Legislature(2015 - 2016)HOUSE FINANCE 519
02/02/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB245 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 245 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 2, 2016
1:32 p.m.
1:32:55 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:32 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Jerry Burnett, Deputy Commissioner, Treasury Division,
Department of Revenue; John Tichotsky, Chief Economist, Tax
Division, Department of Revenue; Randall Hoffbeck,
Commissioner, Department of Revenue.
SUMMARY
HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 245 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 245
"An Act relating to the Alaska permanent fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska permanent fund;
relating to the earnings reserve account; relating to
the Alaska permanent fund dividend; making conforming
amendments; and providing for an effective date."
1:33:46 PM
Co-Chair Thompson discussed the meeting agenda.
1:35:00 PM
JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION,
DEPARTMENT OF REVENUE (DOR), introduced the bill. He
explained that the bill moved the volatility from oil
revenue stream into the Permanent Fund (fund earnings would
be taken out in a predictable and sustainable fashion) and
changed the way the Permanent Fund Dividend was calculated.
He deferred to his colleague to speak about Alaska's
economy and the benefit of using the bill's revenue
approach to the long-term health of the state's economy.
1:36:27 PM
JOHN TICHOTSKY, CHIEF ECONOMIST, TAX DIVISION, DEPARTMENT
OF REVENUE, discussed his professional background. He
shared that for the past 25 years he had worked in numerous
locations worldwide for the private sector, government, and
as a consultant. He continued to provide information about
his background. He provided a PowerPoint presentation
titled "Alaska Permanent Fund Protection Act: Alaska's
Economic Story" dated February 2016 (copy on file). He
explained that the bill provided an opportunity to
restructure government revenue flows to enable government
to work predictably and stably, which provided fiscal
certainty. He detailed that state agencies, industry, and
the private sector needed fiscal certainty for a healthy
economic environment. He explained that the current
structure could not provide fiscal stability or certainty.
He elaborated that for the past four years he had worked as
the economist with the responsibility of informing the
legislature about what to expect the future of government
revenues to be in order to help plan and budget state
spending. He concluded that it was impossible to predict
revenues that currently went into the General Fund due to
uncertainty. He stated that Alaska in particular was
suffering because General Fund revenues relied on price
volatility of oil. He relayed that four years earlier oil
had been $112 per barrel coming off the North Slope and
Cook Inlet. At present, the price was about $30 per barrel.
He continued that the price of oil would be even more
difficult to predict in the future. He believed that given
the uncertainty, Alaska needed a structure with the ability
to harness the uncertainty to the state's benefit.
1:39:27 PM
Representative Wilson asked if the committee was hearing
about specific legislation or about why a bill was needed.
Co-Chair Thompson replied that DOR Commissioner Randall
Hoffbeck and Attorney General Craig Richards would present
the bill later in the presentation.
Mr. Tichotsky explained that the bill would move the price
and revenue volatility from the budget to the Permanent
Fund, provided a stable sustainable draw for government
spending, and provided a dividend derived from resource
revenues that would be connected to the resource economy
(the primary engine for economic growth in Alaska). The
bill would result in fiscal and economic certainty that had
eluded Alaska for decades. He explained that there would be
a basic building block of predictable revenue in order to
plan for an efficient and right-sized spending plan. He
communicated that there was an "economic playbook" that
could allow the legislature to create a machine where the
flows of revenue matched spending and where the risks were
properly placed to be managed. He furthered that a rational
and scientific approach had been used to construct the
legislation.
1:41:48 PM
Representative Guttenberg remarked that he may not agree
with Mr. Tichotsky's statement about tying the dividend to
resource development and extraction. He reasoned that
resource development and extraction was a roller coaster
ride. He wondered if the department had looked back to
determine what the effect would have been if the state had
been living with the scenario for the past 5 to 20 years.
Mr. Tichotsky replied that the analysis had been done and
would be provided at a later time. He continued to address
the fiscal system and its relevancy to the workings of the
Alaska economy, which he had studied for 25 years. He
explained that the modeling, numbers, and analysis that
went into the bill only made sense in terms of having an
understanding of the overarching framework. He stated that
having a systematic approach based on a rational framework
was not new for Alaska, which he intended to demonstrate
was based on work people had been doing for many years.
1:43:25 PM
Mr. Tichotsky turned to slide 4 titled "Framework for
Economic Analysis." He had learned that many people were
interested in understanding how economies developed,
especially those based on natural resources. He elaborated
that economists had developed a standard economic framework
to explain how the economy worked and grew, which he had
used to understand how Alaska grew. He detailed that the
current framework was based on the work of the Canadian
economist Harold Innis. Mr. Innis had identified items like
furs, fish, and wheat that Canada exported as staples -
resulting in wealth and economic diversification for the
country. Mr. Tichotsky discussed that Alaska's current
staples were oil and financial assets. He detailed that
after WWII a group of economists had created what they
called the "new economic history" related to how regions
developed. The group had added concepts including
quantification and the multiplier mechanism, and worked to
make Mr. Innis's concept quantifiable and testable. He
referred to concepts like economic-based analysis, regional
forecasting, and impact analysis that had come out of Mr.
Innis's work and had become a standard way to look at the
economy.
1:45:33 PM
Mr. Tichotsky turned to slide 5 titled "Framework for
Alaska Development." Mr. Innis had looked at the 19th
Century economic success of Canada, the U.S., Australia,
and Argentina in terms of how they transformed resource
wealth by rejecting colonial control and adapting a market-
based development policy to optimize wealth for the region
and population. He continued that the export-led economy
provided Alaska with a larger, growing, and more
diversified economy. Additionally, it had provided
political, economic, and social well-being; it also made
the population more productive and wealthier. He noted that
the economists had witnessed the items in the early to mid-
20th Century. He moved to slide 6 titled "Major Strands of
Alaska Development." He moved forward to the late
1950s/early 1960s and highlighted the economist George
Rogers, the founder of the Institute of Social and Economic
Research (ISER). Mr. Rogers had written at least two books
where he had talked about the concept of major strands of
economic development. Mr. Rogers had taken Mr. Innis's
concept and determined that Alaska's economy was dictated
by the booms and busts of the export of various resources.
For example, Russians had come to Alaska to exploit the fur
industry and the Yankee whaling ships had plied the Arctic
waters to harvest whales in order to sell whale oil used
for lamps prior to kerosene.
Mr. Tichotsky addressed the colonial Alaska time-period
that included fur, gold and copper, canned salmon, and
military Alaska. Currently the state was in the oil era
that began in the 1950s, which had been "supersized" in
1969 with the discovery of Prudhoe Bay.
1:47:57 PM
Vice-Chair Saddler stated that it was easy to look back at
history to see that something had to happen a certain way;
however, he reasoned that it did not necessarily have to
happen that certain way. He asked if decisions had been
made that had resulted in Alaska having a resource-based
economy; he wondered who had made the decisions if so. He
asked why the state was not a colony.
Mr. Tichotsky replied with slide 7 titled "Development
Alone is Not Enough for Economic Growth." He detailed that
ISER had adopted a sophisticated version of the concept
started by the economic historians. Individuals like Arlon
Tussing, Brad Tuck, Lee Husky, Scott Goldsmith, Gunnar
Knapp, and others had taken the approach. He discussed that
he had worked with Mr. Knapp and Mr. Tussing and had been
made aware that there was a conscious effort to try to
understand how the economy worked. He shared that Mr.
Rogers had testified in front of the legislature many times
and had acted as an advisor to many Alaskan governors. He
explained that the concept had become part of the narrative
of the Alaska political scene. He agreed that someone had
to put the story together - it was pretty clear that 40 or
50 years in the past the narrative put together by Mr.
Rogers and others had been picked up by policy makers. He
stated that current economists like Mr. Goldsmith and Mr.
Knapp had elaborated on the framework and provided the
numbers and structure.
Vice-Chair Saddler asked if the economic work was passively
describing how the economy had developed. Alternatively, he
wondered if the economists had advocated for how Alaska
should develop.
Mr. Tichotsky replied that it was a bit of both. He
furthered that the economists had tried to identify the way
the economy had developed, in addition to making policy
suggestions. He detailed that in the 1960s and 1970s Mr.
Rogers and Mr. Tussing had provided testimony to the
legislature.
Representative Wilson asked if Mr. Tichotsky intended to
show how Mr. Goldsmith believed the Permanent Fund was
already protected and that his sustainable plan could also
work.
Mr. Tichotsky replied that the information would be
included indirectly. He elaborated that the plan had not
been developed by DOR, the Department of Law (DOL), and
administration in a vacuum. He explained that his
interaction with Dr. Goldsmith had shaped the way he
thought; they viewed things within the same framework. They
debated some issues as economists, but the ultimate view
and the decision to restructure the fiscal plan was shared
universally by economists in the state.
1:52:37 PM
Representative Wilson observed that Mr. Tichotsky was
providing a history lesson. She wanted to make sure to
include other strategies that could be used. She remarked
that the state was already protecting the Permanent Fund.
She wanted the presentation to include a whole picture on
the options and to include several slides showing what Mr.
Goldsmith believed.
Mr. Tichotsky answered that he would touch on the question
throughout the presentation. He continued with slide 7 and
explained that Mr. Rogers had discovered that development
alone was not enough; the viewpoint had also been held
prior to and immediately after statehood. Mr. Rogers had
brought examples forward including the Kennecott Mine (the
largest copper mine in the world at the turn of the century
and largest population of any settlement outside of
Southeast) - after the mineral stopped being produced in
the late 1920s there had been no lasting growth. He added
that Kennecott Mine was currently "a hole in the ground
with some abandoned buildings." The second example was
related to fish traps where revenue flows were controlled
by outside owners and economic growth within the state had
been curtailed. He explained that the situation had
prompted the move to statehood. He stated that to grow the
Alaska economy, the political structure and local economy
needed to control the resource and have a policy to guide
economic development.
Co-Chair Thompson remarked that the presentation was meant
to provide a background for the bill.
Mr. Tichotsky shared that the administration believed it
was important to demonstrate that the bill had been crafted
within a context of considering the history, understanding
basic economics, and looking towards the future. He
referred to Vice-Chair Saddler's question about how to use
economics to be able to craft a policy looking forward.
Mr. Tichotsky moved to slide 8 titled "Policy and
Governance." He stated that policy and governance that had
come out of the economic view were not unimportant.
· Comparative advantage in oil and gas
o Export-led growth
o Engine of economic growth
· Market-based economy
· Rule-based, democratic government
· Capture economic rents and revenue
o Taxation as sovereign
o Royalty as owner
Mr. Tichotsky shared that there were other issues of policy
and governance that had come out of the time period. Some
looked at strategies to deal with "white elephants" and
opportunity costs - how to use the dollars gained from
export economic growth to increase economic growth. He
quoted former Governor Jay Hammond as saying "you don't
plant dollars to harvest nickels." He explained that Alaska
had saved surplus revenue in the Permanent Fund and other
funds, which had been revolutionary at the time.
1:57:16 PM
Mr. Tichotsky continued that at the same time there had
been a debate about whether the Permanent Fund should act
as an investment fund or a development bank. The decision
had been made to structure the fund as an investment fund
and the investments were almost exclusively located outside
of Alaska; the investments reaped the benefits from global
economic growth and brought revenues back to the state.
However, it had been recognized that there was a need for
developing the state and its economy, which was addressed
by independent agencies that could address economic change
domestically (e.g. Alaska Industrial Development and Export
Authority (AIDEA), Alaska Housing Finance Corporation
(AHFC), and the Alaska Municipal Bond Bank Authority). With
opportunity costs, Alaska realized it could not buy a
balanced economy; at the time, it had been an issue that
was outstanding. He elaborated that there had been regions
and countries that decided they could rebuild everything
once they had created economic wealth (e.g. Soviet Union).
Having a desire to have a balanced economy and to not
receive the gains of trade was a policy decision that
needed to be made; Alaska had made the policy decision that
it was easier to trade for the benefits or goods it needed.
One of the results was that Alaska's economy was not as
diversified as it could be and it did not have grand
examples of white elephants [opportunity costs]. He
concluded with slide 9 and relayed that the state
distributed part of its resource wealth to the population
as dividends, which was not done by any other sovereign
wealth fund (with the exception of an experiment done in
Mongolia).
1:59:39 PM
Representative Wilson pointed to slide 9. She believed the
presentation left out a major component associated with the
slide's bullet point about distributing part of the state's
resource wealth. She believed that government was intended
to get a certain percentage of the resource wealth for
General Fund spending, while the remaining portion went
into the Permanent Fund for constituents. She stated that
there was a reason the funding had been split into two
parts. She detailed that a portion went to General Fund
spending and the other portion benefitted Alaskans given
that they did not own the subsurface rights. She elaborated
that the dividend was a payment to residents for their
portion of the oil royalties. She believed the plan under
the bill basically looked like government thought its share
was not large enough and that it should take a portion of
the people's share. She noted that soon there would be a
conversation about why it would be good or bad to utilize
the funds for government as well.
Mr. Tichotsky believed the observations framed some of the
discussions that would take place related to the bill. He
stated that there had been significant thought put towards
the issue.
Representative Wilson wanted to ensure that constituents
understood that the conversation was about their share of
the resource wealth because the government's portion had
been used.
Mr. Tichotsky turned to a production history and forecast
chart (from 1977 to 2025) related to the North Slope on
slide 10 [mistakenly labeled in the presentation as slide
9]. He noted that he had shown the chart to the committee
for the past four years as part of DOR's fall revenue
forecast. He explained that the chart showed the importance
of Prudhoe Bay as a single resource. The chart showed that
Alaska continued to have a competitive advantage for oil
and gas, but it was greatly diminished relative to the
past.
Co-Chair Neuman spoke to his problem with the chart on
slide 10. He pointed to a flat-line in revenue forecasts
around 2019 and 2020, which subsequently began dropping at
a pretty good rate. He remarked that people who had not had
the discussion previously would not know that. He observed
that the department did not know what was going to happen
in the future and he doubted that oil production would drop
100,000 barrels in five years (from 2020 to 2025).
Mr. Tichotsky replied that he had included the chart
because of the past conversation. He explained that the
modelling done for the legislation was based on the DOR
forecast of production (included in the chart on slide 10).
He expounded that the forecast was admittedly conservative,
but it was realistic in the sense that it was backed up
with actual resources. Additionally, it reflected status
quo, investment, and effort. He added that there was an
upside that could be released through technology, market
conditions, industry decisions, and government policies.
There was a potential of monetizing gas on state land, in
addition to more oil - including heavy oil and shale - on
state land. He elaborated that there was potential for oil
and gas on federal and private land. He pointed to the
National Petroleum Reserve Alaska, Alaska National Wildlife
Refuge, and offshore resources. Many of the opportunities
had existed for decades and still showed great potential;
however, converting potential to reality was exactly the
heart of what uncertainty is. He explained that the
department had taken the approach that it was not prudent
to determine a budget and sovereign wealth fund draw
without taking the uncertainty into account.
2:05:02 PM
Vice-Chair Saddler asked for verification that the
[production history and forecast] chart on slide 10 it was
the mean case from the department's 2015 fall revenue
forecast. Mr. Tichotsky responded that the forecast portion
of the chart reflected the mean case.
Vice-Chair Saddler clarified that he had meant production
forecast.
Mr. Tichotsky continued to address slide 10. He explained
that the production shown was bankable; the revenues that
would come from the conservative base were bankable. He
explained that it was not possible to bank on some of the
other projects "be they quite desirable or quite
prospective."
Co-Chair Neuman remarked that the goal was to produce
information that was as accurate as possible in order for
the public to understand. He did not believe the chart was
accurate and that no one knew what the number would be. He
stated that the decline over the past year had leveled off
substantially. He believed that people could look at the
chart and determine that the administration wanted to
convey that the state could not continue to "kick the can
down the road" and that the administration wanted to
convince the public that the bill needed to pass in the
current session because the amount of oil production was
going to drop. He did not believe it was an accurate
presentation of the facts.
Mr. Tichotsky stated that the chart on slide 10 showed a
median case, which he had used to introduce the concept.
During the course of the information outlined in the
presentation the department would present a significant
amount of modelling. He clarified that there was one model
(with two aspects) the department had developed for the
case. One was the core aspect that was deterministic in
nature; the means showed a single pathway of what the
future could be depending on what variable was used. The
other way the department would look at the issue - which
was a common way to look at investment returns and
calculate annuities - was with probabilistic modelling. He
detailed that the probabilistic modelling included a
realistic range of several variables, which addressed the
problem outlined by Co-Chair Neuman. There would be a
probabilistic distribution of production, oil price, and
investment returns. He explained that the distributions of
the three variables drove the fiscal system and the
economy. He concluded that the department would focus on
the issue.
2:08:59 PM
Mr. Tichotsky moved to slide 11 titled "Economic and Policy
Patterns":
· Before 1960 - Statehood and resource control
· 1960s and 1970s - State establishes basic system
over oil revenues and creates Alaska Permanent
Fund in 1976 Rapid economic growth
· 1980s - increasing oil production, changes in oil
price Economic expansion followed by contraction
· 1990s - oil production begins to decline, changes
in oil price Economic expansion, some
diversification, contraction
· 2000s - production declines, but commodity prices
increase Slow, steady economic growth
· 2015 - Production continues decline, commodity
prices collapse between 2014 and 2015
Mr. Tichotsky elaborated on slide 11 and noted that he had
moved to Alaska in 1988 and had been one of the first
people who came to the state after the economic decline. He
recalled hearing stories about people losing their homes
and jobs and leaving the state. He remarked that in the
2000s there had been fiscal opportunities - revenues had
been flowing into savings and the General Fund. However,
between 2014 and 2015 commodity prices collapsed
dramatically.
Mr. Tichotsky turned to slide 12 titled "Alaska Budget is
Heavily Reliant on Petroleum Revenue." The chart showed
petroleum revenue as a percent of Unrestricted General Fund
(UGF). He explained that in most cases the General Fund
relied on oil revenues for over 80 percent of its funds. He
remarked in years that looked to be improving with 60 or 70
percent petroleum revenue, it was not because the economy
was becoming diversified or there were economic sectors
able to provide revenue; it was just because prices were
low and there was less revenue that the state was stuck
with a non-oil based revenue that was relatively stable.
2:12:42 PM
Mr. Tichotsky addressed slide 13 titled "US Resource-Rich
States," which showed the percentage of real gross state
product in constant dollars for Wyoming, Alaska, West
Virginia, Oklahoma, and Texas. He explained that during the
development of the bill the department had looked at what
was going on worldwide and around the county. The states
included on the chart reflected the country's resource-rich
states. The chart also showed oil and gas production and
mining as a share of the states' economies. He pointed out
that Alaska dwarfed other resource-rich states with the
exception of Wyoming. He noted that Wyoming and the other
states (excluding Alaska) were integrated within the
economy of the Lower 48. The level of diversification the
other states had was far greater than Alaska; Alaska was by
far the most dependent state on oil and gas revenues.
Mr. Tichotsky addressed one of Alaska's competitive
advantages on slide 14 titled "Alaska's Financial Assets."
The chart showed the Permanent Fund balance, which had
basically doubled in the past 15 years despite dips and
bumps in the road. He relayed that the one thing the state
could bank on was its financial assets that were large and
were finally large enough to make a difference. He stressed
that financial assets and their revenues acted like a
reverse Prudhoe Bay; the revenues could be harvested and
the assets continued to grow. He stressed that financial
investments were the ultimate renewable resource. Unlike
underground oil and gas resources, financial assets were
already monetized and contained no risk that they may not
be monetized. A large part of the financial plan focused on
financial assets for that reason and was driven by the
economic analysis.
Representative Wilson wondered why the state was not
looking at living within its means. She referred to the
charts and times when oil had dipped down and reasoned that
if the state had kept the standard instead of increasing
spending with oil to have a sustainable budget. She
wondered why using the "other pot of money" outlined in the
legislation was more important to the administration than
the state living within its means. She noted that people
had to live within their means in their own homes.
2:15:57 PM
Mr. Tichotsky replied that the question was foreshadowing
where he was headed in the presentation. He discussed that
one of the issues the state had was that it engaged in pro-
cyclical spending (i.e. roller coaster spending). He moved
forward to slide 22 titled "Alaska Pro-Cyclical Spending."
He explained that the situation occurred when there was a
significant amount of money, it was spent, and the
situation wound up overheating the economy through
government spending. The opposite was also true during
economic downturns. He explained that in times when Alaska
did not have as much resource revenue, the contraction went
the other way. He detailed that the state doubled down on
the times when revenue contracted, which further contracted
the economy. Alternatively, when there was significant
petroleum revenue coming in, there was more government
spending and the economy was overheated. The volatility and
the volatility in the budget that drove the pro-cyclical
spending was the issue. The department had worked to
determine the magic number the state could sustainably draw
from savings (from financial and other assets). Once the
answer was known, it could determine what the state could
sustainably spend. He furthered that there was a method
that could link sustainable spending to understand the
sustainable number that could be drawn.
Representative Wilson remarked that Mr. Tichotsky was going
in the opposite direction from her question. She stated
that he was trying to determine how much money could be
taken from all of the different sources and how it would be
spent. Alternatively, she believed the state could have
determined a sustainable budget four or five years earlier
(to $4.5 billion, $4 billion, and lower) based on the kind
of government it wanted. She thought he was suggesting
using revenue to determine budget. She thought the state
should determine the right size of government first, what
it was constitutionally mandated to do, and then look at
its resources. She stated that there may actually be too
much revenue at present being spent on more than was
needed.
2:19:32 PM
Mr. Tichotsky noted that Representative Wilson had raised
two issues. The first was related to how Dr. Goldsmith and
others at ISER were looking at the sustainable spend, which
was based on the nest egg approach. The one difference
between what Dr. Goldsmith did with petroleum and
investment assets (related to the production number the
presentation used) was that Dr. Goldsmith believed the
state should be able to keep in mind that it would have
potential revenues coming in from projects in the long run
(e.g. ANWR or other large-scale project) - from there he
pulled back the number to determine the sustainable draw.
The department focused more on the financial assets because
it looked at production with a more conservative approach.
He noted that ISER and DOR came up with essentially the
same number and scale. The ISER modeling was in many ways
analogous to DOR's method. The second issue was that from
the perspective of an economist or business person there
were two sides to the equation (i.e. supply and demand);
there was a balancing act that had to occur between supply
and demand in a household or other. He furthered that a
business had to consider how much money it could make and
how much money it wanted to spend. He noted that when
defining issues such as living within means it was
important to know what the revenues were. He addressed
times of surplus and discussed that someone could identify
what they needed to spend and what they wanted to put into
savings for spending at a later time or further investment
savings in the form of a trust fund or annuity. He
explained that individuals used the same process at home
with checking, savings, and retirement accounts; the
spending depended on what was needed. For example, Alaska
had invested in infrastructure, primarily on a pay as you
go system, which many regions did not do (many regions used
debt financing). There were many ways to look at how money
was spent, but it was important to structure and know where
revenues were and what could sustainably be drawn and how
to predictably know what spending was. One of the key
issues of the legislation was that it took away volatility
(risk and uncertainty) and placed it in a location where
they could be very well managed.
Representative Wilson requested to hear from Dr. Goldsmith
again. She did not believe his statements from the past few
years were being interpreted correctly by the department.
She stated that if the goal was to look at all models it
would be helpful for the committee to hear from him.
Representative Munoz believed the restructuring of the
Permanent Fund into a sovereign wealth fund would provide a
sustainable draw similar to the earnings on the Permanent
Fund as it was currently structured. She wondered about a
sustainable draw using the current framework of the
Permanent Fund.
2:24:45 PM
Mr. Tichotsky replied in the affirmative. He relayed that
the committee would hear several presentations associated
with the topic. The department had defined the sustainable
draw as follows - if an amount of money was drawn annually
with annual increases for inflation it would not undermine
the real value of the fund within a certain period (they
had selected a 24-year period). He continued that the real
value of the fund would be maintained the same over the
period of time and the draw would be increased with
inflation. The number was about $3.3 billion per year based
on the model and assumptions worked out by the department.
Representative Munoz asked about the current structure. She
wondered what the sustainable draw would be under the
current structure.
Mr. Tichotsky replied that the bill looked to operate
without a constitutional change. He detailed that an annual
$3.3 billion draw from the earnings reserve was
sustainable; the money all came from the same pie whether
it was used to fund the dividends or government. Under the
current formula 50 percent of the earnings reserve went to
the dividend program.
Representative Munoz asked for verification that the
sustainable draw was the same under both models and was
$3.3 billion.
Mr. Tichotsky answered in the affirmative. He explained
that when developing an annuity the question would be how
much could be drawn indefinitely. The answer in the state's
case was $3.3 billion.
2:27:39 PM
Mr. Tichotsky moved to slide 16 titled "Alaska - One of the
Wealthiest Regions in the World." He referred to a
presentation to the committee from Malan Rietveld from the
previous week (the source of the charts on slide 16 was Mr.
Rietveld). He pointed to the left chart showing assets
under management in billions for various countries
including Norway, Abu Dhabi, Saudi Arabia, Kuwait, and
others down to Alaska. Alaska's $54 billion fund was
dwarfed by funds like those in the other listed counties.
He moved to a chart on the right showing the size of assets
relative to the budget and explained that a different view
was immediately achieved. He detailed that on a per capita
basis, Alaska was probably one of the wealthiest regions in
the world. He turned to slide 17 titled "Moving Alaska to a
Safe Harbor," which included another chart from Malan
Rietveld related to oil's percentage of revenue and the
fiscal break-even price. The left axis [y axis] showed the
oil price required to balance the budget and the bottom
axis [x axis] showed oil's share of total government
revenue. Mr. Rietveld had addressed why a group of
countries like Norway, Alberta, and Wyoming were in a more
desirable or stable place than Alaska. The answer was due
to the locations' highly diversified economies. He
furthered that it would probably take Alaska a decade or
more to achieve diversification at the same level as
Wyoming. He pointed to economies without diversification
such as Qatar, Kuwait, Abu Dhabi and other. He stressed
that Alaska had the ability to join the "winner's circle"
within a short time period of one year. He believed it was
an important takeaway from Mr. Rietveld's slide.
Vice-Chair Saddler asked if anything in the work done by
Mr. Innis or Mr. Rogers presumed that a resource-based
economy could not be diversified. He referred to
constituents who often asked why the state's economy was
not more diverse. He remarked that oil had paid so much of
the state's budget for a long time period and there had
been some unsuccessful efforts to force diversification. He
wondered if having a single commodity-based resource
economy precluded anything other than that commodity and
financial management. For example, he wondered if Norway
had telecommunications and agriculture and whether Alberta
had petrochemicals and other. He wondered if Alaska's
resource-based economy model precluded diversification
other than financial assets.
Mr. Tichotsky replied that the reality was the state was
not diversified for several reasons. The state had found
that it was better off to trade for what it needed rather
than to develop the industries at home. Places like Norway
were located in the old world and had an economy upon which
diversification was brought. He emphasized that Alaska was
one of the 20th Century regions of recent settlement; apart
from the Alaska Native population, the additional
population came to Alaska after the 1850s and mostly in the
20th Century. He addressed the strategy the state needed to
follow next, with the knowledge that it was an
undiversified economy. Diversification was desirable and
worth pursuing, but it took a long time. He believed the
important thing to do at present was work to stabilize the
state's economy. He stressed that the one way to achieve
diversification and investor confidence was to have a
stable economy.
2:32:59 PM
Vice-Chair Saddler reiterated his question about whether
having a resource-based economy precluded having any other
diversification other than fiscal assets.
Mr. Tichotsky replied when an economy was developing and
looking for an investment it was prudent to focus on the
areas it was competitive. Alaska was competitive in oil and
gas, minerals, fish, tourism, and money. There may be some
areas that the state could diversify into that were not yet
known. Possibly in telecommunications technology that took
away the state's geographic disparity. He reasoned that
Alaska was isolated and had and there were a limited number
of things where it was easy to generate revenues.
Co-Chair Thompson asked Mr. Tichotsky to work towards
wrapping up the presentation.
Mr. Tichotsky addressed the "natural resource curse" on
slide 19. He detailed that resource-rich countries were
poorer, had slower economic growth, and no lasting wealth.
He explained that the administration would like to avoid
the resource curse. He discussed price and revenue
volatility on slides 20 and 21. He relayed that revenue
volatility had recently been discovered by economists to be
the "quintessential feature of the resource curse" due to
the concept of pro-cyclical spending. He explained that
when there were a lot of incoming revenues more was spent
in the economy and subsequently state spending drove and
overheated the economy. The opposite is also true, an
absence of revenues wound up contracting government
spending and there was a doubling down on economic
stability. He expounded that the situation created
institutional and political instability, economic growth
was difficult, it was hard to plan development and attract
outside investment, and the well-being of the population
was difficult. Additionally, the risk of destabilizing
savings was increased. During times of budget deficit
savings were used and depleted (savings were treated as a
checking account rather than an investment fund or
retirement annuity), which undermined social stability.
Mr. Tichotsky returned to slide 22 and shared that history
demonstrated Alaska practiced pro-cyclical spending with a
vengeance. He noted that the R-Square values on slide 22
were a statistical way of showing the state had pro-
cyclical spending. He moved to slide 23 titled "Volatility
- A Systemic Issue." He explained that price volatility
lead to oil revenue volatility. Volatility drove its way
through the economy until it created general instability,
which was one of the reasons the legislation had been
created.
2:37:08 PM
Mr. Tichotsky addressed slide 24 titled "Where is Long-term
Volatility Good?" He detailed that financial institutions
looked at volatility when they created portfolios - stable
assets were included, but growth and value were really
derived from volatile revenues. He furthered that when
looking for volatility, investors looked for inexpensive
assets that would appreciate in a portfolio. He explained
that it made sense to manage volatility in an investment
fund where the professionals were used to mitigating the
dis-benefits of volatility and maximizing the benefits. He
stated that the worst place to manage volatility was in the
General Fund. He explained that it meant doubling down the
risk to the General Fund and when volatility was combined
with other risk (i.e. political risk or other), the risks
were magnified. He relayed that the bill worked to manage
and mitigate risk. He furthered that the volatility risk to
Alaska did not go away; the question was about where to put
it. He explained that the bill would move the volatility
from the General Fund into the Permanent Fund.
Mr. Tichotsky addressed items that an effective fiscal
framework needed to include on slide 25. He explained that
the work DOR and DOL were doing was not something they were
doing in a vacuum. He furthered that the rest of the world
and resource-rich countries were facing the same dilemma.
He detailed that in October 2015 the International Monetary
Fund (IMF) had focused its efforts on the problem facing
resource-rich countries caused by the collapse of commodity
prices. He expounded that the IMF had the ability to look
historically at the regions and regions where policy errors
had been made that were suffering consequences.
Additionally, the IMF could show the decisions made by some
of the winners or people successful in mitigating risks.
The IMF had established four basic recommendations for
resource-rich countries facing the commodities collapse.
First, it recommended creating economic macro-stability by
saving money and building financial buffers. He noted that
Alaska had taken that step through the Permanent Fund and
other savings measures; however, without restructuring, the
state had the opportunity to lose the benefits and the
ability of the buffers. He furthered that it would be
extremely destabilizing for the economy if savings were
depleted without a long-term plan or understanding the
scale of the potential draws. Alaska had also engaged in
pro-cyclical spending in the good and bad years. He
explained that the state needed spending that was just the
right size, which was addressed by the bill.
Mr. Tichotsky explained that secondly the IMF had looked at
the concept of increasing revenue stability by improving
the taxation of resource and non-resource sectors.
Co-Chair Neuman asked if the information on slide 25 came
from the IMF. Mr. Tichotsky replied that the information
had been sourced directly from the IMF website and included
the generic recommendations the organization had made to
all resource-rich countries.
Representative Gara addressed the forms of revenue put into
a sovereign wealth fund. He furthered that as proposed the
sovereign wealth fund that would lead to ten years of the
lowest level of school funding, infrastructure spending,
and renewable energy spending in the past decade, was not a
"be all and end all." He believed the real issue was what
resources were going to be put into the fund. He stated
that on its own the fund would not do anything without
knowing what resources would be put in. He reasoned that it
was the level of funding put into the fund that would
determine the stability of the economy. He submitted that
continuing to flat-fund education did not constitute a
stable economy. He asked for verification that the elements
of the revenue sources going into the fund more or just as
important as the concept of the fund itself. He reasoned
that a fund could spin off so little income that no economy
would remain.
Mr. Tichotsky responded that it would be great to have a
Permanent Fund that was over $100 billion. He detailed that
if the savings were generated over time and the fund grew
to that amount, the state could easily draw about $5
billion and the state would probably not be having a fiscal
crisis. At the current point, investment revenues could
only produce what they could produce. He noted that it
would have been great to save more in the past, but the
second best time to take action was at present. The
restructuring would enable a sustainable spend in years
where oil prices were low and resources revenues,
production, and development did not come. He addressed
Representative Gara's question about what kind of revenues
the administration wanted to put in the Permanent Fund. He
explained that the goal was to place the volatile revenues
in the Permanent Fund.
Mr. Tichotsky concluded his remarks on slide 25. He spoke
to stability of revenues and relayed that in a non-
diversified economy, the non-resource sector and a small
population base made it difficult to generate sizable
revenues; therefore the investment revenues were important
to the future sustainability of the state. He addressed
better use of resources and affirmed that spending
efficiently was a major part of a total fiscal package. He
noted that the topic needed further discussion. The fourth
point on slide 25 related to an effective fiscal framework
was the need for strong institutions, which included
improving medium-term planning and investments and having a
rules-based system that had some certainty. He addressed
fiscal certainty and believed the bill solved the issue of
volatility for Alaska - it moved the volatility in the
budget to the Permanent Fund, provided a stable draw to the
General Fund at a sustainable scale, and it moved the
dividend where it could be connected to the resource
economy. He and the other economists in Alaska (in addition
to other economic experts) believed it was the kind of
action that needed to be taken to regain fiscal and
economic certainty and stability that had eluded the state.
2:47:53 PM
RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE,
provided a PowerPoint presentation titled "Alaska Permanent
Fund Protection Act" (copy on file). He discussed that the
governor's plan had some basis in what was considered to be
the proper way of dealing with sovereign wealth funds. He
communicated his intent to "drill down" into how it fit
within the legislation.
Representative Edgmon felt that Commissioner Hoffbeck's
comments were a bit of an understatement. He stated that
creating a sovereign wealth fund in the next one to two
years would be a historic moment and was on par with the
Permanent Fund that had been created in the 1970s and with
big decisions on oil taxes. He stressed that it was not
merely a theoretical discussion. He observed that it was a
turning point in Alaska's history, where it could no longer
depend on oil. He recalled the former Department of Natural
Resources (DNR) commissioner Dan Sullivan prefacing the
conversation on SB 21 [oil and gas production tax
legislation passed in 2013]. He furthered that Mr.
Tichotsky had properly framed the historical significance
of the discussion. He noted that many people doubted the
fund would be established in the current year; he believed
it would be the following year. He implored the governor's
team to put more emphasis on the historical nature of the
discussion.
2:50:25 PM
Commissioner Hoffbeck shared his intent to address how the
administration had arrived at the plan it had put forward.
He informed the committee that the administration had
started working the process in two ways. They had looked at
the standard tools that government always had at its
disposal including what it could cut in the budget, where
it could achieve new revenues, and what it should do in
years one, two, and three. Additionally, the administration
had worked to determine how much Alaska's sovereign wealth
could be used to balance the budget. He referred to various
discussions in newspapers about how much of the government
could be funded by the state's wealth. As the
administration had worked through the process, it had
determined that both of the processes only got them part of
the way there. The state could get to a balanced budget
with cuts, savings, bringing in new revenues, and leaving
everything in the silos they were currently in (spent the
way they were always spent); however, the solution did not
take volatility out of the system. One of the things the
administration had heard clearly from the private sector
was that volatility in government spending inhibited
private sector investment; the private sector wanted to see
some kind of stable platform of government spending. When
the administration had looked in depth at funding
government with the sovereign wealth model, it had found
that the model could not generate enough revenue on its
own. Therefore, the separate considerations had begun to
merge together into the plan in front of the committee.
Commissioner Hoffbeck furthered that the sovereign wealth
model could function to provide a systematic, rules-based
way of using the state's wealth, as opposed to a haphazard
expenditure of the state's wealth and spending down faster
than it could accommodate. The administration also had to
look at additional spending reductions and new revenues.
The three items together created the "new sustainable
Alaska" plan - the three components each had a set of bills
associated with them. The sovereign wealth fund fell under
the Alaska Permanent Fund Protection Act, which was
included in the bill before the committee [HB 245]. The
budget bill dealt with spending reduction areas, and there
were a whole series of new revenue tax bills that had been
introduced. The current meeting would only focus on the
Alaska Permanent Fund Protection Act - a methodology for
using the state's sovereign wealth and taxes from oil and
gas and other minerals to create a stable cash flow for
funding government.
2:54:10 PM
Commissioner Hoffbeck addressed slide 4 titled "The New
Sustainable Alaska Plan." He detailed that under the plan
the state would still have very low taxes, continue the
dividend, grow savings at a rate of inflation or higher,
maintain most of the state's public services, and money to
invest in the future. He noted that the items would all
continue, but at a different level than at present. He
turned to slide 5 titled "Alaska Permanent Fund Protection
Act" and addressed the bill's three components:
1. Sustainably draw from the Earnings Reserve
2. Minimize oil price volatility on the General Fund
3. Adjust the dividend
Commissioner Hoffbeck turned to slide 7 titled "Defining
the Problem." He addressed the short-term, medium-term, and
long-term problems going forward and relayed that all three
problems needed to be solved. The short-term problem was
the drop in oil prices. He elaborated that it was necessary
to determine how to handle the short-term problem
immediately - there was currently a $3.6 billion to $3.8
billion budget shortfall in the current year that needed to
be taken care of. The medium-term problem was that if
nothing was done the state's savings would be spent in the
next four to five years, which would take away an asset
that could be used efficiently to help fund government
going forward. The resulting budget hole would
substantially damage Alaska's economy. He did not want to
fall off the edge of the cliff, which he did not think
would occur - there were many different proposals to
consider. Additionally, dividend payments were not
sustainable under the status quo. He detailed that
currently there were counter-cyclical dividend payments
where the largest dividend payment in the history of the
state was paid at the time when the state's economics were
worse than they had been in a very long time or ever. He
explained that the dividend needed to flow with the economy
of the state.
2:57:08 PM
Representative Wilson referred to Commissioner Hoffbeck's
statement about status quo and remarked that no one at the
table thought the state could continue its current level of
spending. She asked if Commissioner Hoffbeck meant the
dividend was unsustainable if spending was maintained at
the current level. Alternatively, she wondered if
Commissioner Hoffbeck meant that the dividend would still
be unsustainable if the budget were reduced to a
sustainable level.
Commissioner Hoffbeck answered that status quo meant using
the current formula to calculate the dividend that was tied
to the investment earnings from the Permanent Fund. He
stressed that no matter what the state did to address the
problem, the dividend formula would change if Permanent
Fund earnings were used. He explained that a Percent of
Market Value model or any other model would require the
dividend to be calculated in a different way. He furthered
that some of the money currently paid in the dividend needed
to be incorporated within a sustainable draw in order to
come to a level of draw that worked for sustainable
government. He stated that it was a balance of the numbers.
He concluded that the dividend needed to be smaller to get
to a sustainable draw.
Representative Wilson asked what percentage the
administration was proposing to cut as part of its plan.
Commissioner Hoffbeck replied that the current budget
contained $100 million in cuts to agency spending and $400
million to oil and gas tax credits. The long-term plan
included another $50 million in cuts in each of the next
two fiscal years. The governor was proposing a total of
about $600 million in cuts.
Representative Wilson stated that the administration was
really only looking at increasing revenue and not at
spending, which would keep government at status quo. She
did not believe the same message was coming from the
legislature.
Vice-Chair Saddler replied that the governor had promised
16 percent cuts during his campaign. He discussed that a
deficit could be filled by new revenue or less spending. He
wondered what had happened to the promise of 16 percent
cuts.
Commissioner Hoffbeck deferred the question to Pat Pitney,
Director, Office of Management and Budget, Office of the
Governor. He relayed the governor was working towards the
cuts that he believed would create a stable economy and
that reflected the desires of the people in terms of the
services they wanted to see delivered. The cuts on the
agency side were fairly substantial, but he did not have
them on hand.
3:01:02 PM
Representative Edgmon wondered why the changes had to be
made in the current year. He wondered why there was not
time to get the consent from the rest of the state that may
or may not think the proposal was a good idea. He asked
about the rush.
Commissioner Hoffbeck replied that it would have been
better if the proposal had been implemented two years
earlier - the state was already late to the game. There
were three components that changed the math within the
equation: how much the state was spending, the size of the
dividend, and whether any new revenues could be introduced.
The idea of how the state used its existing wealth was
really just about which pot of money the funds came from
(e.g. Constitutional Budget Reserve or Permanent Fund
earnings). He furthered that the dynamic did not create the
critical nature. The critical nature was related to the
other three components. First, how much the state was
paying out in dividends. He detailed that the more the
state paid out in dividends, the more it took from savings;
currently the state was paying everything with savings.
There was essentially no oil and gas tax revenue in the
current year at the low oil prices and the Permanent Fund
was showing negative earnings on investments for the
current year. Second, how much the state could decrease the
size of government in order to reduce spending. Third,
whether new revenues could be introduced into the system in
order to avoid relying entirely on savings. He explained
that part of what made the proposed plan work was the
return on investments from the savings; the smaller the
amount, the lower the sustainable draw became, which meant
the need for either more cuts or more revenues. He
concluded that the sooner the action was taken, the better.
Representative Edgmon surmised that it was more about
opportunity costs versus the absolute necessity of having
to take action in the current year from a mathematical
standpoint. He reasoned that the state had savings to carry
the state over into the next year, which was a non-election
year. He believed they had the ability to take the issue
out to voters to explain why the dividend would be cut in
half, that the construct of the Permanent Fund program
would be changed, and why the sovereign wealth model was
the best for future generations of Alaska. He believed the
change was inevitable, but he struggling with the fact that
the political gap needed to be traversed. He had not heard
a compelling reason the change needed to occur in the
current year.
3:05:09 PM
Representative Guttenberg referred to a comment made about
the governor's promise to cut the budget further. He had
appreciated the effort the governor had put into the issue.
He also knew there were promises made by legislators in the
committee room on taxation to achieve 1 million barrels per
day out of the pipeline, which people knew was factually
impossible. He wondered how long it was sustainable to make
cuts and take $3.5 billion from the Permanent Fund. He
stated it should have been done the past year. He furthered
that the preceding year the legislature had not had the
excuse of it being an election year; they had been aware
that a crisis was coming, but they did not know the price
would drop as significantly as it had. He remarked that
some people were saying it should not be done in the
current year because it was an election year. He stated
that maybe the legislature would get to it next year, but
maybe not, and then people would say it was another
election year. One of the rationales he had heard for
taking action sooner rather than later was that the current
higher level of assets would be more sustainable instead of
spending savings down and not being able to achieve a
sustainable rate of return in the future. He asked if the
rationale was accurate.
Commissioner Hoffbeck answered in the affirmative. He
detailed that the more the state spent down its existing
assets, the less it would have to create a sustainable
draw. He explained that if the payout of the dividend was
not changed, substantial cuts were not made, and no new
revenue was generated in the current year it would equate
to about $100 million less in the sustainable draw. He
elaborated that it would mean a base that was $100 million
lower, which would carry through the state's life. The more
the of the state's assets that were spent, the less money
the state would have as it moved forward with a sustainable
draw.
Co-Chair Neuman asked about the monetary value of taking
action in the current year as opposed to the next year.
Commissioner Hoffbeck answered that it was probably in the
range of $100 million to $200 million per year on the
sustainable draw [if action was not taken until the
following year].
Co-Chair Neuman surmised that there would be no monetary
impact if the budget could be reduced by $200 million in
the current year. He reasoned that the action could be put
off for two years if there were cuts totaling $400 million
in the current year. His concern was making sure the public
understood the action.
Commissioner Hoffbeck answered that the assumption was that
some, if not all, of the cuts would be made anyway. He
explained that it did not necessarily change the math in
the long-term. He noted that it would balance in the short-
term, but there would still be a lower sustainable draw
going forward.
Co-Chair Neuman asked the department to provide modelling
to show the difference between taking action in the current
year versus the following year. Commissioner Hoffbeck
agreed.
3:09:37 PM
Representative Gara did not think it was useful to discuss
what budget cuts had been discussed in the past. He
believed the governor had probably made a mistake when he
stated he would cut the budget by 16 percent. The current
legislature passed a bill aiming for 10 percent savings. He
stated that most of the committee members had voted for
that legislation. He surmised the governor had room to call
the legislature out on the issue. He reasoned that the
conversation would not be productive. He assumed that half
the legislature had campaigned on increasing oil
production, which had not occurred. He was done with the
conversation. He was also done with the conversation about
continuing to cut more and more. He supported taking action
sooner rather than later. He spoke to a scenario where
there was not legislative support to do the fiscal plan
until the following year. He reasoned that the state would
still have savings, but that was not what would cause a
recession. He believed a recession would occur due to
excessively steep cuts that laid off people and cut grants
that would ripple into the private sector and negatively
impact retail, restaurants, and other. He asked if he was
correct that excessive cuts would result in a recession.
Commissioner Hoffbeck agreed that one of the
administration's larger concerns was cuts that were too
draconian would have a ripple effect through the economy.
Representative Gattis believed that if action was decided
on in the current year, further cuts would not be made once
revenues backfilled the deficit. She addressed the belief
that a recession would come if further cuts to government
were made. She countered that the private sector was
already making the cuts, which would result in a dip in the
economy. She stated that everyone was tightening their
belts. She thought it was insulting to Alaska to not take
government cuts. She believed making the cuts was doing the
right thing for Alaskans. She stressed that if government
was not cut, it would continue backfilling and taxing
Alaskans to keep growing government. She remarked that cuts
were not the complete answer, but they were a part of it.
She opined that if government was not cut, the state would
continue backfilling and would continue taxing Alaskans to
keep growing government. She stated that there was a large
number of individuals who believed the cuts needed to be
made in order to prevent backfilling. She was adamant that
due diligence should be done on the bill prior to
backfilling government with revenue. She wanted to do the
right thing for Alaska for the long-term. She reiterated
that the private sector was laying people off.
3:14:10 PM
Representative Munoz relayed that she had recently met with
former Representative Bill Hudson. She discussed that when
he had been in the legislature the state had been facing
similar fiscal issues, but the deficit was not nearly as
large. At that time, the legislature had close
conversations with former Governor Jay Hammond in an
advisory role. Representative Hudson had relayed that
former Governor Hammond recognized that excess earnings of
the Permanent Fund would at some point be used to help with
the funding of state government, but that the dividend
should not be decoupled from the earning power of the body
of the account. She struggled with that aspect of the
proposed plan, which would tie the dividend to the royalty.
She reasoned that under the scenario at some point in the
future the dividend would not be available to future
generations. She referred to Mr. Tichotsky's testimony that
the sustainable draw from the current framework and the
sovereign wealth model was $3.3 billion. She asked if the
department had looked at formulating a plan that would use
excess earnings and the sustainable target of $3.3 billion
and possibly recalculate the dividend based on a formula
similar to the one used at present. She believed it would
get the state significantly closer to closing the deficit
without reprogramming the entire system.
Commissioner Hoffbeck answered that the department had
looked at many different options. The current option had
been adopted from a proposal by Senator Lesil McGuire [SB
114]. He had initially thought her proposal was "too clever
for its own good," but as the department worked through it
he had realized there was substantial logic to tying the
dividend with the economic vitality of the state. He
furthered that when things were going well, the dividend
would be larger, but when things were going poor, the
dividend would be smaller. He relayed that the concern
about decoupling the dividend from the Permanent Fund
earnings had been expressed by others as well. He
communicated that the administration was not attached to
its proposed way of treating the dividend; the proposal
worked and fit in the plan, but if some dynamic could be
created where the dividend was pro-cyclical with the
economic health of the state (higher in good times and
lower in bad times), the administration was willing to look
at other ways to calculate the dividend.
3:17:35 PM
Vice-Chair Saddler referred to a remark by Representative
Wilson that cutting the budget was as much of a legitimate
part of the discussion as new revenues from a sovereign
wealth fund. Based on Mr. Tichotsky's presentation, he
observed that stability had never really been a driving
force in Alaska's economy. He reasoned that the state had
been fairly comfortable to ride the booms; a significant
amount of money had been made on the volatility. He asked
if the end of addressing the state's fiscal gap justified
the means of using the Permanent Fund earnings. He asked if
the administration would have brought the proposal forward
if there was not a budget problem.
Commissioner Hoffbeck did not believe the administration
would have brought the proposal forward if there was a
balanced budget with oil revenues. He reasoned that crisis
brought change. He elaborated that he believed the state
"had been headed here eventually. I think we just got here
a lot quicker than when we expected." He noted that even in
the last years of the prior administration when oil had
been $110 per barrel, the state had already been fighting
with deficits (in the $1 billion range at some point in
time). He concluded that the Walker Administration was
dealing with the hand it was dealt.
Vice-Chair Saddler wondered why the action had to be taken
at present. He understood the value of the proposal and
reasoned that it may have been good to take action 2 to 10
years earlier; however, he had not heard the compelling
case why it had to happen in the current year as opposed to
1 to 2 years in the future. He addressed volatility and
noted that the state had saved money during high revenues
and had spent the funds during periods of low revenues. He
continued that the situation persisted. He reasoned that it
was not the most advisable of situations, but
mathematically it did work out for additional time.
Commissioner Hoffbeck answered that the department would
follow up with numerical data.
Commissioner Hoffbeck moved to slide 8 titled "Short-Term
Problem." He discussed that in 2008 the state was bringing
in almost $11 billion between petroleum and non-petroleum
revenues; currently the state was bringing in less than $2
billion. He noted that a swing that dramatic was difficult
to deal with - it made long-term planning and budgeting
challenging. He moved to slide 9 titled "Medium-Term
Problem." The slide demonstrated that there were earnings
that continued to be generated from the Permanent Fund even
if "we fall off the fiscal cliff." He detailed that if the
state used all of its savings prior to making any type of
sustainable balancing plan, the state would continue to
have $2.5 billion to $3 billion available for government
spending. The current spend was about $5.2 billion to $5.4
billion. He stressed that it was a substantial cut and
would leave the state with a dramatic decline in services
provided.
Commissioner Hoffbeck moved to slide 10 titled "Long-Term
Problem." The slide showed that the state had been chasing
oil prices up and down over the years. The state's fiscal
plan had been fairly simple - it had mandated saving 25
percent of the Permanent Fund royalties and had saved more
than 30 percent because more money had been deposited from
some fields. The strategy had worked and had resulted in a
$50 billion savings account; however, the state never
really had a plan for what to do with the money - it had
paid dividends, inflation proofed, and saved the remainder.
Additionally, any money remaining at the end of the year
had been swept into the Constitutional Budget Reserve
(CBR). He detailed that the function of the CBR had been to
take care of short-term ups and downs in available
revenues, but it had never been intended to deal with the
type of deficit currently facing the state that would last
for multiple years (it was not large enough to provide that
option). The state had used the remaining funds to chase
oil prices up and down.
Commissioner Hoffbeck furthered that some of what the state
had been chasing in the past no longer existed; production
was only one-quarter of what it had been at its peak - it
had been on decline since the 1980s. Current production was
about 500,000 barrels per day, which should be fairly
constant for the next several years before starting to fall
off. He detailed that at the current level of production
the state needed oil prices of $109 to $110 per barrel to
balance the budget. He explained that due to technology
changes with shale oil and other things, the numbers did
not appear to be viable in the immediate future. He
expounded that it did not appear the state would even have
the option of chasing the oil price up to get to a balanced
budget; therefore, a different plan was needed. In the
past, price and production had bailed the state out; at
present the state had its wealth. He elaborated that the
Permanent Fund generated $2 billion to $3 billion per year
in statutory net income that could be used for things other
than paying a dividend and inflation proofing.
3:24:38 PM
Representative Wilson discussed that the state's
constitutional delegation and founders had believed that at
some point the entire state would be organized in some
fashion (i.e. city, second-class borough, or other). She
asked whether a solution would be for boroughs to organize
in order to get services they wanted if the state could no
longer pay for things outside its constitutional mandate.
Commissioner Hoffbeck was aware that several mandatory
borough bills had been introduced in the legislature on
several occasions with the idea of increasing local self-
support. He relayed that the strategy alone was not
sufficient. He agreed that it would help balance some of
what the state was funding versus what was funded locally.
He elaborated that most of the state's unincorporated areas
did not have a large economic base and did not have the
ability to generate a substantial amount of income for
local services.
Representative Wilson clarified that she was not stating
the legislature should mandate anything. She believed the
whole point of the constitution was to enable local
governments to provide things outside of the state. She
reasoned that there was currently no reason for areas to
become boroughs because they had to pay more for schools
and other items; there was currently no benefit unless
communities wanted to tax themselves more and receive less
state funding. She explained that Fairbanks, Juneau,
Anchorage, Mat-Su, Dillingham, and others had already made
decisions that they wanted more than the state provided.
She reasoned that because the state provided all of the
services [beyond what was constitutionally mandated] that
there was no advantage for areas to take on any more
responsibility. She wondered if more organization would
occur on its own; towns would have to decide whether they
wanted a service or not. She questioned why local
governments would choose to pay if the services were
provided for free by the state. She believed the strategy
was another option that was not currently being considered.
She remarked that there were counties in the Lower 48 that
had chosen to offer services beyond what the state could
give them.
3:27:42 PM
Co-Chair Neuman asked for an explanation of R-Square value
(slide 10). Commissioner Hoffbeck answered that it was a
measure of how much of the variance in the data points
could be explained for a line (on a graph). He detailed
that the best line was fitted to data points and the R-
Square value showed how much of the variance was explained
by the line. He addressed the graph on slide 10 and assumed
that the line for oil price had been plotted against
spending and had determined that most of the spending could
be equated to the oil price.
Co-Chair Neuman the department to follow up on precisely
how the data had been achieved on slide 10.
Representative Gara remarked on Commissioner Hoffbeck's
gracious and calm demeanor before the committee. He noted
that sometimes there were terms used in the building that
everyone started using. He requested that the commissioner
and others refrain from using the term "final solution."
Commissioner Hoffbeck replied that Co-Chair Kelly had made
the same request earlier in the day.
Commissioner Hoffbeck moved to slide 12 titled "The
Commodities Roller Coaster." He addressed that the IMF had
done a study of 85 economies over a period of three decades
and had found that government spending in commodity-based
economies tended to move up and down with commodity
revenue. The IMF had also determined that pro-cyclical
government spending (moving up and down with a commodity)
tended to stunt economic growth. Additionally, the IMF had
found that stabilizing fiscal policy had the inverse
effect, which could increase gross domestic product by 0.3
percent annually. He relayed that there was some logic for
government spending at a time when the rest of the economy
was declining because it tended to stabilize the economy.
He acknowledged that it was difficult politically, but it
did make economic sense.
Commissioner Hoffbeck turned to slide 13 titled "Break-Even
Oil Price." He relayed that countries such as Norway,
Kuwait, and Abu Dhabi that had been able to diversify their
revenue streams had a much lower dependency on oil;
therefore, they had a lower breakeven oil price. Alaska
fell in the range with Russia and Saudi Arabia and was not
nearly as bad as countries that had not saved revenues
well.
Representative Edgmon observed than none of the locations
on the chart paid a dividend (slide 13). Commissioner
Hoffbeck answered that he did not believe so. He noted that
dividends could come in many different ways and many of the
countries provided substantial subsidies for services.
Commissioner Hoffbeck addressed slide 14 titled "Alaska: In
the Middle":
Alaska lacks
· Revenue diversity
· Fiscal rules to address pro-cyclical spending
But, like Norway, Kuwait, and Abu Dhabi, Alaska has
· A large sovereign wealth fund
· Proven experience with rule-based fiscal policy
· An independent investment authority
Alaska has a cash flow problem, not a wealth problem.
Commissioner Hoffbeck elaborated that the state needed to
develop revenue diversity, some of which would come with
economic diversity. He detailed that some revenue diversity
came in other forms of taxation outside of the oil and gas
industry, which currently carried 90 percent or more of the
load. He discussed that the state had been able to maintain
the dividend program purely as a legislative rule; the
money had always been available for appropriation to fund
government services. The Permanent Fund money had been used
to pay a dividend, inflation proofing, and savings. He
discussed that the Alaska Permanent Fund Corporation (APFC)
ran independently from the legislature, governor, and
administration. He stressed the importance of maintaining
that independence. He noted that the proposed bill included
components honoring that independence because they did not
want to be in a situation where APFC started making bad
investment decisions because they had to fund something on
the government side.
3:34:30 PM
Co-Chair Neuman referenced conversations he had with
Commissioner Hoffbeck and others about preventing a
situation where the Permanent Fund board ended up managing
the Permanent Fund for the sole purpose of funding state
government as opposed to growing the fund in order for
Alaskans to have a higher dividend. He had communicated
that his problem with having administration cabinet members
holding APFC board positions was that he did not believe
the members could stay autonomous. He clarified that he had
not known the House speaker [Representative Mike Chenault]
was going to introduce a bill on the concept; his
statements had nothing to do with that. He stressed that
under the current administration there had been some
serious problems with the Alaska Gasline Development (AGDC)
Corporation board interference in the past. He referred to
challenges with confidentiality and explained that the AGDC
board chair had to get permission from the attorney general
to look at confidential information. He reiterated his
concern and wanted to ensure that the boards could maintain
their autonomy under the current and future
administrations.
Representative Wilson wondered if the committee would hear
a presentation on the bill during the current meeting.
Co-Chair Thompson replied that the presentation would
happen at a subsequent meeting.
Commissioner Hoffbeck answered that the presentation was an
excerpt of the first 14 slides of a longer presentation.
Representative Wilson voiced her preference to hear a
presentation on the bill.
Vice-Chair Saddler asked if financial asset management was
the only way to reduce volatility in a single commodity-
based economy. He remarked that it was one potential way to
expand from oil to oil and financial management. He
wondered if there was another path forward to a less
volatile and more diversified economy other than financial
asset management. For example, he asked if the state could
be just as advantaged economically if it was to invest in
something counter-cyclical to oil.
Commissioner Hoffbeck answered that the state had limited
tools at its disposal. Other states largely dependent on
oil and gas also had more diversified economies and a tax
structure associated with the diversified economy so that
as certain components grew, money also went into the
treasury. He believed the only large lever the state
currently had at its disposal to deal with the deficit was
the use of its investment earnings. He discussed that there
had been efforts to diversify the state's economy for
years, but it was a heavy lift and the state was far from a
significant number of things.
3:39:33 PM
Vice-Chair Saddler surmised that it was necessary to have
significant discussion on attaining the right mix of
things. He was not saying the administration was wrong, but
he believed it was a fair question to ask. He remarked that
the strategy may be the state's only diversification tool.
HB 245 was HEARD and HELD in committee for further
consideration.
Co-Chair Thompson addressed the agenda for the following
meeting.
ADJOURNMENT
3:40:27 PM
The meeting was adjourned at 3:40 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB245 - Alaskas Economic Story (Feb 1 2016 SSA).pdf |
HFIN 2/2/2016 1:30:00 PM |
HB 245 |
| HB245 - Sectional (Feb 1 2016 HF).pdf |
HFIN 2/2/2016 1:30:00 PM |
HB 245 |
| HB245 Sponsor Statement - Governor's Transmittal Letter.pdf |
HFIN 2/2/2016 1:30:00 PM |
HB 245 |
| HB 245 - Alaska Permanent Fund Protection Act Powerpoint (Feb 1 2016 HF).pdf |
HFIN 2/2/2016 1:30:00 PM |
HB 245 |