Legislature(2015 - 2016)HOUSE FINANCE 519
01/22/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Overview of the Governor's Fy17 Budget & 10-year Plan: Office of Management and Budget | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 22, 2016
1:32 p.m.
1:32:31 PM
CALL TO ORDER
Co-Chair Neuman called the House Finance Committee meeting
to order at 1:32 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative 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
Randall Hoffbeck, Commissioner, Department of Revenue; Pat
Pitney, Director, Office of Management and Budget, Office
of the Governor; Representative Andy Josephson,
Representative Dan Ortiz, Representative Louise Stutes.
SUMMARY
OVERVIEW OF THE GOVERNOR'S FY17 BUDGET & 10-YEAR PLAN:
OFFICE OF MANAGEMENT AND BUDGET
Co-Chair Neuman announced that the committee would be
hearing an overview of the governor's 10-year fiscal plan.
^OVERVIEW OF THE GOVERNOR'S FY17 BUDGET & 10-YEAR PLAN:
OFFICE OF MANAGEMENT AND BUDGET
1:34:00 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
introduced the PowerPoint presentation: "New Sustainable
Alaska Plan: Pulling Together to Build Our Future." He
indicated he would be talking about the new sustainable
Alaska plan and distinguishing it from the Permanent Fund
Protection Act. He would be clarifying some of the
confusion and complexity in trying to understand how they
fit together in terms of balancing the budget in both the
short-term and the long-term.
Representative Gattis asked if the new sustainable plan was
different from an old sustainable plan. In other words, she
wondered if there was an older plan that was updated.
Commissioner Hoffbeck replied in the negative.
Representative Gattis surmised the new plan was the old
plan. Commissioner Hoffbeck indicated Representative Gattis
was correct.
Commissioner Hoffbeck moved to slide 2: "Fiscal Challenge."
He relayed that the state was looking at a shortfall of
around $3.6 billion to $3.8 billion in unrestricted general
funds (UGF) for the FY 17 budget. The question was how to
close a gap of such size.
Representative Gara commented that the legislature had been
talking about a $3.5 billion deficit and the price of oil
currently was at $28/bbl (per barrel). He wondered if, for
the current fiscal year, the state was at a projected $3.5
billion deficit based on the average price of oil through
the present day or from an old projection of oil prices.
Commissioner Hoffbeck answered that the deficit was growing
because of the reality of the price of oil. The Department
of Revenue (DOR) forecast was based on $50/bbl. The state
was at the forecast at the end of the year. However, since
then, the price of oil has dropped to $25/bbl or $30/bbl.
The department was projecting less revenue than when the
official forecast was projected.
Representative Gara asked if the state was really
projecting more than a $3.5 billion budget deficit for FY
16.
Representative Thompson corrected Vice-Chair Gara by
clarifying that he meant FY 17.
Representative Gattis clarified that he was talking about
FY 16 because the year was not over.
[A technical issue occurred requiring the committee to take
an "At Ease"].
1:36:55 PM
AT EASE
1:38:21 PM
RECONVENED
PAT PITNEY, DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET,
OFFICE OF THE GOVERNOR, introduced herself. She answered
that based on the fiscal summaries provided by Mr. Teal,
director of the Legislative Finance Division, if the state
chose to do nothing remaining with the status quo, then the
FY 17 budget deficit would equal $3.5 billion. She
explained that the budget deficit for FY 16 was $3.8
billion. The projected revenue for FY 16 was $1.6 billion.
However, in the previous spring, revenue had been projected
at $2.2 billion. She furthered that $3.8 billion was
compounded by the drop in oil prices not counting transfers
and other items.
Commissioner Hoffbeck discussed the graph on slide 3:
"Fiscal Challenge." He noted that the chart was very
simplified. However, for the point of discussion, the chart
showed what happened if the state did nothing. By FY 18 the
Constitutional Budget Reserve (CBR) would be depleted. By
FY 20 the Permanent Fund (PF) Earnings Reserve Account
(ERA) would be depleted. The state would be in a place
where its revenues would not be sufficient to provide basic
public services. He added that the Permanent Fund Dividend
(PFD) would no longer exist. The question was how to solve
the problem of insufficient revenues to sustain service and
depleted savings.
1:40:04 PM
Representative Munoz asked, in reference to slide 3, if the
commissioner had calculated the projected rate of return on
the corpus of the PF and the state's ability to use the PF
earnings beyond the slide's four-year projection.
Commissioner Hoffbeck responded that the chart showed the
status quo approach. The earnings had always been used to
pay dividends. Going forward there would be a balance
between using the funds to continue paying dividends and
funding government. He thought that status quo money
flowing out of the corpus and into the ERA would equal
about $1 billion to $2 billion.
Representative Munoz stated that the corpus generally
earned around $3 billion per year. She did not see that
amount reflected in the slide. She wondered how far out the
projection would stretch into the future if the state were
to use excess earnings on an annual basis.
Commissioner Hoffbeck clarified, "Before it would be
depleted?"
Representative Munoz responded if DOR had done some
analysis on the subject.
Commissioner Hoffbeck responded that it would not affect
the depletion; however, there would be additional revenues
going forward. He reported that the slide needed to be
cleaned up; it was for visual purposes only.
1:41:41 PM
AT EASE
1:42:35 PM
RECONVENED
Co-Chair Neuman invited Commissioner Hoffbeck to continue.
He added that he suspected the committee would engage in
discussions on the PFD in greater depth.
Commissioner Hoffbeck scrolled to slide 4: "Fiscal
Challenge":
· Take action now, not later:
Government must be cut further
Protect essential services
· Use of Permanent Fund earnings is acceptable if:
· Protect the Permanent Fund Corpus
· Preserve a Dividend Program
· New Revenues are acceptable if:
· They support right-sized government
· The burden is shared equitably
Commissioner Hoffbeck explained that the administration had
taken the information from the slide and discussed it with
the public over the prior summer. The administration had
been looking for feedback as to what people were willing to
do to solve the state's fiscal problem. He relayed that he
and Ms. Pitney had conducted over 50 community meetings
throughout the state. There were certain clear messages as
a result of the meetings. First, after attending the
meetings, people understood the state's fiscal situation
needed to be addressed immediately rather than later.
Attendees also made it clear that that they were not
convinced the government was operating efficiently. The
individuals were clear they wanted to see further cuts to
the budget, but they also wanted to protect essential
services. He noted that different groups had different
ideas about what essential services were. There was a
balance between protecting services and smaller government.
Attendees had also made clear they understood the necessity
of using the PF earnings but they believed the corpus of
the fund had to be protected no matter what. He explained
that people were not willing to spend the state's future to
balance the budget.
1:44:33 PM
Representative Gattis remarked that the commissioner had
glossed over the point that government needed to make
further cuts. She did not believe the state had made
further reductions. She wondered why the state had not made
additional reductions.
Commissioner Hoffbeck replied that the administration had
made cuts in the amount of $140 million and about $40
million in new investment. Reductions were selected in such
a way that the services people were asking for could remain
intact.
Representative Gattis understood that some cuts were made
but other items had been added back into the budget,
resulting in a larger overall budget. She had a problem
with the administration not making further reductions even
after receiving feedback from people around the state that
government needed to make additional cuts.
Commissioner Hoffbeck appreciated the comment and would
discuss the subject at another time. He continued to report
on the messages the administration had received from people
throughout Alaska's communities. People were willing to
talk about new revenues, but only after "right-sizing"
government. They also conveyed that they wanted to see the
burden shared equitably rather than falling on one
particular constituency or industry.
1:46:29 PM
Commissioner Hoffbeck advanced to slide 5: "Fiscal
Challenge: Alaska Permanent Fund Protection Act - Defining
the Problem." He posed the question as to what the state
was facing in its current challenge. Some of the responses
included the belief that: the enemy of fiscal stability was
oversized government; the oil and gas industry was not
paying enough; the legislature was not doing its job in
controlling spending; and, the administration was not
controlling government spending. He suggested the real
enemy of fiscal stability was not having a solid plan on
how to move forward. He commented that the state never
really had a plan for declining oil prices. Currently, the
state saved 25 percent to 30 percent of the royalties
moving it into the PF. Any monies left over at the end of
the year went into the CBR which was intended to bridge
short-term oil revenue fluctuations. He added that the
state had been chasing oil prices up and down. The slide
depicted state revenue versus petroleum revenue. He noted
that with a one year lag there was a significantly strong
correlation between oil price and the state budget. He
suggested there were always people wanting to use available
monies. The governor had advocated that there was no reason
to blame anyone for the condition Alaska was in, except to
attempt to replicate the situation. He paraphrased
President John F. Kennedy that it was not a time for
despair, it was a time to act. He underscored that the
right solution was needed.
1:49:13 PM
Co-Chair Neuman asked the commissioner to return to the
slide. He thought the problem was that there was only one
line representing revenue from petroleum. He thought the
state had not diversified its economy enough. The state
depended on one revenue stream: the development of its
resources. He wanted to know how the administration
evaluated the effects the bill would have on the state's
economy. He maintained that what was getting lost was the
financial impacts on Alaska. He asked the commissioner to
respond. He wondered if there was a program that could
produce revenue and if the administration had considered it
more carefully.
1:50:17 PM
Ms. Pitney replied that one of the considerations in
developing the budget was looking at bringing in more
revenue to the state. The administration looked to programs
within the Department of Natural Resources (DNR) for
possibilities. However, the state had one main revenue
stream, oil. Although the administration was examining the
economy and the impacts every decision it made would have
on each sector, the reality was that the change in the
state's economy was due to the change in the price and
production of oil. Part of the recommendation in the
overall plan was to begin to link broader economic
diversity and broader gains in industries outside of oil to
state revenue.
Co-Chair Neuman remarked, "I am sure we will see more of
them coming."
Commissioner Hoffbeck indicated there had been research
done on the "resource curse." There were other countries
and states that had a single resource base that supported a
large portion of services. Alaska was really no different
than any other state that had been in the same situation.
1:52:01 PM
Commissioner Hoffbeck turned to slide 6: "The New
Sustainable Alaska Plan":
· Alaska Permanent Fund Protection Act
· FY17 Budget and Future Spending Reductions
· Revenue Increases
Commissioner Hoffbeck relayed that there were three
components to the new sustainable Alaska plan. He would
spending some time clarifying the Alaska Permanent Fund
Protection Act. He had included the slide to clarify that
the act did not include budget line items or revenue
increases, which were contained in separate bills. The act
created a structure for how to use the state's earnings in
a sustainable fashion. All three items made up the new
sustainable Alaska plan.
Representative Edgmon commented that from a mathematical
point the state had more than one year's worth of reserves
left to continue business as usual assuming the state had
the same budget level as it had in FY 16 and into the
future. Looking at the sheer numbers the state had up to
four years of reserves if the earnings of the PF were
included. However, the legislature continued to hear that
it was paramount to act in the current session for the
betterment of Alaska's fiscal future. He commented that the
legislature was discussing state government spending as
well as the overall confidence of the Alaska economy. He
wanted to hear about why it was absolutely paramount the
legislature acted in the current session and about
potential repercussions of not acting right away. He asked
how savings and Alaska's economy would be affected.
Commissioner Hoffbeck responded that the more savings the
state spent, the less it would have to invest to generate
income. The sustainable draw would shrink with less of a
base for earning. He suggested that it would have been
better to have implemented the plan two years prior.
1:54:44 PM
Representative Edgmon suggested Commissioner Hoffbeck only
partially answered his question. He provided the
hypothetical scenario where the state could reduce the
budget by $500 million and still have enough in reserves to
continue for two more years. He felt there was a sense of
urgency being generated. The average person could see that
the state had $15 billion or $16 billion in savings and
could conclude that the governor's plan did not have to be
executed in one year. It could be implemented in a span of
two to three years. He was trying to open up the
discussion.
Commissioner Hoffbeck believed the presentation would
clarify the reasons for avoiding spending down the state's
savings.
Co-Chair Neuman stated that he thought most members echoed
Representative Edgmon's sentiments about wanting a
sustainable plan but wanted it to be right. He asserted
that it was important to inform the public and make sure
they are part of the discussion.
Commissioner Hoffbeck remarked that there were separate
bills for each of the elements of the plan. There would be
extensive analysis on how the administration reached the
draw amount and what would happen without the savings
behind it.
Commissioner Hoffbeck turned to slide 7: "Alaska Permanent
Fund Protection Act":
· A fiscal framework for using our wealth to:
· Help resolve this year's fiscal challenge
· Sustainably fund government operations into the
future
· Provide the maximum benefit to the broader
economy
· Main components of the framework:
· Royalties and production taxes into the Permanent
Fund
· Endowment draw
· Royalty dividend
· Periodic review
Commissioner Hoffbeck relayed that one of the messages the
administration had heard from businesses was that wild
swings impacted their ability to invest. He reviewed the
main framework components of the Alaska Permanent Fund
Protection Act. He noted he had a slide further in the
presentation that detailed the first component: royalties
and production taxes into the PF. He offered that the
second component was an endowment draw - a fixed draw for
government spending. The third piece of the framework was a
royalty dividend, which would be tied to royalties rather
than PF earnings. The last piece was a periodic review to
ensure that the plan remained sustainable over time.
1:57:47 PM
Commissioner Hoffbeck pointed to the flow chart on slide 8:
"Alaska Permanent Fund Protection Act." He referred to the
slide as a plumbing picture. He raised the question about
what the plan did. First, if the state was going to rely on
earnings from the PF corpus as the primary funding source
for state government, the state needed to strengthen the
corpus of the fund. The plan proposed to change the flow of
revenues coming in. All production taxes would flow into
the corpus of the PF rather than flowing directly into the
General Fund. Half of the royalty revenues [50 percent]
would flow into the corpus of the fund; currently, it was
only 30 percent. The corpus of the fund would be built up
in order to sustain government expenditures into the
future. It placed the volatility into the PF and took it
out of the budgeting process. Essentially, the PF was a $50
billion money-sink that could absorb fluctuations in
revenue from year-to-year. He reported that when the
administration modeled it they looked at both high and low
projected years of earnings to determine the sustainable
draw. He continued that the other 50 percent of the mineral
royalties would flow into the earnings reserve and
eventually drop out to pay dividends. He furthered that 50
percent of the prior year's royalties would pay the
dividend in any given year. Monies would then flow out of
the PF corpus into the earnings reserve as they did
currently with statutory net income - realized gains such
as royalties on investments, rents on state properties, or
the sale of assets at a profit.
Commissioner Hoffbeck explained that the administration had
looked at more of an endowment model - a Percent of Market
Value (POMV) model - but thought it would create more of an
obstacle in passing legislation. He believed people were
comfortable that the proposed plan protected the corpus of
the fund and provided a strategy they were accustomed to.
He reported that the earnings reserve account was currently
at about $7 billion. Approximately $2 billion would flow
into the ERA. The earnings reserve would also earn money on
its investments. However, the amount was not quite large
enough. The administration was asking for was a $3 billion
transfer from the CBR into the earnings reserve to bring
the balance to about $10 billion. He detailed that the
state should be able to transfer $3.3 billion annually into
the General Fund for government services if the ERA balance
was $10 billion (resulting from money that flowed in on an
annual basis and the earnings of the reserve itself).
2:01:48 PM
Representative Gara asked if the $3.3 billion was flat or
in real dollars. Commissioner Hoffbeck responded that the
figure was flat through 2020 and then it would begin to
grow with inflation.
Representative Gara asked if the plan would require cuts to
the budget every year for 20 years in real dollars.
Commissioner Hoffbeck responded through 2020 (three years).
Co-Chair Neuman commented that there were sweepable and
non-sweepable funds that got mixed. He asked the
commissioner to expand on the topic.
Commissioner Hoffbeck explained that concerns were raised
within the Legislative Finance Division as to whether
monies that were deposited into the earnings reserve would
be swept back into the CBR at the end of the year. Part of
what the administration was trying to accomplish was to
create the stability of knowing how much could be withdrawn
each year. Ultimately, the state was spending savings
whether from the CBR or the ERA. A steady fund draw was
possible if the money was in the ERA. There was concern
that the character of a fund draw would change if an annual
sweep to repay a debt to the CBR was required. He shared
that he had spoken with the attorney general's office to
confirm what would happen with the funds. The attorney
general's office had the opinion that both the ERA and the
PF corpus would not be swept back into the CBR.
2:04:06 PM
Co-Chair Neuman wanted to make members aware of the
discussion.
Representative Kawasaki asked about the predictability of
putting money in the PF corpus. He mentioned that the PF
value over the previous two months was fairly volatile. He
thought it sounded like the state would be changing one
volatile system for another volatile system - the price of
oil versus the stock market activity. He asked the
commissioner to comment on the topic.
Commissioner Hoffbeck responded that there was volatility
in the investment earnings. However, in the model,
volatility would be accounted for in both investment
returns and in oil and gas production and price in
establishing a $3.3 billion sustainable draw. Most of the
volatility would reside in the corpus of the PF. As money
moved into the ERA there would be less volatility. In other
words, all of the oil and gas volatility would be taken
out. There would still be some investment volatility in the
ERA but the earnings reserve would be managed for an annual
withdraw of $3.3 billion. The administration would do a
couple of things to deal with the volatility going forward.
The first would be to set the goal of having four times the
annual draw residing in the earnings reserve. It would take
away a portion of the volatility because even if there was
a low return year there would still be enough money to pay
the $3.3 billion draw.
Co-Chair Neuman suggested covering the information later.
2:06:59 PM
Commissioner Hoffbeck reiterated the robust modeling which
included an ERA balance of at least four times the amount
of the draw, and a periodic review. There would be a review
in the following calendar year, another review in 2020 to
see if the administration's assumptions were still valid,
and a review every four years after that. He asserted that
both measures took away some uncertainty. He noted there
was a toggle within the bill that if the ERA balance went
below the equivalent of four times the amount of the draw
the production taxes in all but the constitutionally
mandated royalty payments would flow into the ERA. Only 25
percent would go into the corpus until the ERA balance was
up to the required amount. He relayed that when DOR did its
modeling it found that $3.3 billion draw had a 30 percent
failure rate by 2040. A failure rate meant the earnings
reserve would reach a balance of zero. He emphasized that a
failure rate meant that the earnings reserve balance would
go to zero rather than the corpus of the fund. The earnings
reserve would go to zero 30 percent of the time which was
why a review process every four years was necessary to
eliminate the possibility of failure. After a review
process the state cold adjust as necessary to avoid
failure.
2:09:10 PM
Representative Kawasaki asked if Commissioner Hoffbeck had
stated there was a 30 percent failure rate in the modeling
conducted by the department.
Commissioner Hoffbeck explained that if the state launched
the modeling in the current year and did not touch it again
until 2040 there was a 30 percent chance of failure. He
confirmed that the $3.3 billion draw could take the ERA to
zero, 30 percent of the time which was the impetus for
having a four-year review.
Representative Kawasaki asked how the dividend would be
calculated if it was based on 50 percent royalties.
Commissioner Hoffbeck answered that if the state saw a
recovery in oil prices in the $60 range the dividend would
likely bounce between $800 - $1,100, whereas, if oil prices
remained at $25/bbl then the dividend could drop to about
$400.
Co-Chair Neuman asked for information about the assumptions
DOR had used to run its model (including assumptions that
worked and ones that did not). Commissioner Hoffbeck
answered that he would provide the information.
2:11:10 PM
Representative Kawasaki commented that in looking at the
model it appeared that all of the production tax went into
the corpus of the fund. He understood that there would not
be any more drawn from the corpus to the ERA; it depended
mostly on the mineral royalty, a fixed rate. He asked if he
was accurate.
Commissioner Hoffbeck responded that the PFD would be 100
percent based on the mineral royalties.
Representative Kawasaki commented that the dividend was
independent of the price of oil. Commissioner Hoffbeck
disagreed. He explained that the royalty was a percentage
of the sale of oil; as the price increased, the percent
paid in royalty was worth more.
Representative Gara understood the administration's
reasoning in its approach without having a constitutional
amendment. The Legislative Finance Division concluded that
the modeling did not work. He furthered that by putting all
of the money into the ERA to spend on general government,
the state faced a situation where the money in the ERA
would be swept into the CBR annually. He furthered that
every year a three-quarter vote would be necessary. The
constitution was very clear; it stated that the amount of
money in the General Fund available for appropriation at
the end of the year would be deposited in the CBR. He
stated that the bill turned the earnings reserve into a
spending fund. It was no longer a Permanent Fund and
inflation proofing fund, but rather a spending fund used
for schools, roads, etc. He continued that the Legislative
Finance Division in its overview had stated that money
available for general appropriation went into the CBR at
the end of the year. He believed it was clear that a three-
quarter vote would be needed annually to get the money out
of the CBR to make the plan work. He was uncomfortable with
a plan that was going to require an annual three-quarter
vote to fund basic services.
Commissioner Hoffbeck explained that he had posed the same
question to the attorney general. He deferred to the
attorney general's explanation to provide more assurance
that the sweep would not occur. He added that in reality,
the ERA had always been a spending fund and had always been
available for expenditures.
2:14:40 PM
Representative Gara mentioned a court ruling that was based
on a time where the ERA was only used for dividends and
inflation proofing. He noted that it would change with the
bill. He wanted a plan to work but he thought that LFD was
in a much stronger position in its analysis than the
attorney general at present. He expressed concern with the
need for an annual three-quarter vote to fund basic
services. He was aware of what was stated by the attorney
general, but he reasoned that the constitution stated what
it stated.
Commissioner Hoffbeck answered that he would make sure
someone came before the committee to walk through the
analysis.
Co-Chair Neuman agreed that it was a critical piece of the
governor's legislation.
Vice-Chair Saddler understood the investment guidelines and
directions to the PF were different regarding whether funds
were aimed at being available immediately or invested for
the long-term. He asked if the current guidelines
appropriate to the model or would there have to be changes
to those.
Commissioner Hoffbeck responded that a certain amount of PF
investments were short that were in cash or cash
equivalents, characteristic of a balanced portfolio. In the
previous year $1.4 billion was used to pay for the PFDs; it
was a larger draw. He thought it would take an adjustment,
but indicated it would likely be more in the allocation
than in a mandate.
2:17:23 PM
Vice-Chair Saddler asked why the raw number of $3.2 billion
was used rather than a percentage.
Commissioner Hoffbeck commented that the administration
found that a fixed draw provided the most sustainability.
If the draw became larger in high return years it would
take away building up the size of the corpus of the fund
and potentially would leave more volatility in the
budgeting cycle.
Vice-Chair Saddler asked, given inflation and increases in
health care costs, whether the model allowed for any
systemic increase in the cost of government. Alternatively,
he asked if the four-year renewal was the state's
opportunity to allow for inflation.
Commissioner Hoffbeck responded that after 2020 it would
grow with inflation. Government expenditures that grew
faster than inflation, such as medical costs, would have to
be addressed with additional reductions or other revenue
sources. He reported that one of the goals was to extract
as much as possible annually moving forward. The amount of
$3.3 billion was as much as could be pulled out of the
system for funding government services. He asserted that if
the state tried to chase expenditures with the draw
eventually the corpus would start to be depleted. The issue
remained that Alaska had a very limited number of resources
feeding government services. The current structure of the
bill was that $3.3 billion could be reduced in order to
preserve sustainability. However, the toggle switch to go
higher was purely inflation, even on the four-year review.
An exception would be some sort of quantum shift in the
state's economy.
2:20:24 PM
Vice-Chair Saddler asked the commissioner to reiterate how
the structure allowed for inflation.
Ms. Pitney explained that 2.25 percent was the assumption
on inflation.
Representative Pruitt asked about the balance of the PF
corpus in 2040 based on the analysis. Commissioner Hoffbeck
responded that the balance would be at whatever the current
corpus was plus inflation. He offered to provide a chart
that would show an amount.
Representative Pruitt asked about the 30 percent failure
rate and the periodic reviews. He thought the state had
limited its choices around dealing with failure especially
since 50 percent of the production taxes and mineral
royalties would go into the corpus and the remaining 50
percent would go to the dividend. He wondered what the plan
was to adjust if the state were to get to the point of
failure rate. He asked how the state would adjust and pay
for government under the proposed plan.
Commissioner Hoffbeck relayed that it depended on the level
of failure. If there was a short-term cash flow issue due
to multiple bad years in a row, the toggle would place
production taxes and all constitutionally mandated royalty
payments into the earnings reserve to bolster the account
and to enable further payments. If it appeared that the
long-term forecast of returns on invest and oil price and
production would not support the draw then the
administration would recommend to the legislature reducing
the size of the draw. He noted that the administration
would not want to take more out of the ERA than it could
provide.
2:23:14 PM
Representative Pruitt asked about the $3.3 billion draw.
The proposed budget was about $5.2 billion. He pointed out
there was a $1.8 billion gap. He asked whether the state
had enough revenues to fill the gap without having to go
forward with some of the newly proposed revenue sources
such as an income tax.
Commissioner Hoffbeck responded that on slide 8 the barrel
labeled "All Other Taxes" represented taxes and fees the
state currently collected - about $850 million per year.
The administration expected the state would be making some
return on the CBR investments. He relayed that $3.3 billion
plus $850 million, plus $135 million totaled approximately
$4.2 billion to $4.25 billion. The state was about $1
billion short. He asserted that the other parts of the new
sustainable Alaska plan, revenues and reductions, would
help to fill the remaining gap.
Representative Pruitt concluded that the state would be
about $1 billion short. Commissioner Hoffbeck concurred. He
reiterated that revenues and reductions, the other parts of
the new sustainable Alaska plan, would help to fill the
gap. In other words, the state could get within $1 billion
using its existing financial assets. The Permanent Fund was
not large enough to fill the gap alone.
Representative Pruitt asked if the administration was done
making cuts. He wondered if the legislature would have to
find other sources of revenue in the current year and in
future years such as a sales tax, income tax, or other
things. He wondered if the administration would continue
with cost reductions and resizing. He also wondered about
inflationary growth and the potential the gap would
increase.
2:25:51 PM
Commissioner Hoffbeck flipped to slide 9: "The New
Sustainable Alaska Plan." The slide showed the various
pieces of the new sustainable Alaska plan. The Alaska
Permanent Fund Protection Act was a $3.3 billion draw and
existing taxes and fees and earnings on savings brought the
number to $4.285 billion. The numbers were forecasted out
to FY 19, as it would take three years to get the plan in
balance. The slide showed spending reductions in FY 17
through FY 19 in the amount of $240 million ($140 million
in FY 17 and $50 million the following two years). Another
reduction of $400 million was connected to the oil and gas
tax credit reform. He noted about $40 million in priority
investments was placed back in. The net in spending
reductions was $600 million, $500 million of which were in
FY 17. He anticipated about $457 million in new revenues.
He concluded that the $1 billion shortfall was covered with
$600 million in the form of reductions and about $400
million in the form of new revenues.
Representative Pruitt thanked the commissioner for
answering his question. He asked if the capital budget
would be limited to $50 million or if there would be
additional capital spending. He asked if there was a
commitment from the administration to continue reducing
spending, He also wondered if the legislature would have
hit the administration's goal in a single year.
Commissioner Hoffbeck suggested that where cuts were made
would dictate his response to the representative's
question. However, the governor had made it very clear that
the plan was in pencil; if the legislature believed the
proper balance included additional cuts and less revenues
he was amenable to that. He relayed that the governor
intended to work with the legislature to find the necessary
balance; he was only using the plan as a template and left
the door open to modify it. The only thing unacceptable to
the governor was no plan at all. The administration
expected greater reductions that what was proposed.
2:28:55 PM
Co-Chair Thompson referred to slide 8 and the PF corpus.
The way the plan was set up 50 percent of mineral royalties
and 100 percent of production taxes would go into the PF.
He noted that the remaining 50 percent of the royalties
would go towards the dividend. He mentioned the potential
gas line in 10 years and suggested that 50 percent of gas
royalties and 100 percent of gas production taxes could be
added to the PF. There would be a much larger royalty and
potentially a much larger dividend. He stated that possibly
the dividend could grow to $3,000 or $4,000. He asked if he
was correct.
Commissioner Hoffbeck responded affirmatively. The dividend
would follow the economic health of the state.
Representative Edgmon reiterated his earlier question about
why the plan needed to be formed in one year. He wondered
how the legislature would sell the plan to the Alaska
voters in such a short amount of time. He asserted that not
only did the state have a fiscal problem, it also had a
political problem. The plan had come about sometime in late
October or early November of the prior year when it was
presented to the legislature. He was trying to rationalize
how he was going to explain to a group of people in
Dillingham that the state was going to cut their dividend
in half, consolidate all of the state's savings accounts,
and continue to make major reductions to K-12 education
funding and several other programs. He suggested that
whatever plan was adopted would be a cooperative effort
between the legislature and the governor. It was already
the end of January. He appreciated the work that had gone
into the model and thought it had promise. He also liked
the way the governor was trying to take a judicious
approach to reducing the budget. However, he wondered if
there was any other reason for hurrying the model out in
the current year. He mentioned looking at the M/V Susitna
in Ketchikan five years earlier. He recalled it had looked
pretty good on dry dock. He wondered, though, how it was
going to work in the water and the rigors of ice
conditions. He emphasized the importance of needing to be
able to explain the model to the voters in Alaska in order
for the legislature to decide to go forward with the plan.
Commissioner Hoffbeck said he would bring in some matrixes
that showed what the sustainable draw would look like if
the legislature waited one year to take action. The impacts
of waiting could be seen in the information he would
provide.
2:32:47 PM
Representative Edgmon suggested that the inference was that
the administration would be working with the general public
between the present day and the end of session to help them
understand why it was that the state had to take action and
why it would be beneficial for the long-term sustainability
of the state.
Commissioner Hoffbeck responded, "Absolutely, we will talk
to anybody, anywhere, anytime about it."
Co-Chair Neuman remarked that the administration had been
going around the state frequently. He added that he had
been putting the presentations on Facebook and was trying
to get them to the public as much as possible. He assumed
Representative Edgmon was doing the same with his
constituents.
Representative Edgmon responded that he did not understand
the model well enough yet to sufficiently explain it to his
constituents.
Co-Chair Neuman stated that it would take a while to better
understand it, as it was a very complicated plan with
several pieces. The goal for the current meeting was to
provide a 50,000-foot view.
Commissioner Hoffbeck returned to slide 9 and reported
there were separate bills for each of the components. The
components included the Permanent Fund Protection Act, the
spending reductions in the budget bills, and the new
revenue components in the form of a series of tax bills
introduced by the governor - mining, fishing, tourism
[motor fuel], alcohol and tobacco, oil and gas, and
individual income tax legislation.
2:34:52 PM
Vice-Chair Saddler referenced that new revenues were
acceptable if the burden was shared equitably on slide 4;
however, a sales tax was not included on slide 9. He asked
why a sales tax was not put forward.
Commissioner Hoffbeck replied that the administration
thought it was an "either/or" scenario - it believed
proposing both would have been too much. The administration
concluded that an income tax was more appropriate than a
sales tax because of the federal deductibility of the tax,
the ease of implementation and auditing, and feedback from
communities. Many communities were already using sales tax
as a major source of funding; they were concerned they
would have to pull back if a state sales tax was added onto
a municipality sales tax.
Representative Gara referred to slide 4 regarding
equitability. He opined that equitability would really be
the topic of discussion in the current year. He spoke to a
study from Institute of Social and Economic Research (ISER)
that showed if the dividend was reduced to the level the
administration was suggesting, 50 percent of Alaskans (some
of the least wealthy Alaskans in the state) would have
their income reduced by about 20 percent. On the other hand
the proposed income tax would be about 1 percent of the
income of the wealthiest Alaskans. He added that most
corporations in the state did not pay corporate tax. He
suggested requiring corporations that earned over $250,000
per year to pay a tax. He also alluded to the fact that the
state had an oil tax policy in which every field after
2002, at oil prices below $60 or $70 per barrel, paid a
zero percent production tax. He asked how he would tell a
constituent in Fairview or Mountain View or in some of the
poorer parts of the state that they would be paying at tax
equaling 20 percent of their income.
Commissioner Hoffbeck responded that first there was a
balance by having both the PFD and an income tax. The state
was aware that a smaller PFD would impact lower income
families more. He conveyed that by tying the income tax to
the federal tax liability so that it embedded all of the
credits and exemptions within the federal tax structure the
lower 40 percent or 50 percent of individuals would not be
paying a state income tax or a very small one. The income
tax would disproportionately affect higher earners.
Conversely, the dividend would disproportionally affect
lower earners. He concluded that by having the structure of
the PFD and an income tax it created some balance although
he realized it was not perfect. He continued that the issue
with the corporate income tax payers was not with the C
corporations but with the S corporations and partnerships.
The personal income tax would become the mechanism to
capture those. The income would flow through to the
underlying partners. By having a personal income tax the
state would be able to capture revenues from those
corporations.
2:39:35 PM
Representative Gara suggested that the corporate tax for
the other corporations would become 1 percent or 2 percent
because of the income tax amount. He continued that the
corporate tax for C corporations was 9.4 percent. He
relayed that the administration's plan would have the other
corporations paying about a sixth of the rate. He suggested
measuring the rate against the 20 percent of income of
Alaskans not in the top 50 percent of wage earners. He
asked the commissioner if he thought it was equitable.
Commissioner Hoffbeck suggested that by tying the income
tax to the federal income tax structure it removed a
portion of the debate. The simplest way to get an income
tax into play was to charge a percentage of the federal tax
rate. If the state wanted to change to a structure of its
own it could put one into place in the future. He added
that within the oil and gas tax credit reform there was a
provision that did not allow the new oil to drop below the
floor. In the hardening of the floor the minimum tax for
new oil would be the floor rather than zero.
Representative Pruitt mentioned that all of the new revenue
proposals except for an income tax already had an
infrastructure in place. He wondered what the costs would
be to build and maintain the infrastructure for an income
tax.
Commissioner Hoffbeck responded that the upkeep would be
about 3 percent of taxes collected. He would have to get
back to the committee with the costs for implementation.
2:42:40 PM
Vice-Chair Saddler asked if the department had
macroeconomic information as to how the revenue generated
from the reduction in the PFD would compare to the amount
of revenue generated by the proposed income tax which the
commissioner had indicated was about equal. He wanted to
see additional breakout numbers.
Commissioner Hoffbeck suggested that with an assumed
dividend of about $1,000 in the current year and $2,000 in
the previous year the amount would be $700 million. The
income tax would be $200 million in revenues.
Commissioner Hoffbeck discussed the chart on slide 10: "The
New Sustainable Alaska Plan: Per-Capita Broad-Based State
Tax Revenues, by State 2014." He pondered what Alaska would
look like if all of the levers within the fiscal plan were
pulled. Currently Alaska had the lowest individual tax
burden in the country at about $500 per person. He noted
that the slide he was presenting was an ISER slide. If all
levers were pulled the tax would increase to about $1,000
per person. The national average was $2,300 per person.
Alaska would remain either the first or second lowest taxed
state in terms of an individual broad-based tax burden in
the nation. He contended that the state was not creating a
situation in which Alaska's tax level was so onerous that
people would simply leave the state. There was no other
state where they would pay less. He understood that when
the tax burden went from zero to something it would feel
like a significant amount. He wanted to put into
perspective how Alaska taxes would rate in comparison with
other states.
2:44:42 PM
Vice-Chair Saddler commented that because taxes were paid
on the commonly owned oil wealth, the per capita tax paid
either by or on behalf of Alaskans would likely be
different from the chart.
Representative Wilson asked if property taxes were included
in the amount of taxes listed on the chart. Commissioner
Hoffbeck responded in the negative. The property taxes were
local taxes and therefore not on the slide.
Representative Wilson speculated that the chart would look
much different if the comparison between states included
both taxes and cost of living expenses. Alaska would not
appear at the bottom. She disagreed with the commissioner
about his comment that adding a tax would not be onerous.
She wanted to be careful about adding another tax. She
asked if any studies had been done on the impacts of each
of the proposals to the economy. She asked if there was any
documentation showing why the administration chose the
proposals it had. She needed to be able to take that
information back to her district because she did not see a
reduction in government included in the plan. She wondered
if the information would be provided to the committee in
order to better understand the administration's direction.
Commissioner Hoffbeck responded that the administration had
contracted with ISER and Gunner Knapp was doing the study
about the impacts of the various components of the fiscal
plan. He thought the study would be completed by early to
mid-February. He thought it would be available by the time
the topic of revenue was brought up in committee. The
administration thought that it was better to have the study
completed externally to give it additional credibility. The
Office of Management and Budget and DOR stood back and
allowed ISER to do the study without input from either
agency.
2:48:07 PM
Representative Wilson wondered if the study would include a
recommendation for a sustainably sized government without
making changes to the Permanent Fund or imposing additional
taxes.
Commissioner Hoffbeck thought the report would answer her
question - it would include the impact of various cuts and
the impact of various taxes. He was certain that Mr. Knapp
would not be recommending the right balance, but he would
be providing the information necessary to compare the
relative impacts between cuts and taxes. Ultimately, there
were two pieces; math and politics. He thought it would be
more difficult to answer the question about what Alaskans
wanted.
Representative Wilson did not know what entity DOR was
using or its background. She wondered if it had done any
studies for other states doing something similar. She asked
about the chosen entity's expertise. She thought there
might be an economic group that had more nationwide
experience.
Commissioner Hoffbeck replied that one of the advantages of
ISER was that it had done similar types of analysis over
the years; it would have the ability to recheck some of its
previous assumptions. He noted that the agency had the best
knowledge of Alaska as well.
Representative Wilson remarked that Alaska was not the
first state to experience a budgetary crisis. She agreed
that Alaska was unique in many instances but did not feel
this was one of those instances. She stressed that if there
were better experts available, the state should be using
them to tell the legislature what had been done right or
wrong. She believed the department thought the state had a
revenue problem, but she disagreed. She thought the state
had a spending problem. She thought ISER's experience was
too specific to Alaska and she wanted to ensure the
legislature was making the right decisions for its
constituents.
2:51:48 PM
Commissioner Hoffbeck scrolled to slide 11: "The New
Sustainable Alaska Plan." He conveyed that if every part of
the fiscal plan went into effect it would leave Alaska with
the lowest or second lowest taxes in the nation; Alaskans
would still receive a dividend; the state would still be
growing its savings over time; the state would continue to
provide the majority of government services that people
enjoyed; the state would still have money available for
investing in the future through oil and gas tax credits at
a lower level; and, the state had an Alaska Industrial
Development and Export Authority (AIDEA) loan fund to help
support oil and gas development in Alaska. He opined that
it was not the worst place the state could land.
2:53:09 PM
Representative Guttenberg agreed with Representative Wilson
about a couple of things. He mentioned that the disparity
between the cost of fuel (cost per gallon) and the price of
oil was problematic. If the state simply wanted to increase
the ability of the economy to function more efficiently the
administration would find an answer to the problem. He was
unsure if the proper statutes were in place to enable the
administration to do so. The price of oil had dropped by
about 80 percent. The price of motor fuel and gasoline was
nowhere near that. In rural Alaska it was much worse. He
relayed that it affected the economy every time the state
filled up a vehicle or a piece of equipment such as a
grader to plow the roads. He wanted to comment on the
analysis presented in the flow chart and the CBR where a
super majority would not be needed. He did not believe all
funds should be easily accessible to everyone. He thought
there should be an account in existence that was not easily
accessible regardless of politics. He did not want the
administration's plan to fail because it had focused on
eliminating a CBR vote which he thought was clearly in
conflict with the constitution. He hoped Commissioner
Hoffbeck had a backup plan. He was concerned with spending
significant time on a plan that may not be supported by
Alaska's constitution.
2:56:11 PM
Ms. Pitney explained an LFD graph on slide 12: "FY 17
Budget Overview: Total Agency Operating Budgets, Statewide
Items and Capital Budget Compared to Revenue (UGF Only--
$billions)." She transitioned from the governor's numbers
to the legislature's numbers. She reported that in most
cases OMB and LFD agreed on the numbers. There were
potential differences in how the numbers were categorized
or what they were compared to. However, OMB and LFD agreed
on the individual numbers, the directional changes, and the
order of magnitude of the changes. She suggested that
rather than focusing on whether the number was 5 percent or
4.3 percent she would be using LFD documents to explain
where OMB had slightly different interpretations and the
reasoning behind them. She reemphasized that OMB and LFD
agreed on 99 percent of the interpretations, 100 percent of
the individual numbers, and there were only a few places
where they disagreed on the comparisons. She pointed to the
spending change overtime. The Legislative Finance Division
reported a 30 percent reduction over time. She reported
people saying that the administration had not reduced
government. She countered that it had reduced government
significantly. She reported nearly $400 million had been
reduced from the operating budget from FY 15 to FY 16. She
mentioned that in FY 16 to FY 17 there were $150 million in
reductions and $40 million in priority investments. She
explained that the priority investments were very
important.
Ms. Pitney furthered that $38 million of the $40 million
represented operating funds to support the gas line
development project. The Office of Management and Budget
and LFD fundamentally disagreed on the comparison of the
governor's budget in FY 17 to FY 16. In FY 17, for the
first time, $700 million in dividend checks was placed into
the total for general funds. In the governor's version OMB
showed that the earnings reserve cost was similar to prior
years. If dividend check payouts in FY 16 were added, $1.3
billion would be added on top of $5.4 billion, which was
clearly a reduction. She was trying to compare apples-to-
apples. She continued that the reality was that there was
$5.5 billion in spending in FY 17.
Ms. Pitney discussed the four major components of the
sustainable plan: 1) the amount and the method of using the
earnings reserves; 2) the amount of the PFDs and the method
in which to accommodate them; 3) the amount of spending
reductions; and 4) the amount of new revenues to generate.
She contended that the largest component was the use of the
earnings reserves. She continued that all four components
interplayed and had a balance. She pointed out that one of
the main priorities during the current legislative session
was to enact oil and gas tax credit reform. If reform
legislation passed it would require an estimated $1 billion
to be transferred from savings into the oil and gas tax
credit fund to pay all earned credits to date. She
continued that $200 million would be placed in a loan fund
to continue the program. She concluded that the $5.5
billion would become $6.7 billion with reform. She
explained that the oil and gas tax credit transition fund
would allow for the state to get to a steady position of
paying about $100 million in annual oil and gas tax credits
instead of $600 million or $700 million currently.
3:01:48 PM
Co-Chair Neuman asked what ramifications would occur if the
legislature did not implement the governor's change from
the tax credits to a small loan program. He relayed that
many of the tax credits sunset in January 2016. He wondered
about the cost to the state. He noted that the governor had
vetoed $200 million in tax credits from the budget in the
previous year. He asked how many tax credits had been
applied for to date, the cost to the state, and the time in
which they would need to be paid.
Commissioner Hoffbeck responded that in terms of
applications almost the entire $500 million had been paid
out to date. Most of what would come in now would not be
due until FY 17. He estimated that there would be about
$700 million in credits in the current year. He reported
that only a few of the credits expired in FY 16 including
the exploration tax credit. They were only a small fraction
of the total tax credits being paid. The largest credit was
the net operating loss (NOL) credit which would remain in
the program due to the discussions the administration had
with companies that felt that NOLs were critical in moving
forward. The administration had put other provisions in the
tax credit reform bill that would limit the amount of
credits that could be cashed in and by whom. The idea was
to limit the outflow of state funds while still allowing
for the NOL credit to exist. The smaller credits were
expiring.
Co-Chair Neuman remarked that he wanted the information on
record.
3:04:00 PM
Representative Gara suggested that when discussing tax
credits the governor was primarily focused on tax credits
for new oil for companies that did not make a profit. He
relayed that companies that made a profit received a
different type of tax credit: a deduction. He relayed the
prices at which companies were paying the profits tax under
SB 21 [oil and gas legislation passed in 2013]. At oil
prices of $70 to $80 per barrel, the oil companies paid a
tax of about 70 percent and at $100 per barrel the tax was
about 20 percent. The percentage would not increase to 35
percent until oil reached about $160 per barrel. No matter
what percentage companies paid, they were getting a 35
percent deduction for all of their capital and operating
costs; the deduction was essentially a tax credit. He
wondered why the administration did not look at changing
the deduction. He asserted that the state was trying to
save money on tax credits. He wondered why the
administration was only targeting small companies, rather
than asking the larger companies to help solve the state's
budget deficit.
Commissioner Hoffbeck explained that the administration
left the NOL credit of 35 percent intact, essentially
leaving a balance in place where the smaller companies
received a 35 percent credit while developing their fields.
Representative Gara commented that legislature was trying
to decide what the state could and could not afford. He
reported that when he paid his income his deduction rate
matched roughly his income tax rate. He continued that in
most income tax systems the deduction was about the same as
the income tax. He thought the state had a very generous
provision that was costing it a significant amount. He
suggested that Exxon, Conoco, and BP were paying a 20
percent tax and receiving a 35 percent deduction for
capital costs. He wanted to understand how the situation
was sustainable when the state was trying to balance the
budget.
Commissioner Hoffbeck thought it was a larger discussion
than the governor wanted to tackle in the current session.
The governor made a conscious decision to ask everyone to
participate, but he did not want to put an excessive burden
on any one particular sector or industry. He had made a
mindful choice that the underlying oil and gas tax credit
reform would not be part of the discussion, only the
credits.
3:07:06 PM
Co-Chair Neuman communicated that the committee would be
addressing the issue when the subject of tax credit came up
at a later time.
Representative Gara remarked that from his perspective,
everyone was not contributing.
Co-Chair Thompson understood that production taxes and tax
credits were being discussed. However, he wanted to make
the point that oil companies paid a 25 percent royalty up
front. Commissioner Hoffbeck corrected that it was 12.5
percent.
Co-Chair Thompson continued that in addition the companies
paid corporate taxes to the state. He hoped to be able to
look at the taxes more in depth at another time.
Representative Gattis asked if the $5.5 billion included
the PFDs, whereas, previous years did not. She concluded
that the legislature was not comparing apples-to-apples.
Ms. Pitney affirmed that she was correct.
Representative Gattis asked where the tax credits that the
governor had vetoed in the previous year fit into the
budget. Ms. Pitney pointed to the chart and explained that
the $5.4 billion in FY 16 included $500 million in tax
credits, which was reflected in the middle yellow bar (on
slide 12); the amount was $73 million in FY 17.
Commissioner Hoffbeck added that the $200 million would be
in the transition fund.
3:09:33 PM
Ms. Pitney reviewed graph on slide 13: "Real Per Capita
Unrestricted General Fund Revenue/ Budget History (2014
dollars Per Person)." She pointed to the size of the FY 17
budget. She drew attention to the dark blue portion of the
vertical bars representing agency operations. She noted the
cost of agency operations was among the lowest in the
previous 30 years. The governor's plan included additional
operating reductions in FY 18 and FY 19. There were
reductions of $140 million in the current year, $50 million
in the following year, and an additional $50 million after
that. She noted inflation increases were planned
thereafter. She explained that statewide obligations were
depicted in light blue and included retirement and
pensions. In FY 17, unlike previous years, there was $700
million in PFDs. The debt service and pension obligations
were past debts as well as credits. She reported the
capital budget being very constrained in the current year
as opposed to growing in high revenue years. There was a
limit to how much the capital budget could be reduced in
the down years. Although the capital budget showed an
increase in the current year, it essentially funded the
same priorities and projects proposed in FY 16 including a
transportation match and deferred maintenance. She reported
that the state had the opportunity of reappropriations in
the FY 16 budget. The state used them in the previous year
and they did not exist. Part of the difference between a
$118 million capital budget in the previous year and $195
million had nothing to do with the projects included.
Instead, it had to do with a lack of reappropriations in
the current year to cover costs.
3:11:50 PM
Co-Chair Thompson relayed he would talk to Ms. Pitney later
about the capital budget. He was handling the capital
budget and had noticed some items that he thought belonged
in the operating budget. Ms. Pitney concurred. There were a
couple of items in the capital budget that LFD believed
should be in the operating budget.
Ms. Pitney advanced to slide 14: "State of Alaska Fiscal
Summary - FY16 and FY17 (Part 1) ($millions)." She noted
that the summary had been used by Mr. Teal the previous
day. She pointed to line 23 titled "Debt Service" and noted
a debt service increase in the governor's FY 17 budget from
$206 million to $436 million. The number reflected a
proposal put forth by the administration for financing the
state's existing and projected retirement payments for the
following 25 to 30 years.
Ms. Pitney scrolled to slide 15: "Pension Payments." She
explained that Mr. Teal had stated that it would be $58
million more in the current year to finance the retirement
system rather than paying the actuarially required
contribution. She noted that the green bar was without
financing and represented the status quo. The yellow bar
depicted a scenario where the state financed the
obligation. She relayed that the administration had asked
its debt manager to look at a structure that left the
state's required payment as flat as possible understanding
the state was headed into a very flat revenue environment.
The idea was to reduce the increase structuring such that
the state was paying the same amount as it was paying in FY
16. Overtime the yellow bar became less steep than the
green bar, but the savings between the two (based on the
actuarial findings) was $1.7 billion. If the state did not
realize the return it anticipated the cumulative savings
could drop to $1 billion in savings. However, the $100
million increase would be avoided in 10 years because there
would not be a revenue structure to follow. The rationale
behind the pension obligation bonds was to flatten it and
to take advantage of the savings.
3:15:28 PM
Representative Wilson asked about the payment into the
pension fund because of the possibility of bonding, aside
from going from $500 million in tax credits to $73 million
in tax credits.
Ms. Pitney responded in the affirmative. She pointed to
line 28 on slide 14. The state went from $262 million to
$48 million in direct payments. There was an offsetting
increase in the debt service column. Between the debt
service increase and the $48 million the total equaled the
level from the prior year.
Representative Wilson thought the $262 million would not
stay constant because the state had more debt. She wondered
if she was correct.
Ms. Pitney answered, "Correct." She added that with
financing the increase would be more gradual and there
would be savings in the long-term. She relayed that six
years out there would be a savings of $60 million and in
ten years the savings would be around $100 million.
3:17:21 PM
Co-Chair Neuman added that he thought there was about $8
billion available in the Public Employees' Retirement
System (PERS) and the Teachers' Retirement System (TRS) and
a debt of about $10 billion, making it 80 percent funded.
He had heard from some of the state financial advisors that
Alaska had one of the best, most stable retirement systems
in the nation. He spoke of the state taking the available
money, investing it into Wall Street, paying the PERS/TRS
debt, and using the remaining profits to fund state
government. He wondered if that was what was being
discussed.
Commissioner Hoffbeck replied in the negative. He explained
that with the particular plan the state would borrow money,
deposit it into the PERS/TRS fund, and allow it to grow.
The state would pay the debt service from GF, essentially
substituting the state's obligation to the retirement fund
for an obligation to debt service. The state was not adding
a new obligation. The state was not placing the money in
the fund where the fund was responsible for paying back the
debt. If the market did not respond the fund would go
backwards. The administration had indicated that no matter
what happened the fund would be better off if it contained
an extra $1 billion or $2 billion. The state would simply
be switching one obligation for another. The state would
achieve savings over time which would benefit the UGF
spending. He added that there was no pulling money back out
of the pension fund.
3:19:28 PM
Representative Gara indicated it was very difficult to
understand. He wondered how far out the state was in
balancing its retirement debt if the current course was
maintained. He wondered if it was 20 years or 30 years or
another number.
Ms. Pitney answered that based on the schedule she had
looked at, the number exceeded 25 years.
Representative Gara disputed that if the timeframe was 25
years, by extending the payments the state would pay a
lesser amount each year. However, the state had been paying
approximately $262 million per year for 25 years. He
reasoned the state could not merely pay $50 million or $60
million for 25 years and reach the same point. He suggested
that the state could not just finance and reduce the amount
that it paid. He did not understand how the state would go
from $262 million per year for the following 25 years to
financing at $60 million per year. He wondered how long the
state would have to pay the debt.
Ms. Pitney reported that the administration had set its
first combined debt service and direct payment at $262
million. She detailed the amount would grow slowly, which
was reflected in the yellow bar on slide 15; by 2030 the
number would be about $400 million. She added that the
green would be at $500 million; if the state stayed on its
current system the green bar would be what the state would
pay every year to meet its obligation. However, if the
state financed the obligation the state would pay what was
reflected by the yellow bar. The difference was the savings
[that would occur] by financing at present for what was a
scheduled obligation for the next 30 years.
3:21:38 PM
Representative Gara asked if the state would still be
paying of $200 million per year. Ms. Pitney responded
affirmatively, adding that it did not increase as quickly
and there was a strong potential for savings.
Representative Gara clarified that the scenario bet on
beating the market. Commissioner Hoffbeck responded that
there had been some work done several years back on the
potential of not beating the market over a 20-year period.
He was still trying to pull the numbers together. He
reported the chance of making less than the state's cost of
debt was within the range of 5 percent and even if it did
make less the difference would be de minimis. He concluded
there was a much greater upside than downside.
Co-Chair Neuman referred back to slide 4. He stated that he
understood the governor wanted to increase revenue sharing
to distribute $60 million per year to municipalities. He
wondered where he could find the related appropriations. He
was aware of $35 million being in the supplemental. He
wondered where the money would come from (another $80
million) in FY 17.
Ms. Pitney indicated that $35 million was circled in red in
the supplemental appropriations section on slide 14. She
reported that the $35 million in the supplemental
appropriation assured a $50 million payout for FY 17. The
intent would be to add $60 million in as an amendment or as
a supplemental in the following year. The administration
did not anticipate paying out $60 million immediately.
Instead, it anticipated a contribution of $60 million each
year that would bring community revenue sharing back to the
$60 million over time. She suggested that it could really
be 4.86 percent rather than 4.8 percent.
Co-Chair Neuman interjected that the figures would be in
the supplemental budget. Ms. Pitney answered that the
supplemental brought the payout amount to $50 million.
Co-Chair Neuman asked about in FY 17. Ms. Pitney responded
that in FY 17 it would be offered as an amendment or as
part of the supplemental budget. The intent was to bring
community revenue sharing to $60 million over time rather
than by the following year.
3:24:22 PM
Co-Chair Neuman clarified that the administration would be
asking for the appropriation through the supplemental
budget. He thought normally it would be an operating
expenditure so the legislature knew what was coming. Ms.
Pitney would suggest putting it in beforehand as an
amendment.
Co-Chair Neuman commented that there were planned
expenditures and he did not feel a supplemental
appropriation should be used.
Ms. Pitney remarked that the administration had addressed
the $700 million in dividends and how that differed from a
comparison standpoint. Her final point pertaining to Mr.
Teal's fiscal summary was shown at the bottom of slide 14.
She detailed that under the governor's plan there was a
deficit of approximately $400 million. She anticipated the
deficit in the following year's budget to be down to about
$25 million. The remaining balance would be reduced in the
FY 19 budget. The two components necessary to close the gap
were continued reductions and time for some of the revenue
plans to take effect. Currently under the governor's plan
there would be an additional draw from savings of $400
million beyond the CBR draw into the Permanent Fund
Protection Act. She concluded her presentation by stating
that without the plan the state's deficit was $3.5 billion.
Co-Chair Neuman addressed the schedule for the following
week. He recessed the meeting to Monday, January 25 at 1:30
p.m.
RECESSED
3:26:56 PM
| Document Name | Date/Time | Subjects |
|---|---|---|
| House Finance - FY17 Budget Overview and 10 Year Plan v1- 1 22 16.pdf |
HFIN 1/22/2016 1:30:00 PM |
|
| HFIN Overview Legislative Packet 01.22.16.pdf |
HFIN 1/22/2016 1:30:00 PM |
|
| OMB HFIN Response to Questions 1-22 & 25-16.pdf |
HFIN 1/22/2016 1:30:00 PM |
|
| OMB HFIN 1-22-16 Response Packet.pdf |
HFIN 1/22/2016 1:30:00 PM |
|
| DOR Response HFIN FY 17 10 yr Plan Overview 1.22.16 Signed by RH.pdf |
HFIN 1/22/2016 1:30:00 PM |