Legislature(2021 - 2022)
05/12/2021 02:10 PM Senate FIN
| Audio | Topic |
|---|---|
| Start | |
| Legislative Finance Division - Pfd Presentation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
May 12, 2021
2:10 p.m.
2:10:02 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 2:10 p.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson
Senator Natasha von Imhof
Senator David Wilson
MEMBERS ABSENT
Senator Bill Wielechowski
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division;
Conor Bell, Legislative Fiscal Analyst, Legislative Finance
Division.
SUMMARY
^LEGISLATIVE FINANCE DIVISION - PFD PRESENTATION
2:10:02 PM
Co-Chair Stedman discussed housekeeping. He relayed that
the that the state had a finite amount of funds available,
which was important to consider during the budgetary
process. He added that todays discussion would prove
useful when discussing rewrites to the dividend formula.
2:12:51 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
introduced himself.
CONOR BELL, LEGISLATIVE FISCAL ANALYST, LEGISLATIVE FINANCE
DIVISION, introduced himself.
Mr. Painter discussed, "Alaska's Fiscal Position and
Projections" (copy on file). He looked at slide 2,
"Disclaimer":
Scenarios and adjustments in this presentation were
requested by the Finance co chairs. Legislative
Finance Division (LFD) is policy neutral and does not
endorse a particular fiscal plan.
Mr. Painter shared that the assumptions in the presentation
used the Senate budget that was currently before the
committee, as well as updated permanent fund returns.
2:13:44 PM
Mr. Bell addressed slide 3, "About the Modeling
Assumptions":
Revenue is based on Department of Revenue (DOR)'s
Spring Revenue Forecast
Assuming $53 oil in FY21 and $61 oil in FY22, adding
$331.7 million in FY21 and $459.6 million in FY22
compared to fall forecast
FY21 returns use Alaska Permanent Finance
Corporation (APFC)'s actual total income through March
31 of $13,903 million, and actual statutory net income
of $5,272 million
Assume APFC will realize an additional $350 million
in Q4 due to interest and rental income
FY22 FY30 assumes 6.20 percent returns in FY22 30,
unless otherwise stated
Default assumption is no inflation proofing for FY21
24, statutory inflation proofing after (consistent
with legislative intent)
Assumes $50 million for supplementals and 2.0
percent inflation growth on agency operations
Assumes minimum $500 million left in CBR
Full version of the model includes many revenue and
spending options. LFD can work with legislators who
wish to see additional options
A simplified, shorter time horizon model is also
available upon request
2:17:14 PM
Senator Wilson queried the accuracy of the assumption that
Alaska Permanent Fund Corporation (APFC) would realize an
additional $350 million the fourth quarter due to interest
and rental income.
2:17:52 PM
Mr. Bell replied that the assumption was conservative. He
said that, in absence of any gains in the stock market, the
corporation had income sources that were reliable and
consistent.
2:18:04 PM
Mr. Bell pointed to slide 4, "Projected Growth in
Percentage of Market Value (POMV) and Other
Revenue":
? Under these assumptions, the POMV draw is projected
to grow faster than inflation from FY23-27 due to
strong earnings in FY21
Mr. Bell explained that through the years of the forecast
period the revenue outpaced inflation. He said that the
21.75 return in FY21 led to significantly higher POMV
draws. He pointed out that the spring forecast showed rapid
growth between FY23 through FY25 due to rebounding from the
pandemic.
2:20:05 PM
Mr. Painter looked at slide 5, "Fiscal Summary with Capital
Budget Placeholder." He explained that the slide reflected
the first Senate committee substitute (SCS) for the
Operating Budget; line 7 showed the Agency Operations and
line 8 showed the Statewide Items in the SCS for the
Operating budget. He stated that the Capital Budget
assumption was one that had been used previously and was
the governors Capital Budget with undesignated general
funds (UGF) in place of non-UGF sources, particularly
Alaska Housing Finance Corporation bonds, the Power Cost
Equalization fund, and the Alaska Mental Health Trust fund.
He related that with this baseline Capital Budget the
bottom line was a deficit, before paying a dividend, of
$18.9 million roughly a balanced budget without paying a
dividend. He said that different dividend scenarios would
be based on this budget baseline.
2:21:28 PM
Mr. Painter addressed slide 6, "Projected Reserve Balances
with Senate CS and Capital Budget Placeholder." He noted
that the numbers reflected approximately $1 billion in
reserves.
2:22:08 PM
Senator von Imhof spoke to the CBR and the general fund and
the fluctuation of cash flow. She spoke of emergency
funding and the need for the $1 billion cushion.
Mr. Painter pointed to slide 7, "Fiscal Model: Budget
before PFD." The slide showed no PFD, and the difference in
the deficit number in FY22 was due to the assumption of
supplementals of $50 million for future unidentified items.
He noted that the model used constant 6.2 percent returns.
He felt that the baseline was important because other
scenarios could show a larger deficit in the earlier years
than in the later years and each plan could look as if it
fixed the fiscal problem. He explained that the assumption
that revenue would grow faster than inflation resulted in
every scenario showing improvement in the future.
2:24:21 PM
Senator von Imhof understood that the blue section of the
bars showed all revenues going up. She asked about the
capital assumption.
Mr. Painter relied that the model assumed a $176.7 million
Capital Budget, grown with inflation. He said that this
reflected a bare minimum Capital Budget. He recognized that
the level of spending that would be necessary to keep up
with deferred maintenance was higher than the assumption on
the slide.
2:24:59 PM
Co-Chair Bishop assumed that the slide did not consider any
federal funds that could be available in the future. He
thought that additional UGF could make its way into the
Capital Budget by way of federal dollars.
2:25:40 PM
Mr. Painter looked at slide 8, "Fiscal Model: Budget before
PFD." He said that the slide showed the same base
assumption using actual permanent fund earnings between
2000 and 2008, rather than the constant 6.2 percent return.
He offered a brief history of the 2000-2002, recession and
its effect on returns to the fund. He stated that under the
scenario on the slide the ERA would dip down over the next
few years and then rebound. The deficit would shrink
rapidly but not as rapidly as under the scenario on the
previous slide. He relayed that the timing of the returns
made a significant different in the surplus and that the
model was sensitive to changes in assumptions when adding
volatility.
2:28:00 PM
Mr. Painter addressed slide 9, "Fiscal Model: Budget before
PFD." He said that the slide incorporated the worst year in
the funds history, 2009, which was the only year there had
been a loss in the ERA. He said that the years following
2009 had been strong but noted that the ERA did not
recover. He stated that the surplus in FY30 was larger than
the last scenario, but the ERA was less healthy as a result
of the volatility in the scenario.
2:28:44 PM
Co-Chair Stedman pointed out to the committee that there
were several scenarios in the presentation that were
followed up by the two different market return scenarios.
He said that the model was useful to give committee members
a feel for the non-linear financial markets.
2:29:08 PM
Senator von Imhof understood that the POMV was represented
by the green in the bar chart on the left of the slide.
2:29:18 PM
Mr. Painter agreed.
2:29:23 PM
Senator von Imhof posited that even though the ERA in the
model went down, the POMV was flattened overtime and was
consistent.
2:29:37 PM
Mr. Painter replied in the affirmative. He said that the
averaging of the POMV, even with volatility, was smooth.
2:29:51 PM
Mr. Painter looked at slide 10, "Legislative Finance
Division 10 Fiscal Model: Budget w/ Statutory PFD." The
slide showed that the deficit in FY22 would be $2.3, which
had increased since the governor had introduced his budget
in December 2020 due to higher returns in FY21 resulting in
a larger dividend. He stated that in the scenario on the
slide, the CBR was not enough to meet the deficit and
additional draws form the ERA would be necessary to balance
the budget. The effective POMV rates at the bottom of the
slide showed that draws would be over 8 percent in some
years, which would drain the ERA by 2030.
2:31:08 PM
Co-Chair Stedman understood that paying out a dividend of
$3,485 in 2021 would make the FY22 draw 8.23 percent, which
was substantially higher than the 5 percent draw.
2:31:32 PM
Mr. Painter agreed.
2:31:36 PM
Co-Chair Stedman asked about the negative $2,334 million in
FY22 at the top of the chart.
2:31:43 PM
Mr. Painter replied that the figure would be the deficit in
the current fiscal year.
2:31:47 PM
Co-Chair Stedman surmised that the figure was after the
dividend was paid.
2:31:50 PM
Mr. Painter agreed.
2:31:52 PM
Co-Chair Stedman asked whether there had been a period of
growth of the fund when the funds balance had regressed in
number.
2:32:18 PM
Mr. Painter replied that there had never been a period when
the fund had gone down for more than a year or two at a
time.
2:32:36 PM
Mr. Painter pointed to slide 11, "Fiscal Model: Budget w/
Statutory PFD." The slide incorporated the actual returns
from FY00 through FY08. He noted the dotted line that
reflected the budget, with the dividend, went down due to
volatility. He said that the effect of having poor return
years was a reduced dividend. He said that the overdraws
were not as big as in the last scenario because dividends
had been smaller. He noted that the ERA survived through
the scenario but in some years was essentially down to
zero because of paying the amount needed to fill the
deficits.
2:33:49 PM
Mr. Painter addressed slide 12, "Fiscal Model: Budget w/
Statutory PFD." He explained that in FY25, FY26, and FY30
there was a gap in the dotted line and the revenue to meet
it, meaning that even after drawing out of the CBR down to
zero, and drawing the ERA down to zero, there would still
be insufficient reserves to meet the budget. The overdraws
were large enough, combined with losses, would drain the
ERA, and leave no funding for government.
2:34:43 PM
Co-Chair Bishop asked about the model in the out-years. He
assumed that if there was no funding for government then
there would be no funding to pay out a dividend.
2:34:53 PM
Mr. Painter agreed.
2:34:58 PM
Co-Chair Stedman noted the draw rate on the Permanent Fund
and understood that overdrawing led to problems quickly.
2:35:09 PM
Mr. Painter agreed, and furthered that negative realized
income, overdraws, plus the regular POMV draw, combined to
drain the ERA quickly.
2:35:28 PM
Senator von Imhof understood that under the scenario there
would be a need for additional revenue such as taxes. She
wondered how much in taxes would be needed.
2:36:13 PM
Mr. Painter replied that there was no single model to
determine which one tax would fill the gap. He surmised
that it would take a combination of tax sources. He felt
that the recent ISER model showed the economic effects of
the various options.
2:36:47 PM
Senator von Imhof thought that it was important to start
modeling the economic impact of various taxes on working
Alaskans.
2:37:16 PM
Mr. Painter pointed to slide 13, "Legislative Finance
Division 13 Fiscal Model: Budget w/ 50 percent POMV PFD."
The model used constant 6.2 percent returns. He shared that
under the scenario the dividend would be $2,400 in FY22,
which would leave $1.6 billion deficit in FY22, shrinking
to $800 million by FY30. He said that the ERA would decline
while the fund would barely grow and would not keep up with
inflation.
2:38:18 PM
Co-Chair Stedman remarked that the previous slides were on
the existing formula. He related that Slide 13 showed
taking one half of the 5 percent draw for the dividend and
using the other 50 percent for state operations. He said
that under this model, the state would see a deficit of
approximately $1.5 billion, on average per year, and other
revenue would be needed to fill the gap.
2:39:15 PM
Mr. Painter agreed, and furthered that the model reflected
$2.9 billion over the next two years that would have to be
made up for with a combination of draws from some reserves,
new revenue, or budget reductions.
2:39:31 PM
Co-Chair Stedman thought if the legislature set aside a $3
billion cushion in the CBR, and capped the portfolio at a 5
percent draw, the FY24 deficit would be approximately $1.1
billion.
2:39:56 PM
Mr. Painter agreed. He said that if the $3 billion were
spent and no structural changes were made to the fiscal
situation the state would go into FY 24 with a substantial
gap. and explained that putting the $3 billion
2:40:13 PM
Co-Chair Stedman offered that the structural change would
be increased revenue or decreased expenditures.
2:40:19 PM
Mr. Painter agreed.
2:40:23 PM
Co-Chair Stedman stated that the last two governors, and
last four legislatures, had been unable to make and
significant movement within the UGF that resulted in
decreased expenditures. He felt that the slide suggested
that the idea of implementing taxes was the most realistic
for increasing revenue.
2:41:38 PM
Mr. Painter responded that as a nonpartisan employee he
could not comment on the political viability of cuts or
taxes. He offered that the Senate version of the Operating
budget was approximately $4.5 billion, and the $1.5 billion
deficit was one-third of that. He said an attempt to reduce
the budget by cuts alone would mean reducing it by one-
third, would prove extremely difficult if not impossible.
2:42:22 PM
Co-Chair Stedman asked whether UGF cuts over the last 5
years had remained flat.
2:42:48 PM
Mr. Painter replied in the affirmative and added that the
current budget was comparable to that of FY18.
2:42:57 PM
Co-Chair Stedman hoped that those watching at home
understood that the budget had already been significantly
cut and the only viable option for increased revenue was
taxes or revenue enhancements of some kind.
2:43:30 PM
Senator von Imhof asked whether the scenario on the slide
mirrored the governors current proposal.
2:43:44 PM
Co-Chair Stedman said that the governor proposed a 50/50
split at 5 percent POMV.
2:43:56 PM
Senator von Imhof pointed out that under the model there
was a significant deficit in FY22, FY23, and FY24. She
noted that the Department of Revenue had modeled that new
taxes and a change to oil taxes would be needed to fill the
deficit gap under the 50/50 plan.
2:44:59 PM
Co-Chair Stedman revealed that the committee would have
further discussions the issue of the 50/50 split. He noted
that even if the deficit projections were slightly off,
they were still significant. He expressed concern at the
magnitude of the overdraw illustrated in the POMV draw
rates at the bottom of the slide. He noted the flat growth
on the right-hand side of the slide. He hypothesized that
if the portfolio could reach $100 billion, with a 5 percent
or less POMV, the state could have the cash to manage
deferred maintenance and infrastructure construction while
also maintaining a healthy dividend and no taxes.
2:46:25 PM
Senator von Imhof commented on a draw rate of over 5
percent. She said that traditionally endowments and
sovereign wealth funds did best at a consistent 5 percent
draw. She said that any draw over 5 percent would erode the
value of a fund overtime.
2:47:04 PM
Co-Chair Bishop stated that, while positions had been
eliminated in departments to cut costs and right size
government, past attempts at income tax legislation had
suggested the addition of personnel at the Department of
Revenue.
2:47:35 PM
Co-Chair Stedman stated that the financial market was not
linear and that consultants for the Permanent Fund had
cautioned the projected returns for the next decade were
lower than the last.
2:48:48 PM
Mr. Painter discussed slide 14, "Fiscal Model: Budget w/ 50
percent POMV PFD." The model used FY00 through FY08
returns. He shared the right of the slide showed that the
ERA shrinks, rebounds with strong markets, and then shrinks
again. He said that the deficit was approximately $1
billion per year, while the overdraws each year were 6.5
percent, or higher, to balance the budget. He said that the
amount in the ERA was visibly reduced due to volatility.
2:49:53 PM
Mr. Painter addressed slide 15, "Fiscal Model: Budget w/ 50
percent POMV PFD." The slide used FY09 through FY17
returns. He noted that this model was worse than the
statutory dividend model. The ERA was eliminated by FY30.
He said that the deficits were comparable to the last slide
and after FY24 there was no ERA worth noting.
2:50:47 PM
Co-Chair Stedman stated that if the corpus were to be
rolled into the ERA, the negative volatility would not
block the ability to extract 5 percent. He said that when
looking at the concept of rolling the corpus in to the ERA,
some of the slides would need to be adjusted to reflect the
new percentages.
2:52:22 PM
Mr. Painter pointed to slide 16, "Fiscal Model: Budget w/
$1,000 PFD." The model used 6.2 percent constant returns.
He shared that the deficit in FY22 was $744 million,
shrinking to $334 million, and reaching a surplus in FY 25.
He said that there would be an eventual surplus of $700
million by FY30. He relayed that FY22 through FY24 would
require overdraws but would settle at 5 percent. He noted
that the ERA was healthy in this scenario.
2:53:17 PM
Co-Chair Stedman noted that a $1 billion deficit was equal
to approximately $1,600 per state resident.
2:53:49 PM
Mr. Painter looked at slide 17, "Fiscal Model: Budget w/
$1,000 PFD." The model used FY00 through FY08 returns. He
said that the deficit had still shrunk in the scenario,
turning to surplus in FY25 but smaller than the previous
scenario. He noted that the ERA remained healthy in the
scenario and any overdraws were relatively small.
2:54:28 PM
Mr. Painter discussed slide 18, "Fiscal Model: Budget w/
$1,000 PFD." The model used FY09 through FY17 returns. He
pointed out to the committee that because of the large
negative market in the first year, the overdraws persisted
from FY22 through FY28, but were minimal. He said that the
result of the overdraws and the negative market performance
meant that the ERA vanished, but the model was not
considered a broken one. He explained that there was enough
in the ERA to balance the budget, but barely, and in some
of the years the ERA balance did not recover in the
scenario despite the minimal overdraws.
2:55:23 PM
Senator von Imhof asked whether there was enough in the ERA
to pay the POMV.
2:55:38 PM
Mr. Painter replied that the ERA balance on the slide was
after paying the POMV draw and the overdraw. He added that
it was tight the ERA was essentially drained to nothing.
2:55:59 PM
Senator von Imhof surmised that the state lost fiscal
footing for the next several years under the scenario on
slide 18.
2:56:13 PM
Mr. Painter agreed.
2:56:19 PM
Co-Chair Bishop asked about FY25 and the surplus of $37
million on slide 17. He said that without any new revenue
there would be no funds for a supplemental budget without
and overdraw.
2:57:05 PM
Mr. Painter agreed and explained that the nature of the
modeling was imprecise but anything within $100 million,
either way, was close enough to balance within the modeling
margin of error.
2:57:25 PM
Co-Chair Stedman added that 250 thousand workers in the
state would have to pay $4,000 a piece to generate $1
billion.
2:57:55 PM
Mr. Painter addressed slide 19, "Legislative Finance
Division 19 Fiscal Model: Budget w/ $750 PFD." The model
used 6.2 constant returns. He noted that in contrast to the
last scenario this slide showed two years of overdraws,
with a balanced budget starting in FY24 and a surplus of
$921 million by FY30.
2:58:42 PM
Mr. Painter pointed to slide 20, "Legislative Finance
Division 19 Fiscal Model: Budget w/ $750 PFD." The model
used the FY00 through FY08 returns. He stated that the
scenario was like the last one with deficits in the first
two years and a surplus in following years, with a healthy
ERA, and a surplus balance of $509 million by FY30.
2:59:07 PM
Mr. Painter looked at slide 21, "Legislative Finance
Division 19 Fiscal Model: Budget w/ $750 PFD." The model
used the FY09 through FY17 returns. He related that the
deficits persisted longer in the scenario through FY26,
with a balanced budget in FY27 and surplus in the following
years. He said that the overdraws were small enough that
the ERA persisted albeit barely.
2:59:42 PM
Mr. Painter addressed slide 22, "Fiscal Model: Budget w/
$500 PFD." The model used 6.2 percent constant returns. He
noted that the budget would be balance by FY23, with
surplus in the following years. He said that the overdraw
would not affect the ERA balance and the ERA and corpus
would grow.
3:00:23 PM
Mr. Painter pointed to slide 23, "Fiscal Model: Budget w/
$500 PFD." The model used the FY00 through FY08 returns. He
noted the overdraw in the first year with a deficit of $424
million in FY22, which turned into a surplus in FY24.
3:00:51 PM
Co-Chair Stedman appreciated the numbers but recognized
they were hypothetical.
3:01:24 PM
Mr. Painter hoped that there would not be another recession
like in 2008.
3:01:36 PM
Co-Chair Stedman hoped that he could live to see the day
when the reserves hit $100 million.
3:02:04 PM
Mr. Painter discussed slide 24, "Legislative Finance
Division 24 Fiscal Model: Budget w/ $500 PFD." The model
used FY09 through FY17 returns and showed the overdraw in
FY22 with balanced budgets turning into surplus. He said
that despite volatility the ERA would remain during this
period and the fund would grow.
3:02:37 PM
Senator von Imhof noted the large drop in the first year
and the subsequent claw back. She thought that the returns
could not continue overtime because inflation would become
a problem.
3:03:39 PM
Mr. Painter pointed to slide 25, "Impact of FY 22 Overdraw
on ERA Balance and OMV Dra Constant 6.2 percent Returns."
The bar chart assumed no inflation-proofing from FY21
through FY24. The chart showed what would happen if the
amount pulled out in FY22 were equal to the statutory
dividend. He said that the impact of the POMV draw would
compound year after year and would increase the deficit by
$632 million.
3:05:19 PM
Co-Chair Stedman asked whether the base number for the
Capital Budget was $127 million.
3:05:26 PM
Co-Chair Bishop replied in the affirmative.
3:05:30 PM
Co-Chair Stedman relayed that the deficit number was as
significant as an entire Capital Budget.
3:05:49 PM
Mr. Painter addressed slide 26, "Impact of FY 22 Overdraw
on ERA Balance and POMV Draw." The bar graph assumed no
inflation-proofing from FY21 through FY24. He said that the
ERA would decline even without the overdraws and with the
overdraws it would get down below $10 billion for a three-
year period. He added that this would result in $566
cumulative difference in POMV which would have to be made
up from another fund source.
3:06:28 PM
Mr. Painter looked at slide 27, "Impact of FY 22 Overdraw
on ERA Balance and POMV Draw." The graph assumed no
inflation-proofing form FY21 through FY24. He shared that
there would be a reduction in the EA with the single draw
in the first year. He related that one single overdraw
could cause the elimination of the ERA entirely.
3:07:42 PM
Co-Chair Stedman announced that he had asked Mr. Painter to
run a report on historical dividend growth. He said that
the report would show the statutory number as well as the
50/50 plan. He spoke of the dividend amount in the event
that the Callan & Associated numbers were accurate. He
stated that the dividend formula that had been established
40 years ago had worked for decades but was not proving
problematic due to the financial markets. He hoped that any
formula established by the legislature would last for
several decades. He asserted that the permanent fund was
still a young fund and he hoped that the fund could stay
healthy for future generations.
3:11:24 PM
AT EASE
3:12:47 PM
RECONVENED
3:12:53 PM
Co-Chair Stedman stated that the following day's agenda
would be determined the following morning.
3:13:48 PM
Senator Olson announced that he would call in for Fridays
meeting.
ADJOURNMENT
3:14:04 PM
The meeting was adjourned at 3:14 p.m.
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