  years  with  lower                                                                   
1:53:54 PM                                                                                                                    
Representative  Grenn asked if  there would be  an investment                                                                   
philosophy   change   within   the  Alaska   Permanent   Fund                                                                   
Corporation (APFC)  regarding the  management of the  fund if                                                                   
the funds began to be used for the state.                                                                                       
Commissioner Hoffbeck  answered the modelling did  not assume                                                                   
a change  in fund management.  He outlined that  the dividend                                                                   
was the only  draw and that inflation-proofing  was the other                                                                   
large draw  but went back into  the corpus, whereas  what was                                                                   
proposed  was  twice  that  size. He  believed  it  would  be                                                                   
possible  to work  out  a plan  where the  CBR  was used  for                                                                   
daily expenditures  and when gains  were realized  they would                                                                   
be transferred  to DOR  to pay back  the CBR. Currently,  the                                                                   
projections  from  the  APFC showed  that  it  earned  around                                                                   
90 percent  of its earnings  every year.  The fund  should be                                                                   
realizing  more  than  enough   annually  without  having  to                                                                   
change its structure.                                                                                                           
1:56:09 PM                                                                                                                    
Commissioner Hoffbeck  continued to address slide  20 related                                                                   
to  how the  fund should  be used.  He stated  that the  plan                                                                   
needed to  be rule-based. It need  to have rules  for saving,                                                                   
spending, and paying  out the dividend. He thought  that once                                                                   
new rules were  in place, the legislature would  follow those                                                                   
rules,  which were  international best  practice. He  briefly                                                                   
highlighted  slide 21  that included  examples of  rule-based                                                                   
frameworks used  for other  sovereign wealth funds.  Examples                                                                   
included Singapore, Kazakhstan, and Norway.                                                                                     
Vice-Chair  Gara asked  for verification  the  administration                                                                   
was proposing  a 5.5  percent draw  from the Permanent  Fund.                                                                   
He  referred   to  talk   about  whether   it  should   be  a                                                                   
4.25 percent or  other draw. He  asked for verification  that                                                                   
none of the numbers would work in a catastrophic year.                                                                          
Commissioner   Hoffbeck  answered  that   in  the   event  of                                                                   
multiple  catastrophic  years   in  a  row,  it  was  a  fair                                                                   
statement,  but that  it was not  the history  of the  market                                                                   
for this  to occur.  In the proposal,  there was  a provision                                                                   
for a  three-year  review which  would act  as a safety  net,                                                                   
allowing  for adjustment.  It would  not work  with three  or                                                                   
four years of catastrophic returns in any number.                                                                               
Vice-Chair  Gara stated  he was  not being  critical, it  was                                                                   
just  the reality.  He spoke  to  the structure  of the  ERA,                                                                   
which was based  on realized earnings rather  than the actual                                                                   
growth  of the  Permanent Fund.  He noted  that net  earnings                                                                   
would present  a problem regardless  of whether the  draw was                                                                   
moved by a quarter percent.                                                                                                     
Commissioner Hoffbeck answered "fair enough."                                                                                   
2:02:00 PM                                                                                                                    
Commissioner  Hoffbeck moved  to  slide 22  and continued  to                                                                   
address  how the  Permanent Fund  should be  used. He  stated                                                                   
that  the  system  needed to  remove  volatility.  The  graph                                                                   
presented  UGF  revenue  in  the yellow  line  and  the  blue                                                                   
dashed  line  represented  UGF  budget.  The  volatility  was                                                                   
apparent, particularly  in the revenue. He specified  that FY                                                                   
07 and FY 08  showed $11 billion [in UGF revenue],  and by FY                                                                   
16  revenues had  been  about $1  billion.  The change  meant                                                                   
that  ten years  later the  state had  to figure  out how  to                                                                   
deal with  $10 billion less  revenue. Flattening out  some of                                                                   
the volatility was  a desirable result that  should be sought                                                                   
in any  proposed plan. He spoke  to volatility that  had been                                                                   
shown to  create slower  economic growth  within the  market.                                                                   
With nearly 100  percent reliance on a commodity  with highly                                                                   
volatile  prices,   there  is   a  situation  of   tremendous                                                                   
volatility.  Returns were  volatile  too, but  that could  be                                                                   
accounted  by   using  a  five-year   lookback  and   a  draw                                                                   
2:04:11 PM                                                                                                                    
Commissioner  Hoffbeck turned  to slide 23  and spoke  to the                                                                   
need  to maximize  the use  of Permanent  Fund earnings.  The                                                                   
modelling  mantra  was  to  fill   as  much  of  the  gap  as                                                                   
possible,  yet  even  with  that method  there  was  still  a                                                                   
significant gap of  $700 million to $1 billion  to be filled.                                                                   
Leaving  significant money  on the  table was  not using  the                                                                   
fund as effectively as possible.                                                                                                
2:05:33 PM                                                                                                                    
Commissioner   Hoffbeck  addressed   the   bill  summary   on                                                                   
slide 25. The plan  before the committee was  essentially the                                                                   
result of  the hearing  process from  the previous  year. The                                                                   
bill  included  language  that  had  passed  the  Senate  the                                                                   
previous year.                                                                                                                  
     Last year, the 29th Legislature held 39 hearings on                                                                        
     the Alaska Permanent Fund Protection Act (SB128,                                                                           
     HB245, and SB5001):                                                                                                        
        · SSTA: 10 hearings, including 2 days of public                                                                         
        · SFIN: 10 hearings, including 1 days of public                                                                         
        · HFIN: 19 hearings, including 4 days of public                                                                         
     Other bills addressing the use of permanent fund                                                                           
     earnings were also considered:                                                                                             
        · SB114 (Sen. McGuire): 7 hearings in SSTA, 9                                                                           
          hearings in SFIN                                                                                                      
        · HB303 (Rep. Millet): 4 hearings in HFIN                                                                               
        · HB224 (Sen. Hawker): 4 hearings in HFIN                                                                               
     HB61 is the same as the CS for SB128, but without                                                                          
     provisions re.:                                                                                                            
        · CBR management                                                                                                        
        · APFC procurement                                                                                                      
        · Spending cap                                                                                                          
2:07:30 PM                                                                                                                    
Vice-Chair  Gara requested  projections for  how each  of the                                                                   
items would impact future dividends.                                                                                            
Commissioner  Hoffbeck  spoke  to  modelling  that  would  be                                                                   
presented in the committee the following day.                                                                                   
Representative  Wilson  asked why  the CBR  management,  APFC                                                                   
procurement, and  the spending cap had been  removed from the                                                                   
current bill.                                                                                                                   
Commissioner  Hoffbeck answered  there had  been concern  the                                                                   
CBR  was not  generating great  enough returns  and that  the                                                                   
Permanent Fund could  generate higher returns if  the CBR was                                                                   
moved there.  He referred  to a study  done that  stated that                                                                   
it  was inconsequential  whether  the money  stayed where  it                                                                   
was or  moved to the Permanent  Fund, with similar  costs and                                                                   
returns.  It had  earned more  the previous  year because  it                                                                   
needed to  be set aside  in a safe  and liquid fashion  as it                                                                   
would be needed  for government services. If  it were sitting                                                                   
in the  Permanent Fund,  the same  restrictions would  apply.                                                                   
One of the things  the Permanent Fund was not  set up for was                                                                   
cash management  on a daily basis  - there was only  one draw                                                                   
annually to  pay the statutory  net income into  the earnings                                                                   
reserve.  The  DOR  had  to  pay   bills  daily,  and  had  a                                                                   
sophisticated   cash   management   system  in   place.   The                                                                   
structure would have  to be recreated in the  Permanent Fund,                                                                   
and did  not exist at  present. Once  a fiscal plan  had been                                                                   
developed,  it could  be  approached much  more  aggressively                                                                   
and see similar strong returns.                                                                                                 
2:11:46 PM                                                                                                                    
Commissioner Hoffbeck  continued to answer the  question from                                                                   
Representative   Wilson.   He    addressed   Permanent   Fund                                                                   
procurement  and  the  spending cap.  The  department  agreed                                                                   
that  the   Permanent  Fund   should  have  the   procurement                                                                   
exemptions,  but felt that  it did not  need to be  addressed                                                                   
in the current  proposed legislation. The spending  cap dealt                                                                   
with  issues  other  than  oil   and  gas  revenues  and  the                                                                   
Permanent Fund  dealt with a  spending cap on  other revenues                                                                   
that came  into the UGF. It  did not impact  restructuring of                                                                   
the Permanent Fund  but was a broader cap for  all government                                                                   
spending  and it was  felt that  it should  be heard  outside                                                                   
the current legislation.                                                                                                        
Representative  Wilson thought  the spending  cap was  one of                                                                   
the  most important  parts of  a current  plan. She  wondered                                                                   
why using  the existing structure  could not get to  the same                                                                   
point, perhaps  with a check  in place in  the form of  a set                                                                   
Commissioner Hoffbeck  replied he would address  the question                                                                   
later in the presentation.                                                                                                      
Representative Pruitt  asked if the intent was  to move money                                                                   
once per  year or  whether some  kind of  cash management  of                                                                   
the ERA would be put in place.                                                                                                  
Commissioner Hoffbeck  answered that  the idea was  to create                                                                   
a structure  where cash could  be accessed as  needed, rather                                                                   
than a large pool.  The CBR could be the liquidity  bank. The                                                                   
Department of Revenue  (DOR) could borrow money  from the CBR                                                                   
as long as  it paid back the  money by the end of  the fiscal                                                                   
year.  Once   gains  were  realized,   the  money   would  be                                                                   
transferred over.  A portion of the CBR would  not have great                                                                   
returns due to the liquidity.                                                                                                   
Representative  Pruitt surmised the  CBR could be  managed by                                                                   
APFC as  long as the  money was paid  back. He asked  whether                                                                   
the issue  was ensuring  that DOR  maintained control  of the                                                                   
money. He  spoke to  the provision that  the funds  needed to                                                                   
be  liquid. He  wondered if  the provision  was statutory  or                                                                   
2:16:49 PM                                                                                                                    
Commissioner  Hoffbeck answered  the department could  manage                                                                   
the  CBR without  legislative  action. The  department had  a                                                                   
robust cash  management  system for around  $400 million  per                                                                   
month, and  tried to have  liquid as  short a period  of time                                                                   
as  possible. In  order  to move  the  CBR  to the  Permanent                                                                   
Fund,  it would have  to establish  a process  for doing  the                                                                   
same thing,  so it was  a simpler process  to leave  it where                                                                   
it was.                                                                                                                         
Commissioner  Hoffbeck turned  to slide  26 and continued  to                                                                   
address  the bill  summary.  The  bill outlined  a  long-term                                                                   
plan with  three formulas. There  were two components  to the                                                                   
sustainable   draw:   5.25   percent    Percent   of   Market                                                                   
Value (POMV) draw and a draw limit.  The sustainable dividend                                                                   
formula was 20  percent of UGF and 20 percent  of the POMV to                                                                   
pay dividends.  Inflation-proofing would become  a four times                                                                   
draw process.                                                                                                                   
Commissioner  Hoffbeck turned  to slide  27 and continued  to                                                                   
address the bill summary.                                                                                                       
Co-Chair  Seaton pointed  to slide  26 and  the 5.25  percent                                                                   
POMV  sustainable  draw  formula.  He pointed  to  the  white                                                                   
paper, page  4, which  gave average return  of 5  percent. He                                                                   
asked the commissioner to address the average return.                                                                           
2:20:02 PM                                                                                                                    
Commissioner Hoffbeck  replied he would address  the question                                                                   
on slide 28.                                                                                                                    
Vice-Chair Gara  discussed the constitutional  requirement to                                                                   
put  25 percent  into  the CBR.  He  furthered  that at  some                                                                   
point  the amount  for  new fields  had  been  changed to  50                                                                   
percent,   but  former  Representative   Norm  Rokeburg   had                                                                   
subsequently reduced  the requirement back to 25  percent. He                                                                   
asked why that did not succeed.                                                                                                 
Commissioner  Hoffbeck  answered  the  previous  bill  had  a                                                                   
trigger which  calculated that  the reduction in  the deposit                                                                   
into the corpus  would reduce an individual's  dividend by $7                                                                   
and had  an automatic trigger which  shut it off after  a few                                                                   
2:21:20 PM                                                                                                                    
Commissioner  Hoffbeck  addressed  slide 27  and  highlighted                                                                   
that  25  percent   of  the  royalties  would   go  into  the                                                                   
principle  of  the  fund.  As  with  the  current  structure,                                                                   
statutory  net  income  would  be  how  the  money  from  the                                                                   
principle of the  fund moved into the ERA. The  ERA would pay                                                                   
into  the General  Fund rather  than into  the dividend  fund                                                                   
under   the    legislation,    making   it   available    for                                                                   
appropriation,  and under  the 20/20 formula,  20 percent  of                                                                   
the  POMV draw  and  20 percent  of  the monies  outside  the                                                                   
corpus would  create the dividend.  Money would  flow through                                                                   
the  General  Fund  into  the   dividend  fund,  rather  than                                                                   
directly  into the dividend  fund. The  other difference  was                                                                   
in the  inflation-proofing  transfer from  the ERA back  into                                                                   
the principle, where  in the current legislation  there was a                                                                   
four  times draw  structure.  The reason  they  had tried  to                                                                   
limit the number  of changes as much as possible  was to give                                                                   
confidence to the public of the plan's durability.                                                                              
2:23:25 PM                                                                                                                    
Commissioner  Hoffbeck moved  to slide  28 and  spoke to  the                                                                   
5.25  POMV draw.  The average  fund value  was calculated  by                                                                   
using  the first  five of  the last  six years  and the  5.25                                                                   
percent was  applied to  that average  to determine  the fund                                                                   
draw. For  2012 to 2017, the  average fund balance  was $48.1                                                                   
billion, 5.25  percent of which  was $2.5 billion  for paying                                                                   
dividend and government expenditures.                                                                                           
Representative  Guttenberg asked  about the reasoning  behind                                                                   
the formula.                                                                                                                    
Commissioner Hoffbeck  answered that using the  first five of                                                                   
the  six years  avoided  trying  to  calculate for  the  most                                                                   
recent  year, which  would not  be fully  audited and  closed                                                                   
out when  it was needed. He  returned to addressing  slide 28                                                                   
stating 5.25  percent of $48.1  billion was $2.5  billion. As                                                                   
long as the fund  was increasing in value, that  equated to a                                                                   
4.7  percent  draw  for  2017. He  conceded  the  method  was                                                                   
aggressive, but thought it was sustainable.                                                                                     
2:26:34 PM                                                                                                                    
Commissioner Hoffbeck  turned to slide 29 and  addressed what                                                                   
would  happen if  there was  a POMV  draw that  was added  to                                                                   
current  revenue.   The  chart  showed  the  impact   of  oil                                                                   
revenues.  The  bottom  line of  the  chart  represented  oil                                                                   
prices. The  full earnings reserve  draw was needed  in order                                                                   
to get to  the high $3 billion  and to close the  gap enough.                                                                   
If  oil prices  reached  $95 to  $100  per  barrel, the  draw                                                                   
would  not be  needed;  the draw  would  be  shut off  during                                                                   
those times.                                                                                                                    
Representative  Wilson  did not  understand  why  all of  the                                                                   
other  changes  were  necessary.   She  believed  the  yellow                                                                   
portion of the chart reflected the 5.25 percent.                                                                                
Commissioner  Hoffbeck  answered   in  the  affirmative:  the                                                                   
yellow represented  the 5.25 percent POMV draw.  The blue was                                                                   
current   revenues  from   oil   and  gas,   and  the   green                                                                   
represented other revenues.                                                                                                     
Representative  Wilson   asked  whether  there   would  be  a                                                                   
sustainable budget  without all of  the other changes  in the                                                                   
Commissioner  Hoffbeck   answered  in  the   affirmative.  He                                                                   
stated that few  were forecasting oil prices  higher than $55                                                                   
per barrel.  He underscored  that  the graph  was not a  time                                                                   
series,  but represented  various  price points  for oil  per                                                                   
Representative  Wilson  stated the  way  she read  the  chart                                                                   
meant they  were not that far  off. She did not  believe they                                                                   
needed  to go  much  further and  could  reach a  sustainable                                                                   
budget without necessarily  making all of the  changes in the                                                                   
Commissioner Hoffbeck  answered that current oil  prices were                                                                   
about $55  per barrel.  They were not  facing $65  per barrel                                                                   
in future years.  The average price for the  current year was                                                                   
$50 per  barrel. The  chart represented  a  spot in time.  He                                                                   
pointed out the yellow bar was net a $1,000 dividend.                                                                           
Representative  Wilson  requested  the actual  dollar  amount                                                                   
for  6 percent  or  other. She  stated  it  was difficult  to                                                                   
determine in the present graph.                                                                                                 
Commissioner  Hoffbeck replied  that  at $60  per barrel  oil                                                                   
(higher  than  current  prices) and  current  spending,  they                                                                   
were looking at  a $700 million gap, with a  $1,000 dividend,                                                                   
and $1.3 billion gap with a $2,000 dividend.                                                                                    
2:32:43 PM                                                                                                                    
Commissioner  Hoffbeck mentioned  that the  draw limit  was a                                                                   
very  elegant solution  that  was  developed in  the  hearing                                                                   
process,  in  Senate  State  Affairs   committee  during  the                                                                   
previous legislative  year. He explained that  the draw limit                                                                   
reduced  the POMV  draw by  a  dollar-for-dollar basis,  once                                                                   
the UGF production  taxes and royalties exceed  $1.2 billion.                                                                   
After that,  the draw on the  dividend would be reduced  on a                                                                   
dollar-for-dollar basis  on any additional oil  and gas taxes                                                                   
and  royalties  that  the  state   received,  thereby  slowly                                                                   
turning off the dividend draw as those revenues increase.                                                                       
2:33:48 PM                                                                                                                    
Co-Chair Seaton asked  if he was including the  liability the                                                                   
state currently had for production tax credits.                                                                                 
Commissioner Hoffbeck responded in the negative.                                                                                
Co-Chair Seaton  clarified that  the state would  be limiting                                                                   
its revenue although  the liability for tax  credits could be                                                                   
increasing, depending  upon expenditures decided  on by third                                                                   
Commissioner  Hoffbeck responded  that  the actual  liability                                                                   
would come out  of appropriation and would not  slow when the                                                                   
above-mentioned   trigger  occurred.   The  amount   of  $1.2                                                                   
billion  was actual  severance  tax and  royalties without  a                                                                   
deduction for credits.                                                                                                          
Co-Chair  Seaton  was  concerned  with the  idea  of  credits                                                                   
running the state  into additional deficits. If  the price of                                                                   
oil  increased,  one  would expect  more  liability  for  the                                                                   
state, and it should be factored in.                                                                                            
2:35:59 PM                                                                                                                    
Representative Pruitt  asked if credits were  determined when                                                                   
DOR put  out the Revenue Sources  Book, or were deemed  a UGF                                                                   
Commissioner  Hoffbeck  responded that  it  was portrayed  in                                                                   
different  ways in the  book. He  added that credits  against                                                                   
liabilities   were   a   revenue   reduction   and   not   an                                                                   
expenditure, and  would appear as  less revenue from  oil and                                                                   
2:37:22 PM                                                                                                                    
Vice-Chair  Gara was concerned  about not  being able  to use                                                                   
the excess  state revenue.  He was  wondering when  the state                                                                   
would reach oil prices of $70 per barrel.                                                                                       
Commissioner  Hoffbeck was  unsure if the  state would  cross                                                                   
the $70 price point in the coming years.                                                                                        
Vice-Chair Gara  asked if it was  fair to assume it  would be                                                                   
a least five years before the state saw $70 per barrel.                                                                         
Commissioner Hoffbeck agreed.                                                                                                   
2:39:28 PM                                                                                                                    
Commissioner  Hoffbeck  continued  to  slide  31.  Under  the                                                                   
legislation,  when the  earnings reserve  exceeds four  times                                                                   
the annual  POMV draw,  the extra  money gets deposited  back                                                                   
into the  corpus of the fund.  The feedback loop  becomes the                                                                   
inflation-proofing  mechanism  for the  corpus  of the  fund.                                                                   
The  draw  would shrink  as  oil  prices rise,  the  earnings                                                                   
reserve would  grow faster,  and the  feedback loop  would be                                                                   
reached earlier,  giving more money  into the corpus.  As the                                                                   
corpus  grows, the  5.25 percent  draw increases.  Eventually                                                                   
the fund  begins to grow  at a faster  rate. It did  restrict                                                                   
revenues early  on, and  $1.2 billion  was a compromise  made                                                                   
with the  Legislative Finance  Division. There was  a limited                                                                   
amount of  money in the system.  He agreed that the  bill did                                                                   
not allow for  a capital program. There was  not enough money                                                                   
to cover it and expenditures.                                                                                                   
2:41:22 PM                                                                                                                    
Commissioner  Hoffbeck   spoke  to  a  sustainable   dividend                                                                   
formula on  slide 32. The  bill guaranteed a  $1,000 dividend                                                                   
for  the  first  two years.  Subsequently,  it  would  be  20                                                                   
percent  of  UGF  royalties,  plus 20  percent  of  the  5.25                                                                   
percent POMV  draw. He  moved to  slide 33 titled  "Inflation                                                                   
Proofing Transfers":                                                                                                            
   · AS   37.13.145(c)   currently    provides   for   annual                                                                   
    inflation proofing transfers from the ERA to corpus                                                                         
   · The ERA needs a sufficient balance to be able to meet                                                                      
     the draw each year ("ERA durability" concern)                                                                              
   · Bill provides that the ERA balance over 4 times the                                                                        
     maximum 5.25 percent draw (after current year draw) is                                                                     
     transferred to corpus instead                                                                                              
Commissioner  Hoffbeck elaborated  on slide  33. He  referred                                                                   
to  a  question  from  Vice-Chair  Gara  earlier  related  to                                                                   
multiple years  of bad returns.  The four times  draw coupled                                                                   
with the three-year  review period allowed the  department to                                                                   
take corrective  action if needed  before the fund  was fully                                                                   
Representative  Pruitt asked how  long it  would take  to get                                                                   
to  the point  illustrated, under  the  current scenario.  He                                                                   
asked if it could be an ongoing scenario.                                                                                       
Commissioner Hoffbeck replied that he would follow up.                                                                          
2:44:53 PM                                                                                                                    
Commissioner  Hoffbeck  turned  to slide  34  titled  "Timing                                                                   
   · Review framework in three years                                                                                            
   · Immediate effective date (potentially in FY17)                                                                             
   · Timing of transfers:                                                                                                       
        o In the past, appropriations from the ERA occurred                                                                     
          in  the FY  prior  to using  the  money, i.e.,  the                                                                   
          dividend  was  forward-funded. For  example,  money                                                                   
          for  the October 2015  dividend (paid during  FY16)                                                                   
          was appropriated  on June 30,  2015 - the  last day                                                                   
          of FY15.                                                                                                              
        o To accommodate the UGF use, the appropriation                                                                         
          from  the ERA  will now  occur in  the same FY.  In                                                                   
          other    words,   instead    of   the   FY18    ERA                                                                   
          appropriation  being used in FY19, it  will be used                                                                   
          for FY18.                                                                                                             
Commissioner  Hoffbeck spoke  to an  accounting anomaly  that                                                                   
had occurred  in FY 16.  The dividend  payment for FY  16 had                                                                   
been funded  in the  FY 15 budget.  In the  FY 16 budget  the                                                                   
legislature  had stopped  forward-funding  the dividend;  the                                                                   
FY 17 dividend  had been paid in  FY 17. There was  a hole in                                                                   
FY 16, which  did not show  a transfer of the  dividend. Some                                                                   
of  the slides  showed  a different  balance  related to  the                                                                   
dividend.   The   LFD   and  OMB   followed   the   statutory                                                                   
provisions,  which is the  transfer did not  occur in  FY 16,                                                                   
but the Permanent  Fund records reflect a transfer  in FY 15,                                                                   
resulting in a difference in numbers.                                                                                           
2:47:47 PM                                                                                                                    
Commissioner Hoffbeck provided a conclusion on slide 36:                                                                        
   · Sustainably provides billions to the general fund                                                                          
     (when needed)                                                                                                              
   · Preserves the dividend program                                                                                             
   · Stabilizes the budget to give investors confidence in                                                                      
     our future                                                                                                                 
Commissioner Hoffbeck  elaborated on the slide. As  long as a                                                                   
fiscal  plan  was   not  complete,  there  would   always  be                                                                   
investor concern.  The private sector was very  clear that it                                                                   
wanted to  see a complete  fiscal plan.  Slide 37  included a                                                                   
sectional analysis:                                                                                                             
   · Section 1: Review framework in 3 years                                                                                     
   · Section 2: Royalties to the principal                                                                                      
   · Section 3: Conforming Amendment (CA)                                                                                       
   · Section 4: POMV and draw limit formulas                                                                                    
   · Section 5: CA                                                                                                              
   · Section 6: Appropriations from ERA to general fund and                                                                     
   · Section 7: Dividend appropriation (20/20 formula)                                                                          
   · Section 8: CA                                                                                                              
   · Section 9: CA                                                                                                              
   · Section 10: $1,000/person dividend in 2017 and 2018                                                                        
   · Section 11: CA                                                                                                             
   · Section 12: CA                                                                                                             
  · Section 13: CA and repeal language re. CBR investment                                                                       
   · Section 14: CA                                                                                                             
   · Section 15: Immediate effective date                                                                                       
2:50:37 PM                                                                                                                    
Co-Chair  Foster pointed  to slide  28 that  included a  POMV                                                                   
calculation.  He  asked  for   an  example  of  how  all  the                                                                   
calculations  worked and  how they  would be  equated to  how                                                                   
the  dividend  was  paid  out.   He  was  interested  in  the                                                                   
spreadsheet that had been used to model the information.                                                                        
Vice-Chair Gara  referred to his  earlier request  related to                                                                   
a 10-year  projection for dividends  under each of  the bills                                                                   
and asked for a spreadsheet.                                                                                                    
Commissioner Hoffbeck answered in the affirmative.                                                                              
Representative Ortiz  asked for a  quick summary on  the draw                                                                   
Commissioner   Hoffbeck    pointed   to   slide    30.   Once                                                                   
$1.2 billion is  received through severance  taxes, royalties                                                                   
not  going  into  the corpus,  for  every  additional  dollar                                                                   
received  from oil  taxes and  royalties, the  draw from  the                                                                   
dividend is reduced by one dollar.                                                                                              
Representative  Ortiz asked  how tax credits  related  to the                                                                   
formula, and how often the $1.2 billion marker was reached.                                                                     
Commissioner Hoffbeck  replied that he would  bring modelling                                                                   
in to present to the committee.                                                                                                 
Representative  Guttenberg  asked  about production  tax  and                                                                   
royalties. He wondered  whether modelling would  show what it                                                                   
would look  like if  it had been  raised above $1.2  billion.                                                                   
He asked about the extent of an artificial spending cap.                                                                        
Commissioner  Hoffbeck  answered   in  the  affirmative.  The                                                                   
answer  came with  a  secondary calculation  as  in order  to                                                                   
allow for a larger  cap, it would start at a  lower point and                                                                   
required  less than  5.25 percent  draw due  to the  feedback                                                                   
2:54:49 PM                                                                                                                    
Representative   Grenn   pointed   to  slide   33   regarding                                                                   
inflation-proofing.  He  asked  about the  decision  for  the                                                                   
bill to  provide that  the ERA  balance over  four times  the                                                                   
maximum  5.25 percent  draw, which  would  be transferred  to                                                                   
the corpus instead.                                                                                                             
Commissioner  Hoffbeck  answered  there  was no  downside  to                                                                   
having at least  one extra year's revenue in the  fund so the                                                                   
fund would  not be  depleted in  the three-year time  period.                                                                   
The department  chose the time  period because it  wanted the                                                                   
review to occur  within one gubernatorial term,  to avoid new                                                                   
staff having to make decisions at the time of the deadline.                                                                     
Representative   Pruitt   referred  to   the   presentation's                                                                   
mention that  5.25 percent  was aggressive.  He asked  if the                                                                   
risk in  the current  budget resided with  oil taxes  and the                                                                   
volatility of oil prices.                                                                                                       
Commissioner Hoffbeck answered in the affirmative.                                                                              
Representative  Pruitt  asked   about  putting  risk  in  the                                                                   
Permanent Fund by  being aggressive with the  POMV number. He                                                                   
asked what pressure was placed on APFC.                                                                                         
Commissioner  Hoffbeck answered it  would change  the dynamic                                                                   
at APFC  and would  add scrutiny  to its  annual returns.  He                                                                   
did not believe  it was overly aggressive but  simply used as                                                                   
much  revenue as  possible under  the  existing process.  The                                                                   
corporation would  feel pressure in  a down year. He  did not                                                                   
want  to  be  so concerned  that  the  fund  ended  up  being                                                                   
2:59:19 PM                                                                                                                    
Representative  Pruitt asked for  verification that  he would                                                                   
agree  with  giving some  of  the  procurement tools  to  the                                                                   
Permanent Fund.                                                                                                                 
Commissioner Hoffbeck answered "absolutely."                                                                                    
Vice-Chair Gara  had been surprised  the four times  draw was                                                                   
a political calculation.                                                                                                        
Commissioner Hoffbeck  answered that the four times  draw was                                                                   
not political  calculus, just  the three-year review  period.                                                                   
They wanted  to ensure  that there  was at  least one  review                                                                   
period within every gubernatorial cycle.                                                                                        
3:00:23 PM                                                                                                                    
Co-Chair Seaton  surmised that  inflation-proofing  would not                                                                   
take place for  a number of years. He asked  for the calculus                                                                   
behind the method.                                                                                                              
Commissioner  Hoffbeck  answered if  the  Permanent Fund  met                                                                   
its 6.95 percent  projected return, the fund  would grow with                                                                   
inflation,  even   with  the  draw  occurring.   Without  the                                                                   
inflation-proofing  loop,  putting  money  into  the  corpus,                                                                   
eventually the  earnings are realized  and would flow  out of                                                                   
the  fund. Even  though there  would  not be  a deposit  back                                                                   
into the corpus  in the first few years, it  is expected that                                                                   
the  fund  would  grow  at a  rate  that  would  account  for                                                                   
inflation and  for the draw. The  feedback loop is  needed to                                                                   
take  the money  from where  it can  be spent  to the  corpus                                                                   
where it would  be locked up for perpetuity.  The fund itself                                                                   
would grow with  inflation, but the corpus is  not inflation-                                                                   
proofed without that feedback loop.                                                                                             
Co-Chair Seaton  pointed to page  2 of the legislation  where                                                                   
distributable  income  was deleted  but  not net  income.  He                                                                   
asked  if  the  POMV  was  just  to  have  transfers  to  the                                                                   
earnings reserve and  the draw was not based on  the item. He                                                                   
was trying to  determine the calculation. He  pointed to page                                                                   
2, Section 3, line 17.                                                                                                          
Commissioner Hoffbeck asked for clarification.                                                                                  
Co-Chair Seaton  referred to the  calculation of  net income.                                                                   
He asked  if the sole purpose  of the net income  calculation                                                                   
was to determine what went into the earnings reserve.                                                                           
3:04:00 PM                                                                                                                    
Commissioner  Hoffbeck   answered  in  the   affirmative.  He                                                                   
detailed  the statutory  net income  calculation  is for  how                                                                   
much is moved  out of the fund for appropriation.  The entire                                                                   
POMV  process could  be  done  without that  component.  They                                                                   
left  it  in  to  ensure  the   public  that  they  were  not                                                                   
jeopardizing the fund  and in fact the bill  would be cleaner                                                                   
if it were simply  5.25 percent of the five-year  average was                                                                   
available  for appropriation.  It had been  included to  give                                                                   
comfort  that  the administration  was  not  doing  something                                                                   
Co-Chair  Seaton  looked  at slide  29  of  the  presentation                                                                   
related to  the POMV  draw and restriction.  He asked  if the                                                                   
purpose was  to limit future  legislatures' ability  to carry                                                                   
out  infrastructure  and  deferred maintenance  so  that  any                                                                   
other monies had to come from other revenue sources.                                                                            
Commissioner Hoffbeck  answered in the negative.  The purpose                                                                   
was  to avoid  hyper-inflating  spending in  years with  high                                                                   
oil prices.  It flattened  revenues available for  government                                                                   
spending.  It  allowed  the  feedback   loop  for  inflation-                                                                   
proofing. It allowed  to draw more knowing that  the earnings                                                                   
reserve  would  feed  back  into the  corpus  and  kept  from                                                                   
overheating  government  spending.  There  was only  so  much                                                                   
available to spend in a given year.                                                                                             
3:07:01 PM                                                                                                                    
Representative  Kawasaki mentioned  capital budget  years and                                                                   
suggested   there   were   also   large   operations   budget                                                                   
additions. He referred  to an extra $1,200  dividend provided                                                                   
by  former  Governor  Sarah  Palin  [for  energy  costs].  He                                                                   
discussed the  spike in the price  of energy with  oil prices                                                                   
at $80 to $90 per barrel.                                                                                                       
HB  61   was  HEARD  and   HELD  in  committee   for  further                                                                   
Co-Chair  Foster addressed  the  schedule  for the  following                                                                   
3:08:40 PM                                                                                                                    
The meeting was adjourned at 3:08 p.m.                                                                                          

Document Name Date/Time Subjects
HB 61 NEW FN DOC HRS 1-28-17.pdf HFIN 2/2/2017 1:30:00 PM
HB 61
HB61 Sponsor Statement - Governor's Transmittal Letter.pdf HFIN 2/2/2017 1:30:00 PM
HB 61
HB61 Supporting Document - Bill Summary 1.31.17.pdf HFIN 2/2/2017 1:30:00 PM
HB 61
HB61 Supporting Document - DOR White Paper 1.30.17.pdf HFIN 2/2/2017 1:30:00 PM
HB 61
HB61 Supporting Document - Permanent Fund Protection Act Presentation (0....pdf HFIN 2/2/2017 1:30:00 PM
HB 61
HB61 Supporting Document DOR Letter .pdf HFIN 2/2/2017 1:30:00 PM
HB 61