Legislature(1999 - 2000)
04/08/1999 08:12 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
GENERAL SUBJECT(S): BALANCED BUDGET PLAN PRESENTATIONS:
Senator Steve Rieger; Dave Rose
The following overview was taken in log note format. Tapes and
handouts will be on file with the Senate Finance Committee through the
21st Legislative Session, contact 465-2618. After the 21st
Legislative session they will be available through the Legislative
Library at 465-3808.
Time Meeting Convened: 8:12 A.M.
Tape(s): SFC-99 #82, Sides A and B
PRESENT:
X
Senator Parnell
X
Senator Adams
X
Senator Torgerson
X
Senator P. Kelly
X
Senator Donley
X
Senator Green
X
Senator Leman
X
Senator Phillips
X
Senator Wilken
ALSO PRESENT: SENATOR STEVE RIEGER, PHIL OKESON, Fiscal Analyst,
Division of Legislative Finance, aides to committee members and
other members of the Legislature.
VIA TELECONFERENCE: DAVE ROSE, Anchorage
LOG
SPEAKER
DISCUSSION
000
Co-chair Parnell
Convened the committee at approximately
8:12 a.m. He introduced former Senator
Steve Rieger.
Senator Rieger
Opening statement made to the committee.
Encouraged the committee to find the plan
they liked and make the appropriate switch.
The State has moved a long way towards
consensus on two significant points.
First, they have reached a point where
something needs to be done beyond budget
cuts and budget reserves to fill in.
Second, if it is a question of using a
portion of the permanent fund earnings or
to impose an income tax, the preferred
choice was to use the permanent fund
earnings. Third, if they were looking at
using financial assets, one of the
fundamental principals was that one can not
spend more than they have.
Looking at all the plans he would advise
watching the situation carefully. Not
prudent to shortchange inflation proofing.
Proposed to look at the permanent fund.
Take each year's return, take inflation off
the top and split the earnings fifty-fifty.
Concept has been this split.
Beyond this, he proposed to use a similar
approach with the remainder of the State's
financial assets. AIDEA and ALASKA
RAILROAD, for example.
These suggestions go a long way in closing
the fiscal gap, but do not solve all the
financial problems.
He referred to his "Rieger Plan,
Spreadsheet".
Concerned about the possibility that the
IRS may want to tax the permanent fund
earnings. The fifty-fifty split would pre-
empt this possible tax. Would also prevent
any other taxes being attached.
He described his spreadsheet.
Put new resources to work; new development.
In referring to his spreadsheet he asked
the committee to make several assumptions.
Co-chair Parnell
Asked Senator Rieger to explain the year
2000 according to his spreadsheet.
Senator Rieger
Explained how the spreadsheet calculations
worked.
Co-chair Parnell
Thanked Senator Rieger.
Senator Rieger
Continued his presentation. He thought
there were still tradeoffs between program
"A" and "B". It was necessary to put
whatever plan into perspective to make it
work.
He referred to volatility. Earnings can be
volatile from year to year. Due to the
involvement with oil Alaskans are used to
volatility. It is possible to adopt all
kinds of smoothing tactics so that
everything will be stable.
He noted there was talk this year of using
some kind of endowment procedure.
"Smoothing" is beneficial but has
drawbacks. However, one can "smooth" too
much.
Other steps advised to the Legislature:
change the restrictions on the asset
allocations of the permanent fund because
they need the versatility to adopt away
from only investing in bonds; suggests
looking at buffer accounts; AMERADA HESS
earnings.
Within reach to adopt a realistic budget
plan. Would solidify the protection of the
permanent fund in the long term.
Senator Torgerson
Half of the earnings available from the
permanent fund for the fifty-fifty split?
Senator Rieger
Indicated that was correct.
Senator Torgerson
"How would inflation be dealt with?"
Senator Rieger
Said he would have to look into this.
Senator Torgerson
Calculations on the CBR and balance of the
permanent fund. Not shown on the
spreadsheet. Is the loss of 3% intended?
Senator Rieger
Intended to be that way.
Senator Torgerson
Losing something on the 3% interest. Was
there a calculation for growth such as
schools and population in general?
Senator Rieger
Said the plan only showed a base reference
point. It does not contemplate any new
revenues that might come along. For
example, oil forecast only considers what
is presently in use.
Senator Wilken
Asked which inflation indicator he used?
Senator Rieger
Consumer price index.
Senator Wilken
Asked if that was the Federal one?
Senator Rieger
Responded, yes. Could put it on a disc and
send to Senator Wilken.
Senator Adams
Is there a spreadsheet referring to the use
of the dividend? This would be a major
concern to most Alaskans.
Senator Rieger
Responded briefly.
Senator Leman
Inflation proofing. He stated that the
permanent fund was already inflation
proofed.
Senator Rieger
Eventually all capital gains do get
realized. Unrealized gains left to the
last.
It may be time to consider using the total
return concept. Gains are utilized whether
realized or unrealized.
Senator Phillips
Happy that the "Rieger Plan" is similar to
what he thinks.
Assumed all the plans will be compared
toward the end of session, side by side.
Senator Rieger
Thought his plan was careful to not erode
the principle. Spending has negative
connotation when using savings. A spending
plan is one that would use principle. One
that uses savings has a negative
connotation.
Senator Adams
Changing permanent fund investment
portfolio. What change would you like to
recommend?
Senator Rieger
Would recommend a partial step towards
adopting a clean investment role with no
legal list. Allow the bond portion to go
down to at least 25%
Co-chair Parnell
Thanked Senator Rieger. He then referred
to the Rose Plan.
Dave Rose
Via teleconference from Anchorage. He
began his presentation.
Cannot just look at a quick fix and to
solving immediate problems. Must consider
the long term, "where are we going".
Advocates solving problems by increasing
Alaska's asset base.
Not managed to diversify successfully.
Referred to the Alaska Permanent fund.
Would like to be able to attract other
companies help us diversify our funds.
Need to lure major companies to Alaska.
Advocates expanding Alaska's asset base.
Distinction between savings and spending
plan. Take earnings from the Permanent
Fund and spend them. The money, however,
would be gone.
Take better approach, which is to save the
monies to another fund, building up that
second fund's interest.
(Tape #82, switch to side B at log 597.)
Dave Rose
Continued presentation. Proposed to keep
the CBR just as it is. This will allow
them to tread water and buy time.
Concurred with Senator Rieger to increase
the asset allocation. This would prevent
the appearance of a double dip. More money
could be made available faster.
Keep principle inviolate of the permanent
fund. The earnings from the second fund
could be appropriated by the Legislature.
Suggested cloning the permanent fund since
we did so well.
He explained creation of the second fund.
Has written a number of papers questioning
the purpose of the permanent fund. Felt
the second fund could be as successful as
the permanent fund if the same procedure
adhered to.
Monies in the earnings reserve that could
be shifted.
In his plan no permanent fund dollars are
spent; rather put into the second fund.
Recommended that an annual amount be set
for the fund.
Second fund be allowed to build up and
reach maturity; will throw off big dollars
and can be used as the State's revenue
base.
Senator Phillips
His constituents would not be in favor of a
state income tax. He asked what would
happen if voters do not accept the
permanent fund concept?
Dave Rose
"Then you take the Rieger plan!"
Co-chair Parnell
Thanked Mr. Rose for his efforts.
Dave Rose
Impossible to cut the budget to zero.
However, the public must be assured that
reasonable cuts are being made and
reasonable alternatives are being explored.
Diligent effort must be made to cut State
spending.
Co-chair Parnell
Asked if the permanent fund dividends would
be paid from the tax aversion fund?
Dave Rose
Indicated no. Dividends would be paid out
of the earnings reserve account.
Co-chair Parnell
Query.
Dave Rose
In reply to Co-chair Parnell asked him to
remember that the TAF is a clone of the
permanent fund.
Co-chair Parnell
Said he does not want the permanent fund to
be put at risk. Trying to figure out how
his plan would protect the permanent fund.
Was this with the 5% pay out?
Dave Rose
Earnings reserve account has been used up
until now as a buffer. No reason if we had
an extreme year that we could not reach
into the TAF.
All the years that we have had the
permanent fund only had a tough situation
twice and that, at best, was minimal.
Co-chair Parnell
Thanked Mr. Rose. He noted that the floor
session would begin at 9:30 A.M. this
morning and therefore would be recessing
the committee.
ADJOURNMENT: Recessed at approximately
9:20 a.m., tape number 82, side B, log 390.
SENATE FINANCE COMMITTEE
LOG NOTES
04/08/99
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