Legislature(2015 - 2016)HOUSE FINANCE 519
04/12/2016 05:00 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
April 12, 2016
5:06 p.m.
5:06:57 PM
CALL TO ORDER
Co-Chair Thompson called the House Finance Committee
meeting to order at 5:06 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
Jane Pierson, Staff, Representative Steve Thompson; David
Teal, Director, Legislative Finance Division.
SUMMARY
HB 245 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
HB 245 was HEARD and HELD in committee for
further consideration.
Co-Chair Thompson reviewed the agenda for the meeting.
5:07:50 PM
HOUSE BILL NO. 245
"An Act relating to the Alaska permanent fund;
relating to appropriations to the dividend fund;
relating to income of the Alaska permanent fund;
relating to the earnings reserve account; relating to
the Alaska permanent fund dividend; making conforming
amendments; and providing for an effective date."
Co-Chair Neuman MOVED to ADOPT the proposed committee
substitute for HB 245 (FIN), Work Draft (29-GH2859\E).
There being NO OBJECTION, it was so ordered.
5:08:17 PM
JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, relayed
the sectional analysis by reading from a prepared
statement:
Sec. 1. Provides for a three year reevaluation of
the use of the earnings of the Alaska permanent fund.
Sec. 2. Amerada Hess income no longer flows to the
Capital Income Fund. Segregation of Amerada Hess is no
longer legally required; associated language is repealed in
sec 13.
Sec. 3. Dedicated deposits of royalties to the
Permanent Fund are reduced from the current 25/50
split in old/new leases to the constitutional minimum
25 percent
Sec. 4.
(a) Requires the Alaska Permanent Fund
Corporation to determine the net income of the
earnings reserve account as the income is realized and
received.
(b) Defines the Percent of Market Value payout as
5.25 percent of the average year-end market value of
the Permanent Fund and Earnings Reserve Account for
the first five of the most recently completed six
fiscal years. The payout may not exceed the year-end
balance of the earnings reserve account for the fiscal
year just ended.
Sec. 5 AS 37.13.145 is the Disposition of Income of
the Permanent Fund statute
a. (Unchanged) Establishes the ERA and
identifies the ERA as holding earnings of
the PF and ERA.
b. (Repealed) dividends based on statutory net
income.
c. (Repealed) inflation proofing.
d. (Repealed) segregation of Amerada Hess.
e. (New) The legislature may annually
appropriate the POMV payout from the ERA to
the general fund.
Sec. 6. Dividends are comprised of 20 percent of the
5.25 percent PMOV outlined in Sec. 4(b), and 20
percent of the prior year's royalties, excludes those
dedicated to the Permanent Fund or School Fund (25.5
percent are dedicated)
Sec. 7. Mental Health Trust Fund may not be included
in the computation of the available income available
for distribution under the PMOV.
Sec. 8. Makes computation of the Mental Health Trust
Fund income consistent with computation of other
Permanent Fund Income.
Sec. 9. Transfer of money to the Dividend Fund
requires an appropriation
Sec. 10. The amount of each Permanent Fund Dividend
for fiscal years 2017, 2018 and 2019 shall be $1,000.
Sec. 11. Conforms to Sec. 9, which moves money to the
Dividend Fund by appropriation
Sec. 12. Once the money is in the Dividend Fund, the
Department of Revenue shall annually pay dividends
without further appropriation
Sec. 13. Repeals language relating to the former
dividend calculation, inflation proofing calculation,
and Amerada Hess language
Sec. 14. Repeals Sec. 10 - $1,000 dividend in three
years.
Sec. 15. The Commissioner of Revenue and the Alaska
Permanent Fund Corporation may adopt regulations,
policies and procedures to implement this Act.
Sec. 16. Retroactivity clause.
Sec. 17. Immediate effective date for sections 15 and
16
Sec. 18. Effective date of July 1, 2016
5:12:50 PM
AT EASE
5:15:32 PM
RECONVENED
Co-Chair Thompson invited Mr. Teal to walk the committee
through the bill.
5:15:58 PM
DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
referred to the 4 page handout (copy on file) titled: "LFD
Fiscal Model." He reported that the first page containing
four graphs was the status quo if nothing was changed. He
pointed to the graph on the lower left side titled "Budget
Reserves" that depicted vanishing reserves after FY 2021.
He drew attention to the chart in the upper left corner. He
reported that expenditures were represented as a black line
and revenue was portrayed by bars. The blue portion
represented forecasted combined revenue, the orange bar
represented draws from the Constitutional Budget Reserve
(CBR), and the red represented the draws from the Earnings
Reserve Account (ERA); both accounts were used to fill the
budget deficit. The white space after FY 22 under the
expenditure line represented depleted reserves. He
expounded that the state could not maintain the level of
spending in order to function and the Permanent Fund
Dividend (PFD) would not continue to be paid out.
Representative Gara asked about the charts that
characterized FY 16 and wondered whether the numbers
represented the balance at year's end or during the year.
Mr. Teal responded that they were all year-end balances.
Mr. Teal related that the purpose of the first page was to
show that the state had a problem; the state did not have
sufficient revenues to address expenditures in the future.
The bill attempted to address the issue. He turned to the
second page of graphs that modeled the legislation. He
turned to the data assumptions depicted between the graphs.
He noted that all of the graphs were based on the spring
forecast. He highlighted that the operating budget growth
was held at zero with $247 million in reductions, $30
million in Community Assistance, and $185 million in
Capital Budget spending. He skipped to the data containing
the Permanent Fund (PF) Variables that assumed 6.9 percent
investment return, in the blue shaded area the Point of
Market Value (POMV) payout was 5.25 percent, and the
dividends were 20 percent of the 5.25 percent POMV payout
and 20 percent of prior year royalties. He added that the
dividend had a floor of $1000 and were set at $1000 for FY
17, 18, and 19. He pointed to the data under Revenue
Variables and reported that Tax Credit Reform was set at
the numbers in the House Resources committee version of the
bill. The figures on lower left listed the reserve balance
at $10.4 billion, the deficit was $624 million [in FY 25]
and the reserves lasted 17 years. The table on right
forecasted the PFD real value at 97 percent and the
effective payout of 4.9 percent while the nominal payout
was 5.25 percent. He mentioned that the only difference
between page 2 and page 3 was that page 3 data was based on
the House Finance Committee version numbers for tax credit
reform. He indicated that dividends and the PF changed only
slightly. The only difference was the projected reserve
change to $11.9 billion [FY 25] under the House Finance
Committee version roughly $1.5 billion less than the House
Resources version. He examined page 4 and commented that
the figures were was the same except for the difference in
investment return reported at 7.45 percent. He detailed
that the data was based on the Callan Associates (advisors
to the PF) memo from December 24, 2015. He quoted from the
memo as follows:
"The most salient impacts of the revision are
reductions in the median projected 10 year annualized
total return from 7.8 percent versus 7.45 percent."
Mr. Teal deduced that based on the 7.45 percent figure and
all other variables remaining the same as page 3, the
primary difference resulted in the reserves lasting longer
because more earnings were realized on the PF and ERA. He
pointed to the table on the lower right showing the real
value of the PF at 102 percent in FY 25.
5:25:21 PM
Co-Chair Thompson asked Mr. Teal to explain the middle
column listing the CBR earnings at 6 percent. Mr. Teal
answered that the CBR was currently earning one to two
percent. He delineated that the governor's solution was to
move the CBR into the ERA. The two funds were not legally
required to be physically combined. The CBR could be more
aggressively invested, if the draws were substantially
lower, and could be managed by either the Department of
Revenue (DOR) or the Alaska Permanent Fund Corporation
(APFC). The assumption was set at 6 percent but the actual
rate was unknown. Co-Chair Thompson thought the rate was
definitely higher than the current rate of CBR earnings.
Mr. Teal responded in the affirmative.
Co-Chair Neuman referred to top left graph on page 4
depicting the Undesignated General Fund (UGF)
Revenue/Budget in millions and noted that the budget was
shown at nearly $5 billion. He asked whether any
significant changes would result in a budget reduced to a
$4.5 billion or $4.4 billion range. Mr. Teal answered in
the affirmative. He added that any reduction in expenditure
reduced the revenue gap, which was filled through draws
from the CBR. A balanced budget eliminated draws on the CBR
and strengthened reserves.
Co-Chair Neuman noticed that the fiscal note analysis
reported a $2000 dividend. He suggested that if the
dividend was reduced to $1000 a savings of $700 million
would result. He wondered whether, with the addition of
$300 million in cuts, $1 billion in reductions affected the
calculations significantly. Mr. Teal answered
affirmatively. He pointed to the table on the lower left
that depicted the deficit in the out years at approximately
$350 million and estimated that the deficit would be
eliminated and the reserves would grow. The amount in
reductions each year for ten years totaled an impact of $2
billion.
Co-Chair Thompson asked whether taxes were included in his
calculations on page 4. Mr. Teal affirmed that taxes were
not included. Co-Chair Thompson wondered whether the
inclusion of taxes would increase the savings. Mr. Teal
responded that reductions in spending and increased taxes
had the same result; both closed the deficit and saved
reserves.
Vice-Chair Saddler asked about the effect of inflation on
the models set at 2.25 percent. He cited Section 6 of the
bill that recalculated the dividend at one-fifth of the
POMV stream and one-fifth of the prior year's royalties.
He understood that inflation proofing was built into the
corpus of the PF with the POMV plan. He wondered to what
degree the PFD was protected against inflation. Mr. Teal
responded that as the PF and ERA balance grew the payout
grew and a constant percentage of the payout went to
dividends. He surmised that the dividends were protected
from inflation in the same manner as the full payout and
the PF was.
5:32:47 PM
Vice-Chair Saddler asked about inflation proofing in the
royalty stream into the Permanent Fund. He did not see how
they were covered. Mr. Teal answered that to the extent
that oil prices reflected inflation the royalty portion
would also be inflation proofed. However, royalties did not
"necessarily" have the same inflation proofing protection
as production declined. Vice-Chair Saddler asked for
clarification on the "percent realized" listing under
Permanent Fund Variables on the handout. Mr. Teal stated
that realized earning went into the ERA and unrealized
earnings affect market value but were not cash until they
were realized. He delineated that the model differentiated
between the PF total investment rate at 7.45 percent of
which 75 percent was realized and the remainder was
unrealized, which increased the market value but not the
cash in hand.
Representative Gara asked whether Mr. Teal spoke with the
permanent fund managers to determine whether they planned
to aggressively invest the CBR knowing that a smaller
portion was being spent each year. Mr. Teal answered in the
negative but planned to engage in the discussions. He
relayed that currently the CBR was managed by the
Department of Revenue (DOR). The department invested in
liquid assets when the reserves were being drawn. He was
trying to find a way to get a better return on the CBR.
Representative Gara asked whether the bill contained a
provision authorizing the PFD to manage the CBR and if it
was necessary. Mr. Teal replied in the negative and did not
think that management of the fund mattered. He thought that
the issue of investment parameters was more important.
Co-Chair Thompson mentioned that the attorney general was
in the audience and available for questions.
5:37:53 PM
Representative Gara asked about the bottom right hand chart
on page 4 that denoted different colors for status quo,
governor's plan, custom plan, SB 114, and HB 224. He
wondered why only two colors were represented on the chart.
Mr. Teal responded that the only data included was the
status quo and the option with a "yes" value, otherwise the
chart was "too busy." Representative Gara asked whether the
chart represented the status quo compared to the "custom
plan" which was the current version of the bill. Mr. Teal
replied affirmatively. Representative Gara asked whether
savings were still realized in ten years if the dividend
was set at $1500. Mr. Teal answered in the affirmative. He
indicated that a $1000 dividend equated to $700 million per
year and when increased by 50 percent would equate to an
estimated additional $300 million in expenditure; therefore
a $1500 cap on the dividend by FY 25 reduced the reserve
balance by roughly $2.5 billion.
5:41:40 PM
Vice-Chair Saddler pointed to "cost variables" on the data
that contained a targeted cut of $257 million. He asked
whether that was projected for each year. Mr. Teal
responded that included the cut in FY 2017 and maintained
the same level of cuts in the out years. Vice-Chair Saddler
asked why the specific number was included. Mr. Teal
relayed that the number was based on the changes made on
the current operating and capital budgets in both the House
and Senate. Vice-Chair Saddler asked whether the Amerada
Hess case [Alaska v. Amerada Hess et al., officially known
as State v. Amerada Hess et al. (1JU-77-877)] had any
implication in the equations. Mr. Teal replied that the
Amerada Hess case represented the "fenced off portion of
the Permanent Fund" and amounted to $425 million. He
explained that the legal case mandated that the money
earned on it could not be used to pay dividends of roughly
$21 million per year. The earnings were deposited into the
Capital Income Fund and was typically spent on items in the
capital budget. The extra earnings would become part of the
POMV payout. Vice-Chair Saddler asked whether the money was
always available for spending. Mr. Teal stated that the
funds were not available until about 5 years prior. He
delineated that the legislature continued to inflation
proof the portion of the Amerada Hess money and it
continued to grow until 5 years ago and began using the
earnings in the capital budget. The net effect on the
current legislation was zero because the money was not
fenced off or identified as Amerada Hess anymore due to the
expiration of the legal mandate.
5:44:55 PM
Representative Edgmon asked Mr. Teal to discuss page 2
(House Resources Committee version) versus page 3 (House
Finance Committee version). He noted that both versions set
the rate of return on the permanent fund at 6.9 percent.
The reserves in FY 25 were $11.9 billion versus the House
Resources Committee version in FY 25 that showed reserves
of $10.4 billion. He remarked that the graphs did not look
a "whole lot different" and he asked for an explanation.
Mr. Teal agreed that the graphs looked similar. He added
that part of the problem with modeling was a $500 million
change could be lost. Representative Edgmon cited Section
14 of the bill that repealed the dividend in 2020. He asked
for clarification. Mr. Teal indicated that the $1000
guaranteed dividend was being repealed and replaced by the
amount calculated by the bill's formula, which amounted to
approximately $1000.
Co-Chair Thompson added that the blue bar on the bottom
left showed the amount of reserves remaining. He reported
that reserves lasted 17 years with the House Resources
Committee version and 28 years in the House Finance
Committee version.
Representative Edgmon cited the inflation proofing rate of
2.25 percent included in the data and asked whether
inflation proofing was eliminated in the legislation. Mr.
Teal answered that the bill eliminated inflation proofing
specified in statute. The proposed inflation proofing was
the difference between the earnings and the payout.
Representative Gara suggested that there would be a
significant change depending on the version of the oil tax
credit bill that was adopted. He asked how long savings
would last if the governor's original version figures of a
savings of approximately $250 million per year were used in
the model. Mr. Teal did not remember the number. He
remembered that the governor's proposal had significant
fiscal impacts and the reserve lines went "upward." The out
years were included to provide perspective and were not a
guarantee.
5:51:22 PM
Vice-Chair Saddler inquired whether all of the figures were
real numbers. Mr. Teal responded in the negative. He added
that the numbers were all nominal. Vice-Chair Saddler
deduced that the bill's plan to fill the deficit, extend
the CBR and ERA included reduced payout of the PFD,
increased interest on the PF corpus, ended statutory
inflation proofing, and instituted the 5.25 percent POMV
draw. He asked for confirmation of his summation. Mr. Teal
answered in the affirmative.
Representative Gara asked that if the reserves rose, would
the CBR last over a ten year period and whether the balance
would decline. Mr. Teal answered that the CBR would
maintain a positive balance due to the reduction of the
draws on the CBR. Representative Gara asked whether the
reserves remained "steady." Mr. Teal responded that the CBR
balance remained higher than shown and the ERA would also
increase. He elaborated that the result was based on new
revenues or less expenditures through the tax credit bill,
which reduced the deficit and the draw on reserves. He
spoke to the House Finance Committee version of the bill
and reported that the deficits were smaller and the CBR
maintained a positive balance through FY 25. He added that
in the House Resource Committee version the state's deficit
was over $600 million in FY 25 but fell over $200 million
per year under the House Finance Committee version. Smaller
deficits mean less impact on reserves resulting in higher
reserve balances. The governor's version used less of the
CBR and was roughly $4 billion.
5:57:20 PM
Vice-Chair Saddler referred to page 4 and noted that the
model assumed a flat budget. He relayed that other models
reported 1.5 percent budget growth. He wondered how the
budget growth and inflation impacted the model. He asked
whether the bill assumed a large deposit from the CBR into
the corpus. Mr. Teal replied in the negative and added that
the bill assumed the CBR was invested more aggressively.
Vice-Chair Saddler referred to the lower left chart on page
4 and noted that the reserve balance "tipped upward.
He wondered whether the bill included a "reserve threshold
where the money cascaded someplace else in the model." Mr.
Teal responded in the negative. He indicated that the
governor's bill mandated that if the ERA was more than 4
times the draw, the excess earnings were placed into the
corpus. He informed the committee that he left the
provision out of the model considering that the legislature
had the authority to do what it wanted with the excess. He
mentioned that "from the model perspective… it was all just
money sitting in a reserve." Vice-Chair Saddler restated
that the dividend, predicated on investment returns and the
price of oil, automatically included inflation proofing and
was flat in all of the models at $1000. He assumed the
amount would decrease by 2.25 percent compounded due to
inflation. He requested comment. Mr. Teal replied that
"that was driven to some extent by population growth." He
referred to the page 4 figures on the lower right that
projected PF growth of $10 billion by FY 25 to $65 billion.
He concluded that the PF was maintaining its real value and
the constant 5.25 percent ensured that the payout was
larger and larger over time. He interpreted flat dividends
as a combination of growing dividends due to the POMV,
declining dividends due to royalties, and declining
dividends due to population growth that in combination
resulted in a flat line. Vice-Chair Saddler asked whether
population growth estimates were built into the models. Mr.
Teal replied in the affirmative and added that population
was growing by 1.3 percent.
Representative Pruitt remarked that the models made many
assumptions. He stated that if the spring 2016 forecast was
correct it meant that Saudi Arabia no longer existed;
therefore, he believed the forecast was incorrect. He did
not see a revenue cap that prevented the state from ending
up back in the same position if the price of oil rose and
spending increased. He asked if a spending cap or something
like it was included in the bill, it helped manage the
growth in government and prevent up and down spending and
deficit cycles. Mr. Teal answered in the negative; including
a limit was "an easy amendment." He did not believe that any
limits worked very well because limits or caps were rules
that could be broken by the legislature. He spoke to the
fact that if the price of oil spiked the legislature can
spend the excess. He felt that it was difficult to devise a
cap that granted flexibility for spending while providing a
strong enough rule. He noted that the governor favored a
cap.
6:05:29 PM
Representative Pruitt was concerned about turning on the
tap from the PF to pay for government. He believed that the
legislature was going to increase spending and "did not
follow the rules." He strongly favored including a spending
cap rule. He stated that it was necessary to give the
public assurance that the legislature was not going to
increase spending with permanent fund money and break the
public's trust.
Representative Wilson asked whether an oil trigger was
included in the bill; if oil rebounded the funds from the
Permanent Fund were no longer used. Mr. Teal replied in the
negative. He continued that regarding dividends, as oil
prices rise royalties increased and as royalties increased
the dividend increased. He pointed to Representative
Pruitt's remarks that if the state did not need the revenue
from the POMV payout why make it available. He thought that
"the rule would make the legislature discuss breaking the
rule." The discussion may be helpful, but he reminded the
committee that the POMV payout was subject to appropriation.
He felt that the discussion should center on how much
discretion the legislature should have to spend available
funds with or without rules. He illuminated that the
governor's comparison of the bill assumed that if there was
a revenue spike, all of the money was spent. His model
assumed any surplus revenue was saved and others argued that
an oil price spike was not expected. Representative Wilson
surmised that the percentages did not really matter
significantly because the bill held the PF payout to $1000
as well as the floor.
6:10:33 PM
Mr. Teal replied that the bill set the dividend at $1,000 in
FY 17 through FY 19 and was then based on a formula that
still produced roughly $1,000 dividends. He added that if
investment returns or oil prices were higher than projected
the dividend would increase and also made the deficit
disappear which made reserves go up. He voiced that higher
oil prices improved the model. Representative Wilson
countered that his conclusions were true only if the money
was not spent. She reasoned that a provision did not mandate
that the dividend would increase and that excess revenue
would be diverted to spending. Mr. Teal answered that the
dividend depended on the calculation of the POMV payout. He
elucidated that the dividend would increase with higher oil
prices, but expenditures would not necessarily increase and
the level of spending was decided by the legislature. He
suggested that a revenue or expenditure limit could work if
the legislature chose to follow the rule.
Representative Wilson asked whether the bill was necessary
to accomplish the provisions it contained. Mr. Teal
responded that everything could be accomplished through the
appropriation process. He qualified that bill established a
set of rules, but appropriations were not part of a plan or
rule based system. Representative Wilson restated that the
legislature did not always follow rules.
6:15:08 PM
Representative Edgmon stated that the models were predicated
on assumptions. He articulated that the chief assumptions
embedded in the models were oil production, oil prices, and
investment returns. He pointed out the one constant that no
other revenue stream was counted in any of the models. He
wondered how assuming that no other new revenues were
incorporated into the model, the bond rating agencies would
view the legislature's actions. Mr. Teal recognized that he
was asked to give his opinion. He thought the bond rating
agencies would look at the bill as the very strong first
step. However, he thought the bond rating agencies would
react more favorably in combination with additional revenues
and additional cuts. He noted that new revenue sources and
expenditure reductions were independent actions not included
in the bill. The bill set up a framework for using the ERA.
Representative Gattis stressed the importance of looking at
the worst case and best case scenarios when doing the
modeling. In addition, she suggested that any plan needed to
include a reduction in the size of government.
6:19:31 PM
Representative Guttenberg offered that the model had to
consider the things that were out of its control such as the
price of oil. He wondered whether Mr. Teal had applied the
worst case scenario into the model. Mr. Teal replied in the
affirmative and offered to return when discussing options
beyond the bill with interactive models. He explained that
variables could be applied to the model.
Co-Chair Thompson thanked Mr. Teal for his presentation. He
reviewed the agenda for the following morning.
ADJOURNMENT
6:22:37 PM
The meeting was adjourned at 6:22 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 245 CS FIN Sectional version _E.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 |
| HB 245 CS WORKDRAFT vE.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 |
| HB 245 #1 model 4 12 16 CSSB128 690 sq.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 SB 128 |
| HB 245 #2 model 4 12 16 CSSB128 690 Res.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 SB 128 |
| HB 245 # 3 model 4 12 16 CSSB128 690.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 SB 128 |
| HB 245 # 4 model 4 12 16 CSSB128 745.pdf |
HFIN 4/12/2016 5:00:00 PM |
HB 245 SB 128 |