Legislature(2021 - 2022)DAVIS 106
04/01/2021 11:30 AM House WAYS & MEANS
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Revenue Projections | |
| Presentation: Alaska Permanent Fund | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS
April 1, 2021
11:34 a.m.
MEMBERS PRESENT
Representative Ivy Spohnholz, Chair
Representative Adam Wool, Vice Chair
Representative Andy Josephson
Representative Calvin Schrage
Representative Andi Story
MEMBERS ABSENT
Representative Mike Prax
Representative David Eastman
COMMITTEE CALENDAR
PRESENTATION: REVENUE PROJECTIONS
- HEARD
PRESENTATION: ALASKA PERMANENT FUND
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
LUCINDA MAHONEY, Commissioner Designee
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Provided introductory remarks to the
presentation by Dan Stickel.
DAN STICKEL, Chief Economist
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"Spring 2021 Forecast Presentation," dated 4/1/21.
ANGELA RODELL, Chief Executive Officer
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation, titled
"Alaska Permanent Fund," dated April 2021.
ACTION NARRATIVE
11:34:39 AM
CHAIR IVY SPOHNHOLZ called the House Special Committee on Ways
and Means meeting to order at 11:34 a.m. Representatives Story,
Wool, Josephson, Schrage, and Spohnholz were present at the call
to order.
^PRESENTATION: Revenue Projections
PRESENTATION: Revenue Projections
11:36:18 AM
CHAIR SPOHNHOLZ announced that the first order of business would
be a presentation on revenue projections by Dan Stickel,
Department of Revenue (DOR).
11:36:52 AM
LUCINDA MAHONEY, Commissioner Designee, Department of Revenue,
expressed her appreciation to the House for resurrecting the
House Special Committee on Ways and Means and offered DOR's
support as needed. She conveyed that Mr. Stickel would be
sharing an update on the spring forecast, noting that several
slides had been updated to provide the most recent data.
11:37:58 AM
DAN STICKEL, Chief Economist, Department of Revenue, introduced
a PowerPoint presentation, titled "Spring 2021 Forecast
Presentation" [hard copy included in the committee packet]. He
directed attention to the agenda on slide 2, which read as
follows [original punctuation provided]:
1. Forecast Background and Key Assumptions
2. Spring 2021 Revenue Forecast
?Total State Revenue
?Unrestricted Revenue
3. Petroleum Forecast Assumptions Detail
?Oil Price
?Oil Production
?Oil and Gas Lease Expenditures
?Oil and Gas Credits
MR. STICKEL jumped to slide 4, titled "Background: Spring
Revenue Forecast," which read as follows [original punctuation
provided]:
1. Historical, current, and estimated future state
revenue
2. Updates key data from Fall Revenue Sources Book
3. Official revenue forecast used for final budget
process
4. Located at tax.alaska.gov
MR. STICKEL explained that the "Fall Revenue Forecast" is DOR's
annual publication by the research group that comes out in
December. The publication contains additional tables and
important information on the state's revenue sources.
Alternatively, the "Spring Revenue Forecast," released in March,
updates that fall forecast with a limited selection of tables.
Both documents are located on the Tax Division's website.
11:39:31 AM
MR. STICKEL continued to slide 5, titled "Key Alaska Economic
Indicators," which read [original punctuation provided]:
1. Real State GDP: $51.6 billion in Q4 2020
?Up 1.4% from Q3 2020, still down 3.4% from Q4 2019
2. Employment: 294,900 in February 2021
?Down 22,400 (-7.1%) compared to February 2020;
heaviest impacts in leisure/hospitality,
transportation/warehousing, and oil/gas industries
3. Wages & Salaries (seasonally adjusted): $21.3
billion inQ4 2020
?Up 2.1% from Q3 2020, down 2.9% from Q4 2020
4. Alaska Bankruptcies: 313 for calendar year 2020, 39
cumulatively for 2021 (through February)
?Compared to 400 for all of 2019
5. Foreclosures: 98 in Q3 2020, 303 for calendar year
2020 (through Q3)
?Compared to 197 in Q3 2019 and 729 for entire
calendar year 2019
6. Housing Starts: January-February: 305 in 2021 vs
304 in 2020
?1,491 for calendar year 2020 vs 1,689 for calendar
year 2019
7. Delinquency Rates: 0.7% for mortgages 30-89 days
delinquent, .5% for mortgages 90+ days delinquent at
end of Q3 2020 (as of September 2020)
?Compared to 1.6% for mortgages 39-89 days delinquent,
.7% for mortgages 90+ days delinquent at end September
2019
MR. STICKEL indicated that a combination of factors is driving
the decrease in bankruptcies and foreclosures, including
government programs that provide temporary aide and limit
foreclosures, as well as actions by the financial industry to
support individuals in those situations. Regarding the mortgage
delinquency rates, he said, between income support, a strong
housing market, and lenders working with borrowers, there was
not a significant uptick.
11:43:26 AM
REPRESENTATIVE SCHRAGE sought to confirm that the foreclosure
moratorium had no effect on these numbers.
MR. STICKEL said these numbers include any moratoriums that had
been in place. He added that as foreclosures are down, it would
be reasonable to assume that the moratorium was a contributing
factor.
CHAIR SPOHNHOLZ noted that there was an expansive housing relief
program introduced this year, which may be helping renters catch
up on bills.
11:44:22 AM
MR. STICKEL proceeded to slide 6, titled "Spring Forecast
Assumptions," which read [original punctuation provided]:
?The economic impacts of COVID-19 are uncertain; DOR
has developed a plausible scenario to forecast these
impacts.
?Key Assumptions:
o Investments: Stable growth in investment markets.
o Federal: The forecast incorporates stimulus funding
through February 2021, it does not include potential
new stimulus passed in March 2021.
o Petroleum: Alaska North Slope oil price of $53.05
per barrel for FY 2021 and $61.00 per barrel for FY
2022. No further oil production curtailments.
o Non-Petroleum: Most economic activity will return
to baseline levels by FY 2022, except tourism full
recovery by summer 2024.
MR. STICKEL indicated that DOR is assuming a 6.75 percent annual
return on investments in the Alaska Permanent Fund. He noted
that while most economic activity should return to baseline
levels by FY 22, the assumption for recovery in the tourism
industry was pushed to 2024 because large cruise ships will not
be visiting this summer. He reported that the following
assumption was incorporated into the forecast: no large cruise
ship visits in 2021; 50 percent recovery in 2022; 75 percent
recovery in 2023; and return to 1.4 million visitors in summer
2024.
11:46:44 AM
REPRESENTATIVE STORY opined that assumption for the tourism
industry is "on the low side." She expressed her hope that the
industry would recover sooner than forecasted.
MR. STICKEL explained that while developing the assumption on
the tourism industry, the sense from the industry was that with
COVID-19 protocols and reluctance to travel, the first year of
cruise ships would most likely be under 1.4 million visitors and
it would take one or more years to return to that level. He
noted that the gradual recovery rate was a planning assumption
that incorporated feedback from the industry, as well as
discussions with colleagues at the Office of Management & Budget
(OMB) and Legislative Finance Division (LFD).
11:48:19 AM
CHAIR SPOHNHOLZ said given CDC [Centers for Disease Control and
Prevention] guidelines that cruise ships shouldn't sail in
summer 2021, recovery for that sector of the industry would be
challenging, as cruise ship passengers account for 55-60 percent
of Alaska's tourists.
11:48:50 AM
MR. STICKEL turned to the graphic on slide 7 showing relative
contributions to the total state revenue in FY 20 with the
largest being from federal revenue, investment earnings, and
petroleum. He noted that while other revenue sources -
including mining, fisheries, tourism, non-petroleum corporate
income, and other - are important to the economic picture, they
only amount to slightly over 12 percent of the total state
revenue combined.
CHAIR SPOHNHOLZ shared her belief that slide 7 is slightly
misleading in regard to the significant role that investment
earnings play in the state's current revenue picture. She
explained that the slide suggests that investment earnings and
petroleum are equal contributors to the state's revenue;
however, there was decreased market activity in FY 20. In a
more "normal" market, she suggested the ratio would contribute
twice as much as petroleum.
11:50:47 AM
MR. STICKEL advanced to slide 9, which showed the total revenue
forecast from FY 20 projected through FY 22. He noted that
total revenue is grouped into four categories: Unrestricted
General Funds (UGF), which are revenues that can be appropriated
for any purpose; Designated General Funds (DGF), which are
revenues that can be appropriated but are customarily used for a
specific purpose; Other Restricted Funds, which are revenues
that are dedicated in use and not available for general
appropriation; and Federal Revenue, which is restricted revenue.
11:52:58 AM
REPRESENTATIVE STORY questioned how many barrels of oil are
produced on federal land and whether the revenue generated from
that production could be increased.
MR. STICKEL stated that production on federal land is a
relatively small contributor. He reported that in FY 20, oil
production from the National Petroleum Reserve - Alaska (NPR-A)
amounted to 6,500 barrels per day from the North Slope out of
471,800 total barrels per day. He pointed out that the number
would potentially increase with several new developments
commencing in the future, including the Greater Moose's Tooth
and Willow.
11:54:18 AM
REPRESENTATIVE STORY inquired as to the state's percentage of
oil production on federal lands.
MR. STICKEL explained that for production on federal land, state
corporate income tax, property tax, and production tax applies.
He said royalty from that production goes to either the federal
government or private landowners with the state receiving half
of any federal royalty; however, there are restrictions on how
revenue from the National Petroleum Reserve must be used.
Further, for any production attributable to private landowners,
the state levies a private landowner royalty tax. He concluded
that the state gets some revenue, but because the state is not
the landowner, it does not receive as much royalty revenue as
production on state land.
11:55:44 AM
REPRESENTATIVE SCHRAGE observed an inverse relationship when
comparing the UGF and DGF investment revenue and petroleum
revenue forecasts. He asked Mr. Stickel to provide insight on
that relationship.
MR. STICKEL said looking at the investment revenue for UGF, the
Alaska Permanent Fund is based on the percent of market value
(POMV) draw. For FY 21, that draw was based on 5.25 percent of
a trailing five-year average, whereas the draw in FY 22 and
beyond was based on 5 percent. He added that "the unrestricted
piece is reflecting the lower percent of market value draw with
the permanent fund." In terms of the other investments, the FY
21 data includes some actual performance for the beginning of the
fiscal year combined with a projection for the rest of the fiscal
year; consequently, "the actual revenue had come in a little
stronger than projected for the remainder of the fiscal year for
[FY] 21."
11:57:48 AM
REPRESENTATIVE SCHRAGE asked Mr. Stickel to speak to the
petroleum revenue.
MR. STICKEL said it would be discussed on the following slides.
11:58:27 AM
REPRESENTATIVE WOOL calculated that the total earnings for the
Alaska Permanent Fund in FY 21 is about $3.9 billion. He asked
if that is correct.
MR. STICKEL confirmed that the total earnings of the fund would
be the POMV and the unrestricted, plus the other restricted
earnings component.
11:59:40 AM
CHAIR SPOHNHOLZ highlighted the loss of $1.2 billion in
investment revenue in FY 20. She asked if that represents a
loss in revenue at the permanent fund.
MR. STICKEL said the other restricted investment revenue of
negative $1.2 billion represents the total permanent fund
investment revenue minus the permanent fund draw. He explained
that the total return for the fund, which was about 2 percent
for FY 20, was a positive number. The 5.25 percent POMV draw
represents more money than the total return on the fund;
therefore, any residual gain/loss in the fund is shown as other
restricted investment revenue. He added that in FY 21 and FY
22, the fund is expected to return slightly more than the draw.
12:01:09 PM
CHAIR SPOHNHOLZ summarized that the revenue was net positive,
but more revenue was drawn than was earned from the permanent
fund in FY 20.
MR. STICKEL answered that's correct for that particular year.
CHAIR SPOHNHOLZ concluded that's why slide 7 represents an
atypical year in many respects. She acknowledged that there
would be periodic market declines in the future, but moving
forward, investment earnings would contribute more to Alaska's
budget than petroleum.
12:03:07 PM
MR. STICKEL moved to slide 10, which pictured the unrestricted
revenue forecast from FY 20 to FY 22, featuring investment
revenue - Alaska Permanent Fund, investment revenue - other
investments, petroleum revenue, and non-petroleum revenue. He
reiterated that investment revenue is the largest source of
unrestricted revenue to the state, as it contributed nearly $3
billion in FY 20 and is projected to contribute $3.1 billion in
FY 21 and FY 22. He noted that the POMV transfer is the main
element of that revenue. In FY 20, petroleum generated about
$1.1 billion in unrestricted revenue and is forecasted at
approximately $1.2 billion in FY 21 and $1.3 billion in FY 22.
Lastly, non-petroleum sources are forecasted to contribute under
$400 million in unrestricted revenue in both FY 21 and FY 22.
CHAIR SPOHNHOLZ opined that slide 10 is the most important slide
of the entire presentation because it illustrates the strategic
importance of the permanent fund, as it contributes twice as
much revenue as oil to the state.
12:04:43 PM
MR. STICKEL proceeded to slide 11, which summarized some of the
changes between the unrestricted revenue forecast from fall 2020
and spring 2021. The average ANS [Alaska North Slope] oil price
estimate was increased by $7.73 per barrel for FY 21 and by $13
per barrel for FY 22. He noted that the increase was based on
the continued recovery and stabilization in the oil markets.
The Alaska Permanent Fund transfer forecast was not changed
because the FY 22 forecast is known, as it's based on the
average ending market value of the first five of the last six
fiscal years. In terms of total unrestricted revenue, the FY 21
forecast was increased by $332 million, and the FY 22 forecast
was increased by $460 million, which is a combination of the
increased oil price forecast, as well as an increased oil
production forecast. He said the production forecast was
increased by 4,700 barrels per day for FY 21 and by slightly
over 20,000 barrels per day for FY 22.
12:06:32 PM
MR. STICKEL turned to slide 12, which detailed unrestricted
investment revenue. The Alaska Permanent Fund transfer is
expected to account for two-thirds of unrestricted revenue every
year for the foreseeable future. He said that projection speaks
to the importance of the permanent fund, as well as the
realities of living with oil prices and production that are
lower than historic levels. He reminded the committee that the
unrestricted revenue forecast featured on slide 12 is the POMV
transfer, which is estimated at $3.1 billion in both FY 21 and
FY 22. The remaining unrestricted investment revenue is
primarily earnings on cash balances in the General Fund.
12:07:34 PM
MR. STICKEL continued to slide 13, which showed a graph of the
POMV transfer forecast and read as follows [original punctuation
provided]:
?The statutory POMV rate changes to 5% beginning FY
2022.
?For FY 2019 FY 2021 this rate was 5.25%.
?Forecast assumes Permanent Fund's long-term total
return expectation of 6.75%.
?Differing Permanent Fund returns and petroleum
deposits could significantly alter actual POMV.
MR. STICKEL explained that the transfer is estimated at over $3
billion for every year going forward, growing to $3.7 billion by
FY 30. He noted that this is the baseline forecast and does not
account for any proposed additional draws beyond the statutory
POMV.
CHAIR SPOHNHOLZ concluded that the revenues would continue to
grow if the legislature does not overspend.
MR. STICKEL said assuming the return assumption is correct, yes.
12:08:46 PM
MR. STICKEL advanced to slide 14, which detailed unrestricted
petroleum revenue and its four primary sources. He conveyed
that property tax is levied on all oil and gas property in the
state. He said property tax is a fairly stable revenue source
that generates slightly over $100 million per year for the
state. Additionally, $400 million is generated for
municipalities. Corporate income tax, he continued, is a tax on
profit that's levied on qualified corporations doing business in
Alaska. In FY 20, the petroleum corporate income tax generated
zero in FY 20 and is forecasted at $25 million in both FY 21 and
FY 22. The oil and gas production tax is the state's severance
tax on petroleum, which consists of a net profit tax with a
gross minimum tax floor for ANS oil production. The production
tax is expected to bring in $311 million in FY 21 and $376
million in FY 22. The largest source of unrestricted petroleum
revenue is royalty revenue. Royalties from oil and gas
production on state land are expected to bring in between $700-
$800 million in each of the next two years. Additionally, he
noted that there is a restricted component to the royalty
revenue that's not shown on the slide, which represents the
portion deposited into the permanent fund and school fund.
12:11:58 PM
REPRESENTATIVE STORY inquired about the value from tax credits.
MR. STICKEL referred Representative Story to Table 8.4 in the
Spring Revenue Forecast publication, which provides information
on the tax credits. Additionally, he detailed an upcoming slide
that looked at the outstanding balance of transferrable tax
credits and how those could be retired over time.
12:13:02 PM
REPRESENTATIVE JOSEPHSON in response to Representative Schrage's
question on the slight decrease in petroleum revenue for DGF,
pointed out that the 1980 law calls for a 50 percent royalty
delivery to the permanent fund. He asked if that is how 30
percent is arrived at when averaging all fields.
MR. STICKEL said that's correct. He explained that the majority
of production is from pre-1980 leases.
REPRESENTATIVE JOSEPHSON asked whether the legislature had ever
violated that law by not delivering the extra 50 percent.
MR. STICKEL answered yes, there were years where only the 25
percent was deposited.
REPRESENTATIVE JOSEPHSON questioned whether there is recourse or
remedy for complaints on that issue. He asked for Mr. Stickel's
understanding on its lawfulness.
MR. STICKEL deferred to DOL.
12:14:30 PM
CHAIR SPOHNHOLZ inquired about the difference in revenue from
oil extracted on federal lands as opposed to oil extracted on
state lands.
MR. STICKEL said the key difference is royalty revenue. He
explained that production tax, corporate income tax, and
property tax apply regardless of the landowner to any production
within the state of Alaska and within the three-mile limit. He
conveyed that in terms of royalty revenue, if the production is
from state land, state royalty applies. If the production is
from the National Petroleum Reserve, which is federally owned,
federal royalty applies, meaning 50 percent of those royalties
are shared back to the state and must be used for the benefit of
local communities. He continued to explain that for private
land, a privately negotiated royalty applies, which is not
shared with the state; however, the state levies a tax on
private landowner royalty interest. The tax is 5 percent for
oil or 1.667 percent for gas.
12:16:39 PM
REPRESENTATIVE WOOL asked for an example of private land.
MR. STICKEL replied there are several leases owned by Alaska
Native corporations across the North Slope. He said that
becomes something to pay attention to in the Western North
Slope, as Colville River Unit and the Moose's Tooth Unit have
leases that are [on] private land.
REPRESENTATIVE WOOL inquired as to the aggregate average for
state land.
MR. STICKEL stated that the typical state royalty is 12.5
percent, whereas the average royalty for state land is slightly
below that with royalty relief. He added that there are a
variety of different royalty rates. For private land, the
royalty rate is privately negotiated so it varies. He continued
to explain that the state taxes 5 percent of the private
landowner royalty.
REPRESENTATIVE WOOL sought verification that the state is not
privy to the royalty negotiations between private landowners and
the producers.
MR. STICKEL shared his understanding that information pertaining
to some of those royalty rates is available. He deferred to the
Department of Natural Resources (DNR).
12:20:16 PM
MR. STICKEL progressed to slide 15, which detailed unrestricted
non-petroleum revenue. He relayed that tax revenue is the
largest component of that. Typically, he said, corporate income
tax is the largest non-petroleum tax type, as it generated over
$100 million in FY 20 and forecasted at $55 million for FY 21
and $10 million for FY 22. Several other significant taxes
include mining license tax, insurance premium tax, fisheries
taxes and excise taxes. He added that when combined with other
non-petroleum revenue sources, total non-petroleum unrestricted
revenue is expected to be $389 million in FY 21 and $355 million
in FY 22.
MR STICKEL proceeded to slide 16, which addresses non-oil and
gas corporate income tax (CIT). He emphasized the two major
unusual impacts to consider: the 2020 recession and the CARES
Act impacts, which is a provision of the federal CARES Act that
allows corporations to carry back net operating losses from tax
years 2018, 2019, and 2020. Additionally, there is a provision
of the CARES Act that allows companies to accelerate certain
alternative minimum tax refunds into tax year 2019. He reported
that Alaska's CIT works by adopting the federal tax code by
reference, so the CARES Act provisions are automatically applied
to Alaska's state CIT unless the legislature chooses to decouple
or modify those provisions. General CIT is expecting lower
revenue for FY 21 and FY 22 even before CARES Act impacts, based
on the weak economy. The CARES Act impacts further reduce the
revenue forecast down to $55 million in FY 21. In FY 22, $83.6
million of CARES Act related refunds are estimated to bring the
net revenue down to $10 million. Once the economy recovers and
the CARES Act related issues are worked through, general
corporate tax revenue is forecasted to rebound to $130 million
in FY 23 and beyond.
12:23:54 PM
REPRESENTATIVE JOSEPHSON returned to slide 15 and asked whether
the mining license tax is, effectively, the severance tax.
MR. STICKEL confirmed that the mining license tax is the state
severance tax on mining operations.
REPRESENTATIVE JOSEPHSON surmised that when the state was
getting $6 billion from oil severance tax in 2009 and 2010, the
state was likely receiving a small percentage of that in mining
tax.
MR. STICKEL affirmed that mining license tax had been a
relatively smaller contributor.
REPRESENTATIVE JOSEPHSON asked whether the refined motor fuel
surcharge came from the bill sponsored by Senator Micciche and
former Senator Cathy Munoz, which added 95/100 of a penny.
MR. STICKEL replied in the affirmative.
12:25:18 PM
MR. STICKEL resumed the presentation on slide 17, which featured
the CARES Act impacts to the oil and gas CIT. He explained that
the oil industry, essentially, paid zero corporate income tax in
FY 20 after being hit hard by the pandemic. Relatively low
revenue was forecasted for FY 21 and FY 22, which is before
CARES Act impacts. After those impacts, the forecast is $25
million in net revenue for each year.
12:26:05 PM
MR. STICKEL summarized slide 19, which compared the spring and
fall forecasts of oil price. Slide 20 featured a comparison of
how DOR's price forecast compares to other forecasts. Slide 21
details how revenue would change with different oil prices. He
explained that in FY 22, each dollar change below the forecast
of $61 per barrel equates to a $25 million change in
unrestricted revenue and each dollar change in oil price above
the forecast price equates to $35 million in unrestricted
revenue.
CHAIR SPOHNHOLZ pointed out that the price of oil has varied
between all of those prices over the last 15 years, indicating
that the oil market is incredibly volatile.
MR. STICKEL continued to slide 22, which showed the North Slope
oil production forecast. In general, the forecast shows a
slight increase to production in FY 21, a slight decrease in FY
22, and an increase in FY 23 and beyond. He noted that
production is expected to reach 565,000 barrels per day by FY
30. Slide 23 featured a comparison to the prior fall 2020
forecast. The Spring forecast represents an increase to the
production forecast across all years, which is a combination of
lower expected decline rates at existing fields, as well an
improved outlook for new developments based on the higher oil
price forecast. Slide 24 indicated how allowable lease
expenditures for the North Slope changed over the past decade,
as well as a forecast for the next 10 years. In FY 20, North
Slope capital expenditures were $2.6 billion and operating
expenditures were $2.9 billion. Looking forward, DOR forecasted
increases in spending in FY 22 and FY 23 as companies invest in
major new developments and resume drilling at the major fields.
Slide 25 showed a similar history and forecast for
transportation costs, which are forecasted at $9.72 per barrel
in FY 22. On a per barrel basis, the average transportation
costs for moving oil from the North Slope to market are
forecasted to remain at approximately $10.
12:31:37 PM
MR. STICKEL concluded on slide 26, which highlighted oil tax
credits. These tax credits were available to potentially be
turned into tax credit certificates prior to 2016; however, in
2016 and 2017, the legislature implemented sunset provisions for
earning new credits although there is an outstanding balance of
tax credits for activity prior to those sunset dates. The chart
features the total estimated balance of credits of $739 million,
which would be available for purchase at the end of FY 21
assuming the statutory appropriation for FY 22 and beyond. He
noted that the statutory appropriation is a formula based on
either 10 or 15 percent of estimated production tax levied.
Before subtracting any tax credits, the FY 22 statutory
appropriation is calculated at $114 million. Further, if the
statutory appropriation were made in FY 22 and beyond, it's
estimated that all outstanding tax credits would be paid off by
FY 27.
^PRESENTATION: Alaska Permanent Fund
PRESENTATION: Alaska Permanent Fund
12:33:20 PM
CHAIR SPOHNHOLZ announced that the final order of business would
be a presentation on the Alaska Permanent Fund by Angela Rodell,
Alaska Permanent Fund Corporation (APFC).
12:34:02 PM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation, introduced a PowerPoint presentation, titled
"Alaska Permanent Fund" [hard copy included in the committee
packet]. She began on slide 3, which featured an excerpt from
the transmittal letter by Governor Jay Hammond for SSHJR 39,
which read as follows:
...I have introduced this resolution proposing a
constitutional amendment because I believe strongly
that the revenues from our non-renewable resources
belong to future generations of Alaskans as well as
ourselves. A permanent fund as I have proposed will
set aside a modest portion of the proceeds from the
exploitation of our non-renewable resources for
investment in our future while leaving sufficient
revenues for our present needs.
MS. RODELL continued to slide 4 and reported that Alaskans voted
in overwhelming favor to amend the Constitution of the State of
Alaska and create the Alaska Permanent Fund. She noted that
there is no use of funds discussed anywhere in the
constitutional language, nor was it included in the transmittal
letter. She advanced to slide 5, titled "The Corporation,"
which read as follows [original punctuation provided]:
In 1980, the Alaska State Legislature passed SB 161
establishing the Alaska Permanent Fund Corporation,
with the purpose -
to manage and invest the assets of the permanent fund
and other funds designated by law in accordance with
AS 37.13.010-37.13.190.
APFC operates as a separate state entity under the
oversight of an independent Board of Trustees who
serve as fiduciaries of the Alaska Permanent Fund.
Our Vision -
to deliver outstanding returns for the benefit of all
current and future generations of Alaskans.
MS. RODELL proceeded to slide 6, titled 1980, which provided
excerpts from the free conference committee report on the House
Committee Substitute for Senate Bill 161. She noted that Chairs
Terry Gardiner and John Sackett addressed "the future" in the
report, which read [original punctuation provided]:
...this bill addresses only the question of Fund
management and leaves the separate question of how to
use the Fund earnings to separate legislation. It
merely assures that there will be income and does not
preclude any options for its use. Unless another
determination is made, the Permanent Fund earnings
will be deposited in the general fund.
MS. RODELL pointed out that the existence of the Earnings
Reserve Account (ERA) currently indicates that another
determination was made.
12:38:32 PM
CHAIR SPOHNHOLZ interjected to emphasize the importance of this
historical record. She pointed out that the Permanent Fund
Dividend (PFD) was not included in the original creation.
12:39:04 PM
MS. RODELL resumed the presentation on slide 8, titled
"Renewable Resource," which highlighted the constitutional and
statutory mandates, including: The Principal Account (the
Principal) for permanent savings; the Prudent Investor Rule; the
ERA, which recognizes net realized investment income and makes
that available for appropriation. Additionally, prudent rules
exist to govern savings, withdrawals, and the growth of the
fund. She progressed to slide 9, titled "Board of Trustees'
Resolution 18-04," which read [original punctuation provided]:
In providing guidance on withdrawals for the Fund and
to help ensure the long-term sustainability of using
Fund earnings for the benefit of all generations of
Alaskans, the Board passed Resolution 18-04 at a
special meeting on October 17, 2018.
• This resolution affirms the importance of
formulaic management of transfers into and out of
the ERA to ensure sustainability and long-term
growth of the Fund, by identifying four key
principles: Adherence Sustainability Inflation
Proofing Real Growth
Sustainability ? requires annual formulaic withdrawals
from the Earnings Reserve Account at an amount that
the long-term balance of the account is able to fund.
The Board has long supported the percent of market
value (POMV) concept, including a constitutional
amendment that would ensure no more than a sustainable
amount was taken from the annual earnings of the
Permanent Fund (Resolutions 00-13, 03-05 and 04-09).
MS. RODELL turned to slide 10, titled "Asset Allocation - Multi
Dimensional Implications," which read [original punctuation
provided]:
Asset allocation should not be driven solely by return
considerations; return is just one aspect.
Risk (appetite) should be the other key driver.
In addition to investment/financial risk, operational
risks should be considered:
• Adequacy of Resources (operational risk) should
be a key sub-consideration.
• Aspirations and Capabilities should be aligned.
• Capability requirements and infrastructure costs
vary based on type of asset class, volume, size
and dispersion.
A $1 private asset investment requires a different
(possibly higher) resource requirement compared to a
$1 public equity investment.
MS. RODELL reported that she was told to "minimize risk of
Principal while maximizing returns" during the creation of APFC.
She added that recognizing how allocations have both financial
risk and operational risk is key to understanding how APFC moves
forward as a corporation managing the Alaska Permanent Fund.
She addressed asset allocation on slide 11, explaining that that
the fund is currently allocated by the APFC Board of Trustees
into eight asset classes: bonds, stocks, real estate, private
equity, absolute return, private income, risk parity, and cash.
She indicated that the fund's allocation has changed over time.
In 1980, it was determined that the allocation would be 100
percent in bonds, as they had extremely high interest rates. As
legislators and administrations grew more comfortable with the
management of the fund, additional asset classes were added over
time and in 2005, legislation implemented the Prudent Investor
Rule, which exists today.
12:43:24 PM
MS. RODELL advanced to slide 12, titled "Investment Tactics,"
which read [original punctuation provided]:
Our APFC team is constantly on the hunt for relative
value opportunities in the public markets.
• Value vs. growth stocks
• Overweighting attractive sectors and geographies
• Participating in compelling new issue
opportunities
In alternatives and private markets, our APFC team
focuses on using our reputation in the market place
[sic] and long-term investment horizon to source
investment opportunities with excess return potential.
• Early stage, high growth technology and life
science venture capital opportunities
• Long term cash generative opportunities in Real
Estate, Infrastructure, and Private Credit
• Leveraged buyouts of mature businesses
MS. RODELL emphasized the key word, "relative." She explained
that in weighing investment opportunities that both make money,
it's about determining the best route. She said this is
designed to generate positive value within the acceptable risk
appetite. She proceeded to slide 13, titled "APFC is in the
Business of Taking Risk," which read [original punctuation
provided]:
APFC has to take risks in order to achieve its return
objectives.
The goal of risk management is not to avoid risks, it
is to:
• know and understand the risks taken,
• measure, monitor and report these risks, and
• manage risks to acceptable levels, and review
whether returns are commensurate.
The risk management effort is not owned by or the
responsibility of a single team or department. It is a
collective responsibility, including all staff and
trustees.
The risk function primarily aims to:
• provide a different perspective (mostly: what can
go wrong? How much can we lose?),
• constructively challenge assumptions,
• measure and provide a complete and aggregated
'risk picture', including external indicators.
MS. RODELL Progressed to slide 14, titled "ERA: Statutory Net
Income," which read [original punctuation provided]:
AS 37.13.140 (a) directs the net investment earnings
of the Fund to the ERA and excludes unrealized gains
and losses.
Statutory Net Income is the direct result of
investment activity, and includes:
• Monthly cash inflows from stock dividends, bond
interest, and real estate
• Realized Capital Gains/Losses: All the net income
(i.e., realized gains minus realized losses)
generated by the sale of investments.
FY21 as of February 28, 2021
Statutory Net Income = $4,592,300,000
MS. RODELL explained that Statutory Net Income (SNI) is the
mechanism by which money flows into the ERA. The ERA, she said,
is invested like the Principal. The ERA owns a share of each
investment and is the pot of money that is subject to
appropriation. The chart on slide 14 featured Total Return [in
gold] and SNI [in black], indicating the volatility of returns
compared to the stability of SNI. She noted that as of February
28, 2011, nearly $4.6 billion in SNI had been generated, which
was a result of staying disciplined to ACPE's long-term asset
allocation goal of maintaining 40 percent of the total fund in
stocks. She explained that every time a stock is sold at a
gain, SNI is generated. She pointed out that Accounting Net
Income is different than SNI because it requires unrealized
losses to be included in the calculation. Further, she said
gains generated by the Principal's investments only stay in that
account if it's unrealized or appropriated back, which is the
only way the Principal grows other than the addition of
royalties.
12:50:00 PM
REPRESENTATIVE SCHRAGE asked if in addition to unrealized
losses, calculating the Accounting Net Income requires the
inclusion of unrealized gains, which is not included in SNI.
MS. RODELL replied in the affirmative.
12:50:21 PM
MS. RODELL turned to slide 15, titled "Percent of Market Value -
AS 37.13.140(b)," which read [original punctuation provided]:
Based on market value, rather than realized income
Subject to annual appropriation
Predictable
• average market value of the Fund for the first
five of the preceding six fiscal years
5.25% -July 1, 2018, FY 19 Effective Rate
• FY19 POMV $2.72 billion4.13%
• FY20 POMV $2.93 billion 4.52%
• FY21 POMV $3.09 billion ~4.68%
5.0% -July 1, 2021, FY22 Effective Rate
• FY22 POMV$3.07 billion ~4.55%
• FY23 POMV~$3.21billion~4.66%
• FY24 POMV~$3.29billion~4.68%
MS. RODELL emphasized the predictability of the POMV structure,
indicating that when legislative session begins in January, the
legislature knows "to the penny" how much revenue will be
received under the POMV structure.
12:51:35 PM
REPRESENTATIVE JOSEPHSON said the conservative models suggest
that 5 percent is too generous. Nonetheless, he asked if the
legislature should be comforted by the effective rates.
MS. RODELL answered in the affirmative. She explained that the
effective rate would be changed by changes to the fund's value.
In considering the ERA, she said, using significant portions
above the POMV would significantly drive up the effective rate
and affect rates going forward due the smaller market values in
the calculation.
12:53:45 PM
CHAIR SPOHNHOLZ emphasized the importance of the effective rate.
She asked whether the 5 percent of market value is sustainable
for fund growth or if 5 percent is too high.
MS. RODELL shared her belief that 5 percent is sustainable "all
things considered." She expressed concern about what's driving
the change in number. She questioned whether it's due to a need
to inflate spending or a recognition of other revenue sources.
Additionally, pointed out that the percentage "gets caught" in
the political discussion because it's subject to appropriation.
Further, she questioned how much pressure would be placed on
APFC to take actions that are not in the long-term best interest
of the fund in an effort to stay in line with the legislature
and the administration. She opined that there would always be
an inherent conflict of interest.
CHAIR SPOHNHOLZ clarified her question. She asked whether
establishing the POMV at 5 percent is truly sustainable over the
long-term or if that rate should be more conservative to protect
the growth of the fund.
MS. RODELL stated that the 5 percent is effective in that
regard. She explained that historically, the 5 percent would
have been sustainable had it been included in the original
constitutional creation. Nonetheless, she acknowledged that
lowering the rate would grow the fund faster because more would
be retained.
1:00:19 PM
MS. RODELL resumed the presentation on slide 16, which detailed
the use of realized fund earnings from inception through
February 28, 2021. She reported that $33.8 billion had been
paid out through POMV distributions and dividend appropriations;
$26.3 billion had been saved via special appropriations and
inflation proofing; and $13 billion is unappropriated, which
includes the $3.1 billion set aside in anticipation of the FY 22
POMV.
1:01:18 PM
MS. RODELL continued to the chart on slide 18 showing fund
totals as of February 28, 2021. The data indicated that returns
varied; nonetheless, the fund balance grew in excess of $70
billion. She turned to slide 19 and explained that the APFC
Board of Trustees adopted three specific benchmarks to measure
total fund performance: passive index, performance benchmark,
and objective CPI + 5 percent. She noted the importance of
measuring fund performance against nationally accepted metrics.
She conveyed that passive index viewed the fund if it were only
invested in passive index funds; the performance benchmark
recognized an investible series of indices that mirror the asset
allocation and measure active management; and CPI + 5 percent
considered the long-term growth. She highlighted that the total
fund is currently returning 17.72 percent, which is one of the
highest returning years in history and well above the 5.3
percent [objective CPI + 5 percent] because inflation is low.
CHAIR SPOHNHOLZ asked if that is, in part, because FY 20 ended
poorly.
MS. RODELL pointed out that if it were March 31, 2020, the fund
would be at $60 billion due to fear associated with the
pandemic. She stated that between the fiscal stimulus and other
factors, the markets recovered well. She added that the fund
benefitted from being able to "plow" cash into the stock market
during that time.
1:04:45 PM
MS. RODELL detailed the fund's value on slide 20. She
highlighted the slow growth, pointing out that without the $4
billion appropriation [by the legislature] in FY 20, the
Principal would only have $42.8 billion. She said the primary
growth is from unrealized gains, which have generated $11.3
billion to the Principal and $3.1 billion to the ERA for a total
of $14.4 billion.
1:05:50 PM
CHAIR SPOHNHOLZ noted the recent discussion in the media about
paying out the entire $16 billion in the ERA towards dividends.
She asked what that would mean in terms of a reduced POMV
transfer to the state.
MS. RODELL noted that the $3.1 billion in unrealized gain
changes every month because the ERA does not have its own set of
investments. She explained that the $3.1 billion is the ERA's
proportional gain on the assets. If the entire amount were to
be appropriated, she said, the $3.1 could be much higher or
lower. Nonetheless, she said if the entire known amount of the
ERA were to be appropriated, the account would be at zero. She
said in the current slow growth environment, it would not be
recouped as quickly. She surmised that there would be several
years where the fund would remain around $63 billion. Further,
she approximated that it would cost $200 million per year in
future revenue to the state.
1:09:17 PM
CHAIR SPOHNHOLZ surmised that because the POMV is calculated by
the first five of the last six years of the fund's value, the
impact would be softened, as it would be distributed over years.
She concluded that the cost to the state in year-over-year
earnings would impact the value of the fund over the long-term
as well as the state's revenue in the short-term.
MS. RODELL confirmed.
1:10:19 PM
REPRESENTATIVE JOSEPHSON pointed out that without the
anticipated moneys for government, there would be a deficit of
$3 billion. Additionally, he shared his understanding that the
$3.1 billion in unrealized gain does not tangibly exist by
definition. He asked if that is correct.
MS. RODELL replied in the affirmative.
REPRESENTATIVE JOSEPHSON asked what slide 20 would look like if
the governor hadn't vetoed $5 billion of the $9 billion that the
legislature transferred into the corpus several years ago.
MS. RODELL said it wouldn't look much different because the
governor's veto didn't move money out of the fund in any way;
therefore, the size of the total fund would be the same today,
but it would be divvied up differently.
1:12:59 PM
MS. RODELL resumed the presentation on slide 22, titled
"Reliance on Corporate Activity," which read [original
punctuation provided]:
The Earnings Reserve Account is subject to legislative
appropriation and currently used to:
• Cover the cost of investing and managing the
Alaska Permanent Fund
• Provide a predictable state revenue stream for
current generations
• Protect the value of the Principal for future
generations
• Support state agencies' collection of royalties
MS. RODELL continued to slide 23, titled "Alignment," which read
as follows [original punctuation provided]:
It is vital to recognize the transformation of the
portfolio and align APFC to the future
• Types, complexity and velocity of risks have
significantly increased, due to both internal
transformation and external factors. The trend is
likely to continue, if not accelerate.
• We should expect the Fund to reach the $90 -$100
billion mark in ~ 10 years
-Mid-Fiscal Year 21 = $71.8 billion
-As of February 28 = $74.2 billion
• The need to expand resources, mature and
strengthen control frameworks, in line with
growth, is real.
1:16:13 PM
MS. RODELL advanced to a chart on slide 24 showing the history
of UGF revenues. The yellow portion reflected the POMV draw,
the blue portion reflected non-petroleum revenue, and the gray
section showed total unrestricted petroleum revenue. She
highlighted the stability of the POMV revenue. She noted that
draws on the state's reserves occurred in FY 15, FY 16, and FY
17; however, those draws are not presented as revenue. The idea
that the POMV is now a revenue as opposed to a reserve draw, she
said, is "something that's very different." She stressed that
the APFC staff take the responsibility of being a revenue stream
very seriously.
1:17:43 PM
MS. RODELL turned to a chart on slide 25 showing actual
quarterly returns versus the target. She reported that the
target asset allocation would have generated 7.6 [percent],
whereas 8.9 percent was actually generated. The difference
between the actual and target percentages is the active
management of the corporation and the day-to-day investment
decisions accompanied by annual work by the APFC Board of
Trustees on asset allocation and understanding which levers
generate excess returns without taking outsized risk. She
proceeded to discuss returns on investment on slide 26,
highlighting APFC's FY 22 budget request of $151.8 million. She
pointed out that APFC generated nearly $4.6 billion in revenue
for the state with an additional $29.1 million going towards the
Alaska Capitol Income Fund. She reported that the amount
included for royalty collection totals $8.8 million, which is
expected to collect $240.6 million in returns.
1:19:39 PM
CHAIR SPOHNHOLZ inquired about the appropriations from the ERA
that support royalty generation.
MS. RODELL said it's the concept that the ERA be used to fund
the cost of collecting its entitled royalty and settlements.
She explained that appropriations are made to DOL, DNR, and DOR
to recognize the work done on behalf of the permanent fund.
1:21:02 PM
REPRESENTATIVE JOSEPHSON sought verification that Alaska
statutes allow for those departments to bill APFC for their
efforts at collecting $0.25 billion in royalty. He questioned
whether APFC inspects those bills and charges them against its
total net income.
MS. RODELL shared her belief that this is all found within the
language section of the operating budget bills. She offered to
follow up on the specific mechanics.
1:22:04 PM
MS. RODELL resumed the presentation on slide 26, highlighting
that there are real profit centers within the state that
generate a lot of revenue. She concluded on slide 27, titled
"Stewardship," which read as follows [original punctuation
provided]:
APFC is grateful for the support of the Executive
Branch, the Legislature and our fellow Alaskans. Given
that backing, the influence of our dynamic, Alaskan
corporation extends around the world for practices of
good governance, transparency, and a long-term
investment horizon.
2021 Awards
• APFC has once again been named Limited Partner of
the Year in North America by the global magazine
Private Equity International for our ability to
effectively invest in private equity. We also won
the award in 2017 and 2018.
• Capital Finance International (CFI) has named the
Alaska Permanent Fund Corporation the Best
Sovereign Wealth Fund Investment Team of 2021
(Americas).
In serving Alaska, we provide a - Value Adding &
Worthy Purpose Strong Leadership and Culture
Passionate & High Caliber Team Board of Trustee
Fiduciary Oversight
MS. RODELL stated that Alaskans should be proud of what they've
created over the years. She expressed her hope that by
highlighting these awards, residents understand that their
support is being recognized around the world.
1:23:54 PM
REPRESENTATIVE STORY said she takes stewardship very seriously.
She asked whether inflation proofing occurred last year and
whether the governor's budget includes inflation proofing for
this year.
MS. RODELL relayed that the governor did not include inflation
proofing in his budget proposal. She expounded that when the FY
20 budget was passed that included $4 billion in transfers,
there was legislative intent language included, which recognized
that as forward funding of inflation proofing. She said that's
the mechanism that's being relied upon for the FY 22 budget
proposal.
1:25:09 PM
CHAIR SPOHNHOLZ thanked Ms. Rodell and her team at APFC, adding
that the committee is keenly aware of the strategic importance
of the Alaska Permanent Fund to the future of Alaska and its
fiscal stability.
1:26:33 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Ways and Means meeting was adjourned at
[1:26] p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOR Spring 2021 Revenue Forecast Presentation.pdf |
HW&M 4/1/2021 11:30:00 AM |
|
| Alaska Permanent Fund Corporation Presentation 4.1.21.pdf |
HW&M 4/1/2021 11:30:00 AM |