Legislature(2015 - 2016)HOUSE FINANCE 519
02/16/2016 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB303 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 303 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
February 16, 2016
1:33 p.m.
1:33:40 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 1:33 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Steve Thompson, Co-Chair
Representative Dan Saddler, Vice-Chair
Representative Bryce Edgmon
Representative Les Gara
Representative Lynn Gattis
Representative David Guttenberg
Representative Scott Kawasaki
Representative Cathy Munoz
Representative Lance Pruitt
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Charisse Millett, Sponsor; Senator Lesil
McGuire, Sponsor; Jesse Logan, Staff, Senator Lesil
McGuire.
SUMMARY
HB 303 PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
HB 303 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson discussed the meeting agenda.
HOUSE BILL NO. 303
"An Act relating to the Alaska Permanent Fund
Corporation, the earnings of the Alaska permanent
fund, and the earnings reserve account; relating to
the mental health trust fund; relating to deposits
into the dividend fund; and providing for an effective
date."
REPRESENTATIVE CHARISSE MILLETT, SPONSOR, shared her
viewpoints regarding the concept of the bill. She related
that the companion bill was SB 114 (Perm Fund: Earnings,
Deposits, Accounts) introduced by Senator Lesil McGuire.
She pointed to Representative Mike Hawker's point of market
value legislation [HB 224 State Planning & Budget; Perm
Fund; PFD], Governor Walker's Sovereign Wealth Fund
discussion and fiscal plan legislation and her and Senator
McGuire's legislation, all dealing with restructuring the
Permanent Fund Dividend (PFD) and declared that each
concept had merit. She felt that the ideas were worthy and
important discussions for Alaskans. She acknowledged that
conversations concerning the Permanent Fund were sensitive.
She commended Governor Walker for introducing the Sovereign
Wealth Fund concept and for starting the dialogue. She
offered that the companion Senate bill introduced by
Senator Lesil McGuire contained innovative ideas and
confronted the fact that the state's budget was predicted
on the price of oil and the projected pipeline flow rate.
The bill viewed Alaska's resources in a much different way.
She understood that the bill may not be the one chosen
through the legislative process but maintained that the
legislation furthered the dialogue and contributed to the
process. She believed that the PFD provided Alaskans the
opportunity to participate in the owner state and they came
to rely on their portion of the natural resource wealth as
part of their income. Consequently, the concept was not an
easy conversation to engage in. She shared that she thought
"a lot about what the solution would look like." She
reasoned that at some point, all of the ideas would make
sense to the legislature and worried more that no plan
would be adopted. Her fear of doing nothing was greater
than her fear of engaging in a conversation regarding
restructuring the Permanent Fund. She had taken a tempered
and measured approach to all three plans introduced on the
topic in the current session.
1:40:29 PM
Representative Millett reiterated that the PFD concept was
a difficult conversation, but she believed the legislature
was on the path to "righting the ship." She spoke to the
great opportunity in Alaska and her desire for continued
prosperity for future generations. She believed the
dialogue was appropriate given the gravity of the current
financial situation facing the state. She stated that doing
nothing would be incredibly dangerous and thanked the
committee for the opportunity to address the bill.
1:42:11 PM
SENATOR LESIL MCGUIRE, SPONSOR, commended Representative
Millett for her leadership on the bill. She shared her
thoughts regarding the House of Representatives. She spoke
to the risk of putting the legislation forward due to the
sensitivity of the topic. She stressed that discussing a
different approach for use of the Permanent Fund brought
forth significant emotional responses from Alaskans. She
spoke to the importance of working on the issue of how the
state managed its budget. She related her past experience
as a new legislator and her surprise that the "entire state
budget" was so dependent on the oil commodity and the
direct correlation between the price of oil, amount of
throughput and the size of the budget. She learned that
other lawmakers had considered the budget dependency on oil
and put forth similar bills that were considered in the
past. She presented a PowerPoint presentation titled:
Reducing the Deficit: Investing Alaska's Vast Cash
Reserves."
1:47:07 PM
Senator McGuire addressed slide 2 of the legislation:
The Permanent Fund and the Dividend
· November 1976-Voter Approved Constitutional Amendment
Creating the Permanent Fund
· 2/21/1977-9thLegislature
Created Permanent Fund thru CS to SS to HJR 39
· -to convert a part of the depleting petroleum asset
into a permanent and sustainable financial asset-
(Goldsmith, 2002)
· Zobelv. Williams (Argued: 10/7/1981, Decided:
6/14/1982) US Supreme Court
HELD: The Alaska Dividend distribution plan violates
the guarantees of the Equal Protection Clause of the
14th Amendment
· 1982 The first Permanent Fund Dividend
Created by a statutory overlay on the constitution
(signed into law 4/16/1980)
Senator McGuire expounded that approximately $50 billion
was currently in the Permanent Fund and no provision in HB
303 removed the constitutional protection of the fund's
corpus. She mentioned thoughts around why the legislature
created the Earnings Reserve Account (ERA). She voiced that
the intent was to deliver dividends to certain Alaskans.
The goal had been to reward long-term, pioneering Alaskans
so they would become more intimately connected with the
value of the fund and share in the value of its subsurface
rights. Subsequent to the Supreme Court decision, every
citizen of Alaska was subject to a minimal residency
requirement of two years or more in order to receive a PFD.
1:52:33 PM
Senator McGuire addressed slide 3:
Is there a Problem?
A $3.5 - $4 billion deficit
· The legislature has enacted heavy spending cuts over
the last 2 years
· The state has several savings accounts, but
· We cannot wait and hope for high oil prices
· The price of inaction now could be disastrous for the
state's future
Senator McGuire believed that "it was important to
manifestly change the volatility of the state's dependence
on oil and structurally reflect that in statutory changes
to the Permanent Fund." She stated that contrary to popular
opinion the legislature recently enacted heavy budget cuts
of almost $1 billion that impacted important programs. The
cuts facing the state during the current session were much
more serious and would affect individual Alaskans in all
areas of public services. She stressed that state savings
would be gone in two years.
Senator McGuire turned to a graph titled "Alaska's Fiscal
Situation This Year (FY 16)" on slide 4. She appreciated
the simplicity the slide brought to a complex issue. The
blue bar depicted the state's total expenditure level of
$5.2 billion. The black bar represented the state's revenue
of $1.062 billion. She referred to the state's $3.6 billion
from savings shown in the red as necessary to help pay for
expenditures. She moved to slide 5:
"The Five Stages of Grief":
· Denial
· Anger
· Bargaining
· Depression
· Acceptance
Senator McGuire relayed personal experience with the
stages. She discussed the experience of each of the stages
as a legislator in relation to the state's fiscal crisis.
She highlighted slides 7 and 8 both titled "Status Quo" in
relation to the cost of inaction. On slide 7 the graph
depicted a large fiscal deficit extended out into the
future without taking action and voiced that doing nothing
was "dangerous." She addressed slide 8 and cautioned that
without adopting any of the proposed fiscal plans, the
graph depicted the end of the dividend program in FY 22
under the status quo. She pointed to the delineation of FY
19, FY 20, and FY 21 and communicated that in those fiscal
years the state would spend down the Constitutional Budget
Reserve (CBR) and other funds and arrived at the point
where only the PFD ERA was left. The legislature would have
to choose between funding government and paying a dividend.
2:01:38 PM
Representative Wilson contended that every presentation she
attended on the fiscal crisis based information on "doing
nothing." She offered that the plan of action needed to be
determined and that the legislature was aware of the
situation. Senator McGuire agreed with the statement. She
believed that the issue may have gotten lost in the news
cycle. She noted that the House was taking the historic
step to only focus on the budget issue. She was attempting
to provide a baseline for comparison about where the state
would be if nothing was done. She pointed out that some
people still believed that it was possible to receive a
dividend and not make a structural change and wanted to
relay the opposite message to the public.
Representative Edgmon pointed to slide 5. He shared that he
had also been using the same talking points in his office.
He believed most legislators vacillated between depression
and acceptance; whereas, constituents vacillated between
denial and anger. He felt that legislators were tasked with
"bridging the gap" and help constituents understand the
issue. He applauded the sponsors for coming forward with
the legislation.
Representative Gara believed that Senator McGuire's views
on doing nothing were "fair." He stated that if the state
did not also raise revenues the deficit would not be
solved. He stressed that it was necessary to consider every
option. He understood the frustrations regarding the
publics' lack of knowledge of the $1 billion in budget cuts
that were already enacted and felt that action was
imperative.
2:06:22 PM
Senator McGuire turned to slide 9 also titled "Status Quo."
She relayed that she would begin using the term "status
quo" as opposed to "doing nothing," which she felt was
"vernacularly charged." She pointed to the bar chart
showing the CBR and General Fund (GF) revenues in blue and
the ERA in green, both equaled about $7 billion each. She
explained that both of the funds were available for
spending by the legislature without a constitutional vote.
The CBR required a three-quarters vote and the ERA required
a simple majority vote. If the status quo continued, by FY
18 the CBR would be drained and the legislature arrived at
the point of deciding whether to issue a PFD or fund
government.
2:09:22 PM
Senator McGuire addressed slide 10:
A Path Forward
We need a plan to address the problem.
In crafting this plan I had these principles in mind:
The solution needed to:
1. Retain a dividend
2. Reduce the volatility in the state budget
3. To clearly expose the size and cost of government
-so that downward pressure would ensure that
Alaskans could begin an honest assessment of
needs vs. wants
4. Be enduring to allow maximum use of our wealth
over generations so that benefits and burdens are
shared
5. Be Simple and Easy to implement
Senator McGuire announced that the bill was completely
created by her and her staff, with assistance from
economists, reviews of previous similar legislation, the
Legislative Finance Division (LFD), and specifically David
Teal, Director, LFD. She stressed that "no outside group
that is not elected created this plan." She spoke of the
various elements she focused on when formulating the fiscal
plan. She felt that it was imperative that a plan retained
a dividend and her bill offered the only plan that
guaranteed a $1,000 dividend. She believed it was important
to retain the dividend because the program was created by
the ninth Alaskan legislature to "hand out dividend checks
to share the wealth of our subsurface rights that are non-
renewable resources with Alaskans…" and to connect the
public to the Permanent Fund and its value. In addition,
she remarked on the economic disparity between rural and
urban Alaska and noted that the "dividend had been factored
in as people's income," which affected people's livelihood.
She related personal experience regarding receiving her
first permanent fund dividend check and her family's
decision to save the checks for each sibling's future. She
shared her father's feelings about the creation of the PFD.
He believed the decision to pay dividends was the worst
thing that had ever happened to the state because of the
dependency it would create. However, she strongly believed
the dividend program must be maintained.
2:16:34 PM
Senator McGuire continued to address slide 10. She declared
that a plan had to address reducing the volatility in the
state's budget. She delineated that commodities by its
nature were volatile and value was created through
"perception" and that oil cartels like Oil Producing and
Exporting Countries (OPEC) played a role in driving the
price of oil. She stated that planning a state's budget
based on a commodity price was a "terrible way" to balance
a budget. She revealed that the bill was not a complete
solution; it dealt with one part of the state's largest
asset but did not define the adequate size of government.
She believed that point 4 on the slide was the most
important of all of her stated principles. She reasoned
that in order to keep building the state and preserve
wealth over generations the ERA should be taken off the
table and shared into the future instead of being spent.
She warned that if the legislature did not adopt the
legislation or something similar the principle in item 4
was not attainable. She shared that she voted for a POMV
bill as part of a bipartisan coalition in the House in
2004, which the Senate failed to adopt and that if adopted,
the state would be financially stable today and the PFD
would have been relatively unaffected. She read the quote
on the slide by Albert Einstein, "If I had one hour to
solve a problem, I would spend 55 minutes thinking about
the problem and 5 minutes thinking about the solution."
2:20:05 PM
Representative Kawasaki thanked the sponsors for presenting
the bill. He addressed Senator McGuire's comment that no
one else was responsible for the legislation. He referenced
a talking points memo on SB 114 distributed by Ben Sparks
on behalf of the American Federation of Labor and Congress
of Industrial Organizations (AFL-CIO) president Vince
Beltrami and General Communications Incorporated (GCI)
President Ron Duncan and wondered why it was available [in
the backup packet for SB 114 - available on BASIS]. Senator
McGuire explained that she had introduced the legislation
the past April prior to interim to allow a dialogue to
develop around SB 114. During the interim the Governor
assembled a 35 member panel of Alaskans to address the
fiscal crisis. She was contacted by Mr. Duncan last August
and relayed that he had been a constituent years ago. After
finding her bill in a packet of fiscal options distributed
by the governor, Mr. Duncan requested meeting with the
Senator and offered his assistance. She weighed whether to
enlist his help launching a public relations campaign
promoting the legislation. She could not remember a single
major issue in Alaska that was not decided without private
sector groups weighing in. She thought it would be helpful
to hear from a diverse group of Alaskans and suggested
picking a politically neutral woman to lead a group. She
continued that in the meantime, GCI and AFL-CIO formed a
group to promote the idea of solving the deficit and
examined all of the fiscal plans.
2:25:27 PM
Senator McGuire continued that the talking points were
widely distributed by the group as part of their
educational campaign and she was not associated in its
authorship. She was not sure how the document received its
title listing the specific names. She suggested that many
private entities typically weighed in and wanted to
influence the dialogue on legislation. She emphasized that
"the bill was home grown." She welcomed that the group
promoted dialogue and disseminated information about SB 114
and the other fiscal plan bills.
Representative Kawasaki thought that the title created
perception that SB 114 and HB 303 was their bill. He
understood that many lobbyists were being hired regarding
the issue. He wanted the public to understand that his vote
would not be influenced by a lobbyist.
Representative Millett declared that a bill that she
sponsored or supported "rose to the top" on the merits of
the bill and she wanted to have her statement on the
record. She restated that she sponsored HB 303 solely on
the bill's merit.
Senator McGuire shared that her staffer Jesse Logan worked
arduously with her on the bill and was a resource for any
legislator with questions.
2:31:50 PM
Representative Gattis voiced that she remained undecided,
but she appreciated the conversation. She thought that
"everything should be on the table." She looked forward to
hearing more about the bill.
Vice-Chair Saddler appreciated the passion and the solution
Senator McGuire was offering and for placing the issue in
"context." He requested more details about the legislation.
Senator McGuire briefly mentioned slide 11:
What HB303 IS NOT
It is NOT
•A Raid on the Permanent Fund
constitutional amendment
Reserve Account
•A way for Government to increase the Budget
•A Dividend Killer
Senator McGuire briefly addressed slide 12:
What HB303 IS
It IS
•A way to connect Alaskans directly to their share of
the Natural Resources
•A way to protect your dividend into the future
•Without a structural change, the dividend will go
away in a few short years
•A way to ensure that services you enjoy continue to
be provided
•Police (public Safety)
•Firefighters
•Roads
•Education
•Health and Human Services
•The Marine Highway
•Parks and Recreation
•Fish and Game management
Senator McGuire voiced that the slide emphasized that every
Alaskan depended on government in some way. She highlighted
slide 13 titled "Impacts of Selected Options for Reducing
the Deficit by $100 million Job Loss" authored by Gunnar
Knapp, Director, University of Alaska Anchorage's Institute
of Social and Economic Research (ISER) for the publication,
Alaska Business Monthly 2016. She summarized that the graph
depicted that every job had a value associated with it and
job loss impacted the economy.
Vice-Chair Saddler pointed to slide 13 and endorsed the
information on the graph as the best metric to measure the
impacts from the various deficit reducing options and
encouraged everyone to read the article.
2:34:09 PM
Senator McGuire agreed with Vice-Chair Saddler. She skipped
slide 14. She underlined slide 15:
HB 303 Spending Limitations? Volatility in Commodity Prices
•The Legislature could consider some of the following
to reduce volatility:
o Language that says "FY(x) appropriation cannot
exceed 110% or 120% of previous years draw" -
can pick a number.
o POMV could be a range of % depending on
returns, oil tax revenue, cash flow needs,
capital project outlays, etc…
o i.e.-POMV could equal 2%-8% to fill the budget
deficit, "whichever is less"
· Can create an overall spending cap
Senator McGuire related that she welcomed ideas and
amendments regarding a spending limit and felt one was
necessary.
Senator McGuire moved to slide 16:
A $3.5-4Billion Deficit-volatility in Commodity Prices
We have seen this before for decades
Oil Price x Volume = State Budget
This has been Volatile and Unstable
We have been saved in the past by rebounding oil
prices
What is different today is:
We no longer have the volume
(oil would need to be over $108bbl to balance the
budget)
Einstein said "We cannot solve our problems with the
same level of thinking that created them."
Senator McGuire skipped slide 17. She turned to slide 18
that depicted 2 graphs that were a mixture of a variety of
graphs that illustrated the actual price of oil and the
forecasted price of oil for West Texas Intermediary (WTI)
and Brent oil prices. She reported that the graphs
demonstrated that predictions were "always wrong" and the
difficulty in forecasting commodity prices.
2:37:44 PM
Senator McGuire briefly moved to slide 19 which portrayed
another graph showing the actual price of crude oil
provided by the United States Energy Information
Administration (USEIA).
Co-Chair Neuman asked what the oil price the bill was
predicated on was. Senator McGuire replied that the price
of oil was an "amalgamation" of approximately $30 per
barrel. She stated that she could consider a model based on
$50 per barrel. She explained that there was a
"probabilistic" method and an "actualistic" method to
employ in the calculation and she chose the actualistic
way. A model of the plan developed by a private group made
calculations based on different variables. Co-Chair Neuman
asked what numbers the presentation was based on.
JESSE LOGAN, STAFF, SENATOR LESIL MCGUIRE, replied that the
models in the slide deck were produced by LFD based on
Department of Revenue (DOR), Revenue Source book data.
Co-Chair Neuman asked whether the DOR data was $50 per
barrel. Senator McGuire deferred to Mr. Logan. She
clarified that when she began modeling for the bill the
price of oil slid from $52 to $30. She added that the
governor employed a probabilistic model and she chose to
use the actual based on the Revenue Source book.
Mr. Logan expounded that the governor's model employed the
probabilistic economic model that provided a range of
probable outcomes and a variable percentage on the
likelihood of the outcome happening. He stated that the
bill employed the "deterministic" model used by LFD for
budgeting purposes. Ultimately, the numbers in the model
presented at the end of the slide deck were derived from
the Revenue Source Book. Co-Chair Neuman wanted to know
what value for the price was used because the price was
directly connected to the evaluation of the "effects of the
budget deficit" employed in the bill's model. Senator
McGuire stated that the model had been a "moving
conversation" and when in comparison to other fiscal plan
legislation a similar price should be used to get "the full
impact" of each plan.
2:41:34 PM
Senator McGuire skipped slide 20. She addressed slide 21:
A $3.5-4Billion Deficit
•Oil Price Projections have been inaccurate
•Is the International Oil Market fundamentally
different now?
•Perhaps
•Should we bet on oil prices to save us in the future?
•A better question:
Should we bet our future on oil prices?
Senator McGuire skipped slide 22. She turned to slide 23
which contained a graph depicting," Historical and
Projected End-of-Year Balances of State Reserve Funds -
(excluding Permanent Fund)." She detailed that in 2008 and
2009 the price of oil was up to $147 per barrel under
Alaska's Clear and Equitable Share (ACES). The cream colors
on top of the blue bars depicted deposits into the
Statutory Budget Reserve Fund (SBR). She pointed out that
the state had saved money but in 2015 began spending CBR
funds. She pointed to slide 24 titled "How We Are Spending
$5.2 billion in FY 16." The chart depicted spending by
department and she noted that the two largest budgets
belonged to the Department of Health and Social Services
(DHSS) and Department of Education and Early Development
(DEED). She voiced that even if the legislature cut every
single government job and service provided by both
departments there would still be a deficit. She examined
slide 25 titled "Potential New Revenue From Sustainable
Alaska Plan." She reported that the graph's numbers were
based on the governor's probabilistic model and on his tax
rates which showed generating $457 million in revenue and a
remaining deficit of $3.6 billion. She ascertained from the
slide that revenue generating devices did not generate
enough revenue to close the deficit, which was why
Permanent Fund restructuring was necessary.
2:44:18 PM
Senator McGuire addressed slide 26:
We cannot close the gap with cuts or new broad-based
revenue ALONE.
A sound fiscal solution will necessarily involve using
the Permanent Fund.
Senator McGuire briefly addressed the graph on slide 27
titled "FY 16 Agency Share of Total Agency Operations and
the Appropriation for Permanent Fund Dividends." She
indicated that the single largest budget item was paying
out the PFD dividends from the ERA. She pointed out that
the fund was inflation proofed by approximately $1 billion
and the total for FY 16 was $2.4 billion. She addressed
slide 28 which compared HB 303 with the governor's bill.
Slide 28:
SB 128 (APFPA) vs HB 303 Key Elements
· Royalties go to Dividend under both plans
o PFPA = 50% of Royalties (~$1,000 dividend and
falling)
o HB303= 74.5% of Royalties (nearly 50% Higher
Dividend)
· $1,000 minimum
· PFPA plan moves CBR and Oil tax revenue into Earnings
Reserve Account
o There are possible legal issues regarding the CBR
sweep
· PFPA plan is NOT a POMV
o Targets a set number ($3.3B) for withdrawal and
spending
o This is telling the legislature you have "x"
amount to spend every year
· Does not adjust to market returns and actual earning
of the ERA
· HB303 does not change oil tax revenue (still straight
to GF)
· AFPA is designed as an annuity-looks 25 years into the
future: Foresight
· POMV is based on actual values-Looks 5 years into the
past: Hindsight
2:48:30 PM
Senator McGuire delineated that the governor's plan set a
dollar amount target based on 25 years into the future of
actuarial evidence. She emphasized that a POMV plan was
based on actual values, which she strongly favored. She
commented that POMV was a tested method of managing a
corpus of money allowing a certain amount of earnings to
spin off as usable funds and kept the corpus viable into
the future. She moved to slide 30 titled "Current Cash
Flow" which she considered the "plumbing" of the plan. She
addressed the current cash flow chart on slide 30. She
explained that .05 percent of the royalties went to a
Public School Trust Fund, roughly 30 percent were deposited
into the Permanent Fund Principal and approximately 69.5
percent was moved into the GF. She noted the representation
of the CBR that was outside of the GF and used in deficit
spending needed a three-quarter vote to access the funds.
She identified slide 31 titled "HB 303 Change 1. Royalty
Percentage." She revealed that the legislation proposed
changing the royalty percentages. She referenced slide 32
titled "HB 303 Change 2. Add POMV Payout." She elaborated
that 25 percent was deposited into the Permanent Fund
principal and 74.5 percent was deposited into the GF and 5
percent of the total was deposited into the GF. She skipped
slide 33. She moved to slide 34 titled "HB 303 Change 4.
Dividend Source and Calculation." She elucidated that the
25 percent deposit into the Permanent Fund principal was
permanent and designed to grow the fund. However the bill
included a new way to pay out the dividend. She offered
that currently the ERA payed out dividend checks. HB 303
created a new dividend fund utilizing 75 percent of the
royalty stream. The earnings from the principal of the
Permanent Fund were distributed into the ERA and 5 percent
of the POMV draw was deposited into the GF. The GF remained
the same. She emphasized that the "major shift" was the
creation of a new dividend fund using 75 percent of the
prior year's royalties to pay the dividend.
2:53:43 PM
Senator McGuire reviewed slide 35:
HB 303: The SWAP-Rents and Royalties
•Currently,
•30% of all Royalties and Rents from
•Oil, Gas and Federal Mining revenue
•Deposited into the Permanent Fund corpus
•0.5% to School Trust Fund
•69.5% deposited to General Fund
Senator McGuire read slide 36:
HB 303: Rents and Royalties to Dividend
•74.5% of all R&R would be deposited into the Dividend
Fund
•No Permanent Fund Earnings would be used for Dividend
•SB 114: puts a floor (guarantee) of $1,000 Dividends
Senator McGuire warned that maintaining a $1000 dividend
might involve a policy decision regarding withdrawing funds
from savings depending on the price of oil.
Senator McGuire underlined slide 37:
HB 303: PF Reserve Earnings Account and the General Fund
· The exchange for R&R to Dividend Fund:
· 5% of the total value of the Permanent Fund (Corpus +
ERA)
Withdrawn from ERA Deposited into General Fund
· This is often called a Percent of Market Value (POMV)
concept
· Returns on PF investments average more than 5%
o Thus you inflation proof the PF plus the 25%
R&R deposit
The PF continues to grow
Senator McGuire informed the committee that the net effect
of the ERA withdraw was roughly $2 billion. She indicated
that currently the Senate State Affairs Committee was
discussing SB 114 and the unresolved issues regarded a
spending cap, inflation proofing, and whether or not to
hold a constitutional vote. She illuminated slide 38:
HB 303: PF Reserve Earnings Account and the General Fund
Inflation Proofing?
Callan's Est. Return on Permanent Fund Investments = 6.9%
POMV Draw = 5%
To the Earnings Reserve Account = 1.9%
To the Corpus of the Permanent Fund = 25% of Royalties
Total Royalties $961M * 25%= $240M
Senator McGuire indicated that the only way to maintain a
healthy Permanent Fund corpus was by inflation proofing the
fund. She relayed that Angela Rodell, Executive Director,
Alaska Permanent Fund Corporation reported that over the
life of the fund the legislature "injected an additional
$16 billion to inflation proof the corpus of the fund." She
announced that the yearly budget line item of between $703
million to $1 billion to inflation proof the fund was "in
effect, a direct injection of new capital into the corpus."
She noted that roughly 80 percent of all of the funds'
assets self-inflation proof.
2:57:43 PM
Co-Chair Thompson turned the gavel over to Vice-Chair
Saddler.
Representative Gara pointed to slide 34. He spoke to the
ERA. He stated that the current ERA balance was
approximately $7 billion and wondered how the POMV approach
would work in a "sub-par year." He stated that a $2.5
billion yearly withdrawal may or may not deplete the
earnings reserve. He wondered about the chances of "bad
market returns" emptying out the reserve making the $2.5
billion unavailable for spending. Senator McGuire replied
that the bill was a conversation starter and the mechanisms
could be altered. She encouraged the committee to invite
Angela Rodell, to speak to the issue before the committee
due to her fact based historical perspective. She answered
that the 5 percent POMV draw could be changed in a number
of ways. She elucidated that changes could be a different
exact percentage or range of percentages. She highlighted
one possibility that was a POMV of 5 percent over the past
5 years. She stated the approach was more stable. Another
option was to hold an election to open up the principal.
She relayed that Director Rodell offered the suggestion so
in a bad year money would be withdrawn from the principal.
She offered that in an underperforming year under the bill
funds were drawn from the CBR. She warned that if the
legislature waited two years to act the CBR would be empty
and only the ERA funds remained, which left "a much more
narrow set of circumstances" to operate under. She pointed
to revenue generation or oil tax credit adjustments as
options. She agreed that the 5 percent POMV was an average
that may recoup $3 or $4 billion in high years and $1.2
billion in low years and that considering outcomes and the
"full construct" was necessary. She recommended the POMV of
5 percent over the past 5 years as a relatively stable
approach.
3:03:18 PM
Representative Pruitt appreciated the Senator's
presentation. He relayed Commissioner Hoffbeck's, Randall
Hoffbeck, Commissioner, Department of Revenue (DOR)
comments regarding the difficulty to maintain the $1,000
dividend under her plan. He asked for the Senator's
thoughts. Senator McGuire responded that she had spoken
with Commissioner Hoffbeck. She mentioned that the
governor's plan was entirely different. The governor's
approach embraced a variety of measures under a high degree
of certainty to fill the budget deficit. His plan needed
the formula to equal roughly $2.5 billion and addressed
volatility by decreasing or not paying out a dividend in
favor of a guaranteed amount for government spending. She
explained that her bill proposed to change the fundamental
structure of the fund to provide "more stability." She
reiterated that government jobs had value and government
services had value and eliminating volatility signaled
stability to the "tight nexus… between the public and
private sectors." She believed that was the reason for the
interest from the private sector groups in adoption of a
fiscal plan. She discussed the policy decision HB 303
induced regarding using money from savings to guarantee a
$1,000 dividend.
3:07:29 PM
Representative Kawasaki asked how structurally sound the
plan would be going forward especially in the 5 year
average scenario. He stated that in 9 out of 30 years the
earnings reserve yields were negative. Senator McGuire
responded that she would provide a slide to the committee
that contained the data on the ERA percentages and the
yields over the years and agreed with Representative
Kawasaki regarding the variable returns for the ERA. She
explained that "some volatility was contained in a POMV
approach." She thought the plan was still "light years
ahead" when compared to current budgeting. She did not know
the exact amount the POMV returns would generate. She
reiterated that it would be helpful to have Ms. Rodell
offer a factual perspective regarding the Permanent Fund.
She recommended discussions involving all of the possible
options.
Mr. Logan added that when averaging the last five years of
ERA returns the real draw was roughly 3.87 to 4.81 percent
depending on the range of volatility and with targeted
returns at 6.9 percent and real returns at 5 percent the
actual draw was less than what the ERA was earning. He
agreed with Representative Kawasaki's point. Representative
Kawasaki remarked that 2010 netted poor returns for the ERA
and the state was barely able to pay out dividend checks.
Senator McGuire returned to slide 23 and pointed out that
in 2010 because oil had been so high, under ACES the state
was doing quite well and had put $1.2 billion in its
statutory savings account. She felt that it was "so
disconnected there were absurdities in both ways."
3:12:39 PM
Representative Kawasaki clarified that the targeted draw
from the ERA was between $2.7 billion and $4.1 billion.
Senator McGuire answered in the affirmative. Representative
Kawasaki relayed that the governor's bill proposed a
statutory draw and he believed some people may favor the
more stable approach. He thought the draw proposed in HB
303 was more volatile and wondered why the governor's
approach was "not a better way to go." Senator McGuire
replied that the governor's plan had a different
philosophical approach. She declared that she "was happy
with the solution" [in HB 303]. However, she did not
believe she was more right than anyone else. If through the
deliberative process, the legislature decided the annuity
based direct payment model was the best option, she would
support it. She furthered that her goal was to address the
largest singular budget issue, which she felt was the PF.
She agreed that the POMV was a little more volatile but
thought that it offered much more budget stability. The
approach was recognized over decades of review and use
globally, and maintained a structure that was defined and
upheld in state statute. She discussed the possible legal
contests with restructuring established state accounts. She
reiterated that she favored the POMV approach and liked the
idea of creating a dividend directly from royalties to
connect Alaskans to its resource. She shared her discomfort
with some elements of the governor's plan.
3:17:34 PM
Vice-Chair Saddler appreciated the overall context the
sponsors had provided. He observed that the plan did not
incorporate an allowance for capital projects. He noted the
POMV model included inflation proofing and a 25 percent
deposit from royalties into the corpus of the Permanent
Fund. He asked whether the proposal "over inflation proofed
the model." Senator McGuire responded that the constitution
mandated a minimum of 25 percent of the royalties. She
contended that the state had been over inflation proofing
the fund. She believed that the amount acted as a safeguard
in lean years and did not feel growing the corpus was over
inflation proofing. Vice-Chair Saddler stated that
currently permanent fund dividends were predicated on the
stock market. He asked what effect attaching dividends to
royalties would have on the psyche of Alaskans. Senator
McGuire replied that she had skipped over a couple of
slides on the topic due to the meeting's timeframe. She
believed great things would happen. She elaborated that
whatever side of the debate a person was on regarding a
repeal of SB 21 (Oil And Gas Production Tax) [CHAPTER 10
SLA 13 - Enacted 05/21/2013], she discovered that most
people did not understand that oil was the single source of
revenue for state spending. She voiced that Alaska was a
resource based state and that restructuring would connect
the public to the resource and spark more education and
involvement in the process. She felt that more public
awareness of the relationship between the federal and state
government would also occur.
3:24:33 PM
Representative Gara understood that at the price of
approximately $42 per barrel the Permanent Fund was
automatically inflation proofed. He requested more
testimony regarding inflation proofing the fund.
Vice-Chair Saddler stated that he questioned whether long-
term inflation proofing was the most important issue facing
the state. Senator McGuire stated that the conversation
regarding HB 303 "pulled together all types of
conversations for the public to hear." She related to both
sides of the argument. She reiterated some facts regarding
inflation proofing the fund. She referred to slide 27 that
included the depiction of the permanent fund deposit as a
budget item, which was the largest budget item. She thought
that over inflation proofing was "a very real question."
Representative Millett stated that the meeting's
conversation solidified her view that changes were
necessary. She acknowledged that the fiscal gap was not
remedied through cuts and revenue generation alone. She
agreed that the public was not aware of the amount the
budget was already cut and of how much was saved over the
years. She voiced that the discussion would be long and
arduous and she was open to new ideas.
3:29:41 PM
Representative Gara asked whether statutory change was
required for altering the way the fund was inflation
proofed. Senator McGuire answered that "enough law makers
believed that a statutory change" was necessary because of
the continued deposit into the fund each year. She reminded
the committee that former Representative Rokeburg attempted
to change inflation proofing in 2005. She believed
statutory change was necessary. She encouraged members to
maintain statutory oversight of the fund. She opposed the
idea of a constitutional vote.
Representative Gara noted that he did not suggest "not
inflation proofing the fund."
Vice-Chair Saddler discussed the schedule for the following
day.
ADJOURNMENT
3:32:51 PM
The meeting was adjourned at 3:32 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB303 Sponsor Statement.pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |
| HB303 Sectional Analysis.pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |
| HB 303-DOR-PFD-2-12-2016 .pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |
| HB303 for HFIN 2-16-16 PP.pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |
| HB 303 NEW FN DOA VCCB 2-15-16.pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |
| HB 303 NEW FN DOR PFD 2-15-16.pdf |
HFIN 2/16/2016 1:30:00 PM |
HB 303 |