Legislature(2021 - 2022)SENATE FINANCE 532
06/11/2021 01:30 PM Senate FINANCE
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 | |
| SJR6 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SJR 6 | TELECONFERENCED | |
| + | TELECONFERENCED |
SENATE FINANCE COMMITTEE
June 11, 2021
1:33 p.m.
1:33:13 PM
CALL TO ORDER
Co-Chair Bishop called the Senate Finance Committee meeting
to order at 1:33 p.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Donny Olson
Senator Natasha von Imhof (via teleconference)
Senator Bill Wielechowski (via teleconference)
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman
ALSO PRESENT
Senator Peter Micciche; Senator Mia Costello; Senator Josh
Revak; Representative Kelly Merrick; Lucinda Mahoney,
Commissioner, Department of Revenue; Mike Barnhill, Deputy
Commissioner, Department of Revenue; Alexei Painter,
Director, Legislative Finance Division.
SUMMARY
SJR 6 CONST. AM: PERM FUND & PFDS
SJR 6 was HEARD and HELD in committee for further
consideration.
SENATE JOINT RESOLUTION NO. 6
Proposing amendments to the Constitution of the State
of Alaska relating to the Alaska permanent fund,
appropriations from the permanent fund, and the
permanent fund dividend.
1:34:32 PM
Co-Chair Bishop reviewed the meeting agenda. He recognized
the senators in the room.
1:36:01 PM
LUCINDA MAHONEY, COMMISSIONER, DEPARTMENT OF REVENUE,
asserted that the governor had developed a plan that would
protect the Permanent Fund and enshrine the Permanent Fund
Dividend (PFD) in the State Constitution, along with the
Power Cost Equalization Fund (PCE), protecting the funds
for future generations. She hypothesized that with the
proposed 50/50 split would result in an estimated $3
billion draw from the ERA, and the generation of $300
million in additional revenues, which would position the
state for a balanced budget within 5 years.
Co-Chair Bishop asked the presenter to hold for questions
at the end of each slide.
1:38:16 PM
Commissioner Mahoney provided a PowerPoint presentation
titled "Constitutional Amendment: Permanent Fund and
Permanent Fund Dividends" (copy on file).
Commissioner Mahoney showed slide 2 titled "Goals":
1. Protect the Permanent Fund and Permanent Fund
Dividend (PFD)
2. Determine Consistent PFD for Alaskans
3. Establish Strong Reserves
4. Achieve a Sustainable Balanced Budget
Commissioner Mahoney spoke to slide 3 titled "Comprehensive
Fiscal Plan Steps":
Step One - First Special Session
Permanent Fund Structural Fix Permanent Fund, ERA,
PCE Protected
? Establish Strong Reserves w/Bridge Funding
? Consensus on Deficit Size Required
Spending/Revenue Targets
Step Two - Second Special Session
? Revenue/Reduction Initiatives to Achieve Balanced
Budget
Commissioner Mahoney clarified that "bridge funding" meant
a one-time draw from the Permanent Fund Earnings Reserve
Account (ERA). She spoke of landing on targets to determine
necessary revenues for support. She said achieving a
balanced budget would require further cuts to the operating
budget.
1:41:26 PM
Co-Chair Stedman noted that the committee had a process to
go through which it would maintain. He considered that one
operation would not fix all problems. He thought clearly
step one would not be successful as the legislature would
be adjourning the following week and there was much work to
be done. He thought it would be helpful to have the
Department of Revenue (DOR) to come back with more
structure detailed for the different phases outlined on
slide 3. He expressed concern over the timing of the events
listed on the slide. He noted that there were issues other
than the PFD that Alaskans wanted constitutionally
protected such as, education and public safety.
1:43:17 PM
Commissioner Mahoney referenced slide 4, "Permanent Fund:
Endowment Structure":
? It's time for a true Permanent Fund endowment.
? Endowment approach is an internationally accepted
best practice.
? Stabilizes both revenues and the PFD with a smoothed
five-year average.
? Limits government spending at 50% of the 5% POMV
draw.
? Protects Power Cost Equalization (PCE) by depositing
the PCE endowment (~$1.1B) into the Permanent Fund.
? Constitutionally protects Permanent Fund & PCE for
future generations.
Commissioner Mahoney emphasized that that the trustees
supported the endowment plan.
1:45:10 PM
Co-Chair Stedman wanted further definition of why 5 percent
had been chosen. He referenced projections from Callan and
Associates indicated that the rate of return was lower for
following decade.
Commissioner Mahoney deferred the question to the DOR
deputy commissioner.
1:46:05 PM
AT EASE
1:46:32 PM
RECONVENED
MIKE BARNHILL, DEPUTY COMMISSIONER, DEPARTMENT OF REVENUE,
addressed Co-Chair Stedman's question with respect to the 5
percent distribution. He stated that the Permanent Fund
Board of Trustees supported 5 percent being put in the
constitution. He explained that the 5 percent number had
been controversial. He said that for the past few years
there had been a bull market and there were concerns that
it would not persist into the next 10 years. He noted a
market crash in 2020, which recovered rapidly, and
currently the fund was experiencing positive returns. He
said that it was premature to reduce the 5 percent rate and
that the fund would grow at the rate of inflation. He said
that inserting "not more than" before 5 percent in the bill
language would allow the legislature to choose a lesser
number.
1:49:29 PM
Co-Chair Stedman recalled that the initial figure when POMV
was established was 5.25 percent, which dropped to 5
percent. He expressed concern about declining returns for
the next decade, which could result in a 5 percent draw
rate taking the potential for growth from the fund. He
thought there would be years with lower returns and before
the rate was set as proposed, it was important to have
conversations about setting the rate to maximize the
outflow. He was leery of locking in a number that allowed
for no margin and could stifle the growth of the fund. He
thought more modeling should be done to determine the best
interest of the fund and not the spending appetite of the
legislature.
Senator von Imhof understood Co-Chair Stedman's concern
about the 5 percent rate. She thought currently the choice
was more of an academic exercise since there was such a
long way to go to implement a plan such as proposed in SJR
6. She thought that taking 50 percent of the percent of
market value (POMV) draw would yield more than a billion-
dollar deficit, which she believed what a more immediate
issue.
1:53:59 PM
Co-Chair Bishop asked about the proposal to deposit the PCE
Fund into the Permanent Fund and the earnings used on the
50/50 calculation. He asked whether the change meant that
half of PCE earnings would be used for PFDs.
Commissioner Mahoney stated that the intent was that the
PCE would become part of the Permanent Fund and the 50
percent would be drawn from the fund total.
1:55:00 PM
Commissioner Mahoney turned to slide 5, "Permanent Fund
Dividend: Consistency":
Current Challenge:
? Public Mistrust: Too much spending on Government
? Political Impasse: Results in a PFD Based on
Politics Not Laws
Solution:
? Restore Public Trust: Consistent PFDs and Spending
Limits
? Establish a Fair Resolution: 50/50 Split
? Constitutionalize PFD
Commissioner Mahoney addressed the graph entitled
"Historical Dividend Payments," which showed PFD payments
since the first dividend in 1982. She drew attention to the
green line, which represented the statutory calculation for
the PFD. She said that the red line was representative of
the diverging from the statute that occurred in the
determination for the dividend amount. The governor's
proposal was signified by the dashed line. She said that
there were many schools of thought surrounding the
dividend. She contended that there was public mistrust
surrounding the use of the fund's earnings. She said that
the governor's proposal was representative of his
philosophy.
Co-Chair Bishop referenced public mistrust and pointed out
that individuals did not have the information that members
had. He referenced the $4.9 billion the legislature had
moved into the corpus of the fund, which protected the
money for future generations. He highlighted the proposed
transfer of $4 billion into the corpus currently included
in the budget under consideration by the conference
committee. He noted that the legislature had moved $7
billion total into the corpus for protection and had never
drawn from the fund for government use until the passage of
the POMV.
1:58:23 PM
Co-Chair Stedman recalled that when the Permanent Fund
started, the asset allocation was different. He stated that
in the beginning when 50 percent went to dividends and 50
percent went to the state, the state had reinvested its
percentage. He asked Commissioner Mahoney to discuss the
history of the fund surrounding the state reinvestment.
Mr. Barnhill offered to provide a quick history. He relayed
that first Permanent Fund statute had been enacted in 1980,
limiting investment of fund assets to fixed income.
Unfortunately, the interest rates were skyrocketing, and
trustees were concerned about eroding principal value, so
they requested permission to invest in equities. Also, in
1980, the only cash that went out of the Permanent Fund was
for bonds and PFDs. There was no transfer of realized
capital gains from sale of assets. In 1982, the legislature
had amended the statute, which enabled net realized capital
gains to move to the undistributed income account. He
stated that with the change came the understanding that
anything in the form of capital gains would potentially
erode the inflation adjusted value of the assets, which
lead to an inflation proofing adjustment. Inflation
proofing of the fund began in 1982.
Mr. Barnhill continued his remarks. He related that over
the period of 1982 to 2006, the legislature gave the Alaska
Permanent Fund Corporation (APFC) more latitude on the
types of investments it could invest in; however, there was
always a legal list until the early 2000s. In the early
2000s institutional funds began discarding their legal
lists and embracing the "prudent investment rule." The
legislature adopted the rule in 2006 and the fund had
maintained full control of investment choices since that
time. Since 1982, there had always been an inflation
appropriation back to the fund to ensure the fund principal
kept up with inflation.
2:02:30 PM
Mr. Barnhill continued discussing the history of the
Permanent Fund. He stated that the enactment of SB 26 in
2018 nearly converted the fund into a full endowment. He
explained endowment methodology and the current practice of
the fund.
Co-Chair Stedman reiterated that the state had not taken
its 50 percent out for nearly 40 years but had reinvested
the money in the portfolio of the fund, which had grown the
fund and increased the size of dividends paid out to
residents.
Co-Chair Stedman requested numbers that reflected what the
fund and dividend stream would have been if the state had
never reinvested the 50 percent. He asserted that the
dividend stream on the chart was grossly distorted when the
state's reinvestment was considered.
2:05:14 PM
Mr. Barnhill offered to bring back any data requested by
Co-Chair Stedman. He stated that the legislature intended
for some portion of the 50 percent to go to inflation
proofing. He recognized that there was excess after
inflation proofing that the state never appropriated for
another purpose, which had allowed for the fund to grow
over-time.
Senator Wielechowski understood that under the proposal,
the PFD in 2021 would be $2,354. He asked what the
statutory dividend would be.
Commissioner Mahoney responded that under the proposal, the
PFD would be $2,354 in FY 22; the statutory amount would be
$3,064.
Senator Wielechowski asked how much money from the ERA
would be needed to bridge the gap between the proposed plan
and statute. He considered $700 million.
Commissioner Mahoney replied $700 million sounded correct.
Mr. Barnhill interjected that in the most recent
projection, there was an estimated $2.3 billion for
statutory dividends, which meant the figure would be closer
to $800 million.
2:08:03 PM
Senator Wielechowski understood that the projected amount
for oil tax credits was $762 million.
Commissioner Mahoney affirmed that the number was correct.
Senator Wielechowski observed that if the deductible oil
tax credits were eliminated there would be funds to pay out
a statutory dividend.
Commissioner Mahoney replied in the affirmative.
Senator von Imhof wanted to address a comment about
inflation. She said that the fund was invested as a whole,
so inflation was being invested the same whether it was in
the corpus or the ERA. She stated the reason to move
inflation from the ERA into the fund corpus was because the
legislature did not have the ability to withdrawal
inflation or annual earnings from the ERA. She remarked it
was inaccurate to say the fund would be less or more
because inflation had not been moved.
Co-Chair Bishop recognized Representative Kelly Merrick in
the room.
2:10:19 PM
Senator Wielechowski spoke of the Ballot Measure 1 oil tax
debate. He had not seen any bills on behalf of the governor
to fix the oil tax structure. He asked why the governor had
not proposed any legislation to eliminate oil tax credits,
which would free up funds for dividends.
Commissioner Mahoney stated that for 2022, the governor had
proposed payment for the statutory amount of oil tax
credits.
Co-Chair Stedman clarified that the $114 million in the
governor's proposed budget was to pay a liability on the
books of approximately $730 million. He thought the state
needed to parse liability from previous credits created and
put against the treasury compared to future credits. He
remarked there was a per barrel credit that was an ongoing
issue in the profit side of the severance tax. He thought
the liability issue related to the ~$730 million was a
different issue.
2:12:26 PM
Commissioner Mahoney considered slide 6 titled "Permanent
Fund Dividend: Consistency":
? Alaskans deserve certainty concerning annual PFD
payment.
? State needs PFD consistency to attain budget
stability and sustainability.
? Absent certainty, determining future achievable
revenues/reductions is difficult and may result in
over/under collecting/taxing.
? 50% POMV dividend is an equitable distribution of
Alaska's wealth between its citizens and government.
? Resolving the PFD allows a discussion of required
revenues/reductions to close the remaining budget gap
(Fall Special Session)
? Redirects the legislative conversation to growing
Alaska vs. debating PFD.
Commissioner Mahoney stated that the point of the slide was
to illustrate the need for consistency with regard to the
PFD.
Co-Chair Bishop asked whether the state would be better
served to take a $1 billion draw per year rather than $3
billion all at once.
Commissioner Mahoney stated that while there was a $3
billion bridge requested to solve the fiscal issue, the
funds could be drawn as needed so that the dollars could
remain invested in the fund.
2:15:55 PM
Commissioner Mahoney displayed slide 7 titled "Bridge
Funding":
? One-time use of our strong financial asset the
Permanent Fund - positions Alaska for long term fiscal
sustainability
? With $3.0 billion in bridge funding from the ERA, a
forecasted FY25 fiscal gap of ~$300M can be managed
with a combination of revenue measures and spending
reductions
? Other endowments are considering one-time increases
in draws to capitalize on exceptional market
performance:
? Harvard's $42 billion endowment increased from 5% to
7.5% on one-time basis
https://www.thecrimson.com/article/2021/5/3/draw
-further-endowment-fy22/
https://www.nytimes.com/2020/06/02/arts/endowmen
ts-coronavirus.html
? This plan avoids the need for a new broad-based tax
? Constitutionalizing a 5% POMV prevents overdraws in
the future
Commissioner Mahoney pointed out that with the deposit of
$1.1 billion from PCE into the fund, the net reduction to
the fund would be $1.9 billion. She spoke of fiscal
challenges due to COVID-19.
Commissioner Mahoney relayed that Mr. Barnhill had some
research to share regarding COVID-19 and the economy.
2:17:52 PM
Senator Wilson asked whether the state would need $300
million or $500 million total to bridge the state through
FY 26.
Commissioner Mahoney replied that the $300 million had been
developed based on the 10-year fiscal plan that was
submitted with the budget. The 10-year fiscal plan had
incorporated $200 million in reductions to the operating
budget in FY 23 and FY 24. The administration had assumed
that those reductions were a given, but not everyone looked
at it that way. She said that the model, based on the
governor's philosophy and policy decisions, recognized that
an additional $300 million in revenues or reductions would
be needed in addition to what was presented in the 10-year
plan.
2:19:32 PM
Senator Wilson considered the idea of a broad-based tax. He
thought that each working person in the state would end up
paying $2,100 in tax to fill the $500 million gap.
Commissioner Mahoney was not familiar with the thought
exercise.
Senator Wilson explained a broad-based tax would need to be
paid by each working Alaskan, ranging from $1,300 to
$2,100, in order to fill the gap and provide for a $2,300
dividend.
Commissioner Mahoney stated that the governor's plan did
not incorporate a broad-based tax of any sort, and there
had been no calculations such as the ones suggested by
Senator Wilson. She said that the governor's plan assumed a
different approach to fill the gap.
Co-Chair Bishop asked when the governor might share his
plan with the legislature.
Commissioner Mahoney believed the plan would be shared
during the August 2021 special session.
2:21:17 PM
Co-Chair Stedman considered the $300 million to be a raid
on the Permanent Fund. He referenced the statutory spending
cap that allowed a draw of only 5 percent from the fund. He
was cautious about overdrawing the Permanent Fund. He
contended that taking $3 billion from the fund would affect
future generations of Alaskans and the future of the fund.
He hoped to have further conversation on the issue. He
emphasized the need to protect the Permanent Fund and
reminded the committee that it had saved and spent billions
of dollars from the Constitutional Budget Reserve (CBR). He
recognized that the administration was not suggesting any
broad-based tax.
Co-Chair Stedman addressed budgetary reductions and noted
that the operating budget had not been reduced since the
second year of the former Walker administration. He noted
that the committee had struggled with the operating budget,
which was flat funded. He was curious where the reductions
in the governors budget could be found. He wanted to see
where the proposed budget reductions were by department,
including debt service, fund capitalizations, and
retirement. He did not believe $500 million could be cut
from the budget or it would have already been done.
2:25:52 PM
Co-Chair Stedman emphasized the need to embrace reality. He
explained that budget reductions made in the past to the
University and the Alaska Marine Highway System had been
added back with retirement payments and the Department of
Corrections. A net zero to the state.
Co-Chair Stedman was curious about the governor's proposed
revenue sources. He was not excited about taxes. He thought
operating costs should be flat. He said that there were
clear structural problems with the state's oil taxes. He
discussed moving cash flows that warranted review to assure
sure that the system was as fair as it was before former
President Trump lowered corporate income taxes. He was not
interested in legalizing gambling or sex-work. He looked
forward to finding a solution. He stressed that once the
Permanent Fund was breached for $3 billion it would be
mined for more funds in the future. He reiterated the need
to give future Alaskans an intact Permanent Fund and the
importance of not spending all the wealth of the oil basin
in our lifetime. He commented that things were improving
financially.
2:29:29 PM
Senator Olson acknowledged Mr. Barnhill credentials and
experience. He echoed Co-Chair Stedman's comments about the
billions that he, Co-Chair Stedman, and a previous finance
committee had worked to reinvest in the CBR, only to have
it spent by a finance committee of a different make up
during a past session. He thought the proposed "bridge
funding" was a non-starter and that there was little to no
support for the idea at the table.
Mr. Barnhill discussed the workings of endowment funds; how
endowment funds worked, how popular they were, and how they
had weathered COVID-19 in terms of spending increase
percentages. He said that the 5 percent rule was being
examined elsewhere and discussions were occurring
concerning limited or one-time adjustments being made to
meet the challenges presented by COVID-19.
2:33:30 PM
Co-Chair Stedman stated that one could always justify
spending money for the good of the public. He thought it
came down to the prudency factor. He understood that it was
difficult to say no to the public. He recalled the robust
markets in the 1990s when shortsighted choices had been
made in the management of Public Employees' Retirement
System (PERS) and Teachers' Retirement System (TRS), which
had resulted in $10 billion in liability. He remarked that
when working with long averages in the financial market -
skimming off the top in strong years, while the return
regresses to the mean in the slim years - would destroy a
portfolio.
Co-Chair Stedman noted that the $3 billion was not going to
be set aside while the market readjusted so the state could
buy in at a lower rate. He contended that the $3 billion
would be taken out and spent. He reminded the committee of
the excessive PERS and TRS liability. He did not believe
that turning the Permanent Fund into an endowment would be
comparable to an endowment of an ivy league school as
suggested by Mr. Barnhill.
2:37:02 PM
Senator Olson suggested Mr. Barnhill continue with his
thoughts.
Mr. Barnhill stated that the sustainability of the fund was
of paramount consideration. He said that the governor's
plan managed the needs of the present with the
sustainability that protected the future.
Co-Chair Bishop noted that the commissioner had implied
that people relied on the PFD for basic needs. He said that
everyone in the room agreed on that point. The question was
how to get to a sustainable solution.
Commissioner Mahoney pointed out that the governor
recognized that there were many different opinions and more
than one way of making the budget work. She offered that
the governor was open to all suggestions. She stated that
the current presentation was the starting point for a
conversation.
2:39:19 PM
Commissioner Mahoney highlighted slide 8 titled "Bridge
Funding":
? As the Permanent Fund grows, so does the POMV which
closes the deficit organically.
? 2022 POMV: $3,069.3
? 2030 POMV: $4,171.8
? The gap closes significantly due to increased POMV
revenues
Commissioner Mahoney looked at slide 9 titled "Establish
Strong Reserves":
? Reserves are essential to manage State's revenue
volatility
? ~66% of UGF is POMV Lagged five-year smoothing
reduces market risks
? ~27% of UGF is Oil Price volatility presents near
term risk. This 27% will decrease over time as the
Permanent Fund and POMV grow.
? $1.0 billion in reserves can assist near term
volatility over two fiscal years.
Commissioner Mahoney addressed the graph on slide 9, which
represented what the CBR would look like in the future with
the bridge funding only. The dashed line represented the
minimum balance of reserves that were needed. The circled
area represented the timeframe in which new revenues and
reductions were needed to be sustainable. The $1 billion
had been developed by examining revenues such as POMV,
which was smoothed over a rolling five-year average and
provided some certainty. She highlighted the volatility of
oil revenue, which represented 27 percent of the state's
revenue.
2:43:17 PM
Commissioner Mahoney addressed slide 10, "Achievable
Revenue/Reductions":
? $3.0 billion in bridge funding provides time to
transition into a sustainable fiscal plan.
? Revenues/Reductions of $300 million are needed by
FY24-25 to balance budget and maintain sufficient
reserves
? Absent new revenues/reductions the CBR balance will
fall below $1.0 billion
2:43:56 PM
Co-Chair Stedman struggled with the reality of the proposed
expenditure reductions. He asserted that to reduce agency
costs statutory changes had to be made. He required more
detail surrounding real expenditure reductions.
Co-Chair Bishop stated his understanding that the
expenditure reduction detail would be presented in the
August special session.
Commissioner Mahoney relayed that the objective of the
August special session was to talk about solutions. She
remarked that the administration was open to the
legislature's suggestions beforehand.
Co-Chair Stedman stressed that the legislature could not
come up with solutions, that solutions needed to come from
the administration. He expressed concern that the
administration did not have a plan, or any solutions, to
bring before the committee. He shared the process the
legislature had gone through to compose a transparent
budget.
2:47:28 PM
Senator Wilson clarified his understanding that anytime the
presentation referenced $300 million, it really signified
$500 million.
Commissioner Mahoney replied that if the $200 million from
the 10-year plan was considered, the number was $500
million.
Senator Wilson asked about the likelihood the
administration would provide the legislature with the
information it needed by August. He wondered whether the
administration had a 100 percent certainty that all
proposals and plans would be ready by August 1, 2021.
Commissioner Mahoney thought the question was difficult to
answer because she was not sure what the legislature
needed. She said that she could honor requests. She could
not identify a percent of certainty.
Senator Wilson commented that he thought the committee was
hearing the fourth presentation from the administration in
which the same questions and themes had arisen. He related
that he had hoped for more from the administration in the
way of solutions. He emphasized that the legislature needed
more information form the administration to make sound
fiduciary decisions for the state. He believed that past
use of the ERA had been unnecessary due to high oil
revenues. He thought that there were oil tax credits that
could be changed but that previous concepts and statute
changes had taken years and not 30 days. He felt that the
sooner the administration made details on revenues or cuts
available to the legislature, the better.
2:51:16 PM
Senator von Imhof wanted to build upon Senator Wilson's
comments. She reiterated that approximately $300 million in
revenue was needed, and $500 million in reductions.
Commissioner Mahoney stated that amounts were not correct.
Senator von Imhof asked whether the commissioner could
provide clarification on the numbers needed in terms of
budget cuts and new revenue.
Commissioner Mahoney stated that the 10-year plan
expenditure component included $200 million in reductions
to the budget. As the fiscal plan was developed, it had
been determined that an additional $300 million would be
needed to close the fiscal gap. The $200 million in
expenditures and the $300 million in either expenditures or
revenue was a combined $500 million.
Senator von Imhof thought she was looking at the numbers
differently. She considered the current budget prepared by
the legislature, which was balanced before paying out
dividends. She said that as soon as dividends were added
the state went into deficit spending. She related that with
the governor's numbers, half of the POMV draw was taken for
the PFD. She thought that the current draw would be $3
billion, half of which was $1.5 billion. She asserted that,
using the governor's numbers, if $1.5 billion was taken
from the $3 billion the state was left with a $1.5 billion
deficit. She summarized that taking 50 percent of the POMV
off the top would yield a $1.5 billion deficit. She did not
understand how $500 million total could close the fiscal
gap, particularly when the governor's numbers had shown
otherwise.
2:56:00 PM
Commissioner Mahoney advanced to slide 11 titled
"Achievable Revenue/Reductions." She thought the slide
could help with Senator von Imhof's questions. She noted
that the following slide provided the numbers to support
the graph shown on slide 11. She stated that the orange
bars on the graph illustrated the anticipated POMV growth
thorough 2030.
Commissioner Mahoney explained that the following slide
would provide numbers to support the graph. She pointed out
to the committee that the blue lines represented
traditional revenues, which grew small into the future. The
revenues that drove the success of the model were the POMV
revenues, which were projected to grow significantly over
time due to the larger starting balance of the fund. The
yellow on the graph represented the CBR draw proposed by
the governor. The funds would be used over time to bridge
the state through anticipated deficits. The gray area
represented new revenues and reductions. The green line
represented expenditures.
2:59:06 PM
Co-Chair Bishop asked how much analysis was put into the
scenario depicted on the graph.
Commissioner Mahoney affirmed that a Monte Carlo simulation
had been run. She wanted to confirm the information with
Dan Stickel, the department's chief economist, who had run
the scenarios.
Co-Chair Bishop asked if he was online for questions.
Commissioner Mahoney replied in the negative. She offered
to get back to the committee.
3:00:00 PM
Commissioner Mahoney looked at slide 12 titled "Financial
Details":
? $3.0 billion in bridge funding provides time to
establish achievable revenues/reductions.
? Beginning in FY2024, $150 million to $300 million in
revenues/reductions balances the budget and begins to
grow reserves.
Commissioner Mahoney noted that slide 12 showed the numbers
that correlated with the graph on slide 11. She asserted
that mathematically, the model worked. She said that the
difference between the model and those done by LFD, were
different assumptions and different inputs. She shared that
what was represented on the slide was the governor's
philosophy and policy measures related to how the
structural deficit would be fixed.
Commissioner Mahoney said that the POMV in a 50/50 split
environment was reflected in FY 22 as 50 percent. She
stated that the $4.6 billion represented the governor's
proposed budget. She noted that the CBR grew overtime and
stayed above the $1 billion target throughout the model.
The plan supported a 50/50 dividend for Alaskans of $2,354
in FY22, growing to $3,000 in FY30. She added that FY24
and FY 25 reflected the need for new revenues and
reductions. The necessary additional revenues were $150
million in FY 24, increasing to $300 million in FY 25. The
graph incorporated the bridge funding in FY 22, which was
why the CBR balance increased. She relayed that the last
line assumed the starting point for determining the POMV at
the end of FY 21 of $77.6 billion of the Permanent Fund.
She said that the fund balance was currently $81 billion.
She stated that when the model was updated the June 2021
balance would be used to recalculate what the POMV revenues
would be in the future. She thought that the revenues would
increase due to the increased starting point.
3:03:25 PM
Co-Chair Bishop asked whether the proposal included a $2
billion draw from the ERA and $1 billion from PCE to get to
the $3 billion total.
Commissioner Mahoney stated that the net effect to the
Permanent Fund was $2 billion in regard to a reduction. She
said that $3 billion would be drawn to enable fiscal
sustainability but $1 billion would be deposited, the net
reduction to the fund would be $2 billion.
3:04:12 PM
Co-Chair Stedman observed that when looking back on flat
budget since FY 17, the legislature had struggled with
budget reductions. He thought the proposed 10-year plan
would be a flat budget when considering the numbers on the
slide, which he felt was unrealistic. He remarked that
there were salary increases and contract negotiations that
pushed the budget up. He thought a flat operating budget
over 13 years was hard to imagine. He wanted to see more
agency detail in the forecasts.
Co-Chair Stedman expressed concern about a projected linear
balance for the Permanent Fund. He wanted adjustments to
the models to incorporate real market returns. He thought
that if budget reduction or tax increases did not happen
the Permanent Fund would be in jeopardy. He worried that
the proposal could result in a tax burden that would fall
on state residents.
3:08:00 PM
Commissioner Mahoney thought Co-Chair Stedman raised
several good points. She asserted that there were ebbs and
flows related to debt from year-to-year. She thought it
would be important to discuss budget details in the August
special session.
Co-Chair Bishop whether Commissioner Mahoney could have Mr.
Stickel provide the failure rate from the model analysis.
He noted that the capital budget had yet to be discussed.
He looked at the numbers on the slide and felt that the
numbers failed to approach the 1 percent replacement rule
for the deferred maintenance on the state's assets.
3:09:54 PM
Commissioner Mahoney showed slide 13 titled "Financial
Considerations":
Upside Fiscal Benefits:
? Increased PERS & TRS investment earnings of
approximately $5.0 billion may reduce unfunded
liabilities ($6.5 billion) and decrease the State's
future assistance payment (FY22 payment = $336.2
million).
? Gains will be smoothed over five years per policy
? Potential for decreased state assistance in the
future use of Federal stimulus to offset Unrestricted
General Fund (UGF).
? Lapsing funds are not taken as savings the state
lapses tens of millions of unused funding back into
the general fund every year
? Maintaining downward budget pressure to reduce
programmatic formulas
? Market returns in excess of 6.25% projection
Downside Risk:
? Inflation increases
? Market correction decreasing Permanent Fund and
Retirement Trust values
? Failure to realize downward pressure on budgets
? Oil price and volume volatility
This presentation presumes a "mid-case" scenario.
There are multiple events that are not considered in
these numbers that could drive increases or decreases
in the state's budget position. For this reason,
several hundred million in expected budget savings
have not been included before they are realized.
Commissioner Mahoney discussed forecasts and the inherent
changeability due to unforeseen circumstances. She noted
that there were lapsing funds that were not incorporated
into the numbers. She added that the downsize risk was not
incorporated into the model. She noted that the state's
retirement funds had performed well and maintained healthy
balances. She suggested that after actuarial analysis, the
state could reduce its contribution rate relating to those
funds, which would be a reduction of state expenditures.
She said that the governor's philosophy was to continue to
seek out budget cuts. She said that when the model was
updated in August 2021, the inflation assumption would be
changed if necessary. She asserted that the forecast was a
starting point for conversation.
3:13:24 PM
Commissioner Mahoney referenced slide 14, "$3.0B Bridge
Funding, 50/50 PFD":
? The above graphs depict the impact of the bridge
fund distribution ($3.0 billion CBR transfer, $1.1
billion PCE deposit, $1.9 billion net) on the POMV and
the Permanent Fund Balance
Commissioner Mahoney stated that the slide, with two
graphs, was a representation of what the POMV impact would
be as a result of the $2 billion draw. She pointed out that
the graph on the right represented the change in Permanent
Fund balance. She shared that the department had
reformatted their graphs to mirror Legislative Finance
Division (LFD) graphs.
3:14:32 PM
Commissioner Mahoney turned to slide 15 titled "Summary,
Governor's Plan: Financial and Political Solution":
• Constitutionally protect Permanent Fund and PFD
o Limit annual draw to 5% POMV
o Dedicate 50% of POMV to PFDs
o Combine Principal and Earnings Reserve Account
into one endowment
• Constitutionally protect Power Cost Equalization
o Deposit PCE endowment ($ into Permanent Fund
o Dedicate revenue to equalize power costs in
Alaska
• Provide bridge to balance budgets through FY2025
o Transfer $3 billion from ERA to CBR
• Discuss achievable revenues/reductions in Second
Special Session
3:14:55 PM
AT EASE
3:15:09 PM
RECONVENED
Co-Chair Bishop shared that the committee would abbreviate
the presentation in the interest of time. He moved to a
presentation by the Legislative Finance Division (LFD).
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
provided a PowerPoint presentation titled "Analysis of
Governor's Fiscal Plan" (copy on file). He began on slide 2
titled "Review of LFD Baselines":
? In LFD's Overview of the Governor's Budget back in
January, we presented two budget baselines: current
law and current policy. These are designed to provide
a neutral starting point for the year's budget
discussions, separate from any policy choices made in
the Governor's budget request.
? Our fiscal modeling is currently based on versions
of the
FY22 budget that are very similar to those baselines.
? Legislative Finance's fiscal model is designed to
show policy makers the longer-term impact of fiscal
policy decisions.
? The baseline assumptions are essentially that
current budget levels are maintained, adjusted for
inflation.
Mr. Painter reviewed the division's budget baselines.
3:17:10 PM
Mr. Painter turned to slide 3 titled "Review of LFD
Baselines (cont.)":
Revenue Assumptions
? LFD's baseline revenue assumptions are the
Department of Revenue's Spring Revenue Forecast.
This assumes $61 oil in FY22, growing with
inflation in future years.
DNR oil production forecast projects that
Alaska North Slope production will increase from
459.7 thousand barrels per day in FY22 to 565.5
thousand barrels per day in FY30.
? For the Permanent Fund, we assume actual FY21
returns through the April 30 APFC statement and
Callan's 6.20% assumption for FY22 and beyond.
3:18:05 PM
Mr. Painter addressed slide 4 titled "Review of LFD
Baselines (cont.)":
Spending Assumptions
? For agency operations, we are currently using the
Senate's first committee substitute as our baseline
($3,872.7 million UGF), growing with inflation of
2.0%.
This budget is used because it did not include
any one-time fund sources present in other
versions of the budget, so it represents a
reasonable starting point.
This number is very close to our Current Law
and Current Policy baselines from January.
? For statewide items, our baseline is to assume that
all items are funded to their statutory levels.
This includes School Debt Reimbursement, the
REAA Fund, Community Assistance, oil and gas tax
credits, and the PFD.
We also include a baseline Fund Transfers
amount that represents the ongoing cost of DEC's
Spill Prevention and Response program.
? For the capital budget, we assume the Senate's first
committee substitute ($176.7 million UGF) growing with
inflation of 2.0%.
This budget is used because it represents the
Governor's original amended request without
one-time fund sources.
? For supplementals we assume $50.0 million per year.
This is based on the average amount of supplemental
appropriations minus lapsing funds each year.
3:20:39 PM
Mr. Painter reviewed slide 5 titled "Comparison of
Governor's 10-Year Plan to LFD Baselines":
? The Governor's 10-Year Plan for the budget makes
several policy choices to reduce spending:
50% funding of school debt reimbursement and
REAA Fund capitalization;
$65.7 million less UGF agency operations in
FY22 than original Senate budget;
$100 million of additional reductions in each
of FY23 and FY24;
Grows agency operations in FY24+ at 1.5% rather
than with inflation; and
Supplementals and lapse are assumed to balance
out.
? See handout entitled "OMB and LFD Fiscal Model
Assumption
Comparison."
? This level of budget reductions is not unattainable,
but these are significant policy choices.
Mr. Painter noted that the $65.7 million less in UGF agency
operation in the governor's budget consisted of one-time
fund source changes that were reversed in subsequent years,
which meant the ongoing impact was less. He stated that
there were some policy choices made by the governor to
reduce the budget, that were not reflected in the baseline.
He remarked that the governor's proposed $100 million
reductions in FY 23 and FY 24 did not account for
inflation. He referenced a handout titled "OMB and LFD
Fiscal Model Assumption Comparison" (copy on file) showing
the difference in the LFD baseline assumptions and the OMB
10-year plan with an item-by-item comparison. He noted that
the proposed level of budget reductions was not necessarily
unattainable, but the proposals were significant policy
choices. There had been annual debates in the legislature
over how to fund school debt reimbursement, the Regional
Educational Attendance Area (REAA) Fund, and other items.
He relayed it was not the default or baseline to assume the
reductions would happen.
3:23:14 PM
Mr. Painter looked at slide 6 titled "Comparison of
Governor's 10-Year Plan to LFD Baselines (cont.)." He noted
the negative numbers in the table reflected where the
governor's 10-year plan was below the LFD baseline and
positive numbers (appearing only in FY 22) reflected where
the governor's plan was higher. He pointed to the top line
showing agency operations and noted it contained the bulk
of the difference between the governor's plan and the LFD
analysis. He highlighted -$65.7 million in FY 22 that grew
over subsequent years due to the $100 million reductions
versus LFD's assumption of growth with inflation. The
number continued to grow with inflation over time due to
the difference in the lower base and the different rates of
inflation (2 percent versus 1.5 percent). He pointed to a
$3.1 billion difference in total (agency operations)
spending [through FY 30].
Mr. Painter moved to the second line in the table on slide
6 showing the statewide difference between the governor's
proposal and the LFD baselines. He highlighted that the
governor's numbers were approximately $1.1 billion below
the LFD baseline. He explained much of the difference was
reflected in the governor's 50 percent funding of school
debt reimbursement and the REAA Fund as well as reduced
funding for community assistance in the first couple of
years of the plan. He detailed that part of the difference
was a technical difference in retirement funding. He
elaborated that the governor was using the official Alaska
Retirement Management Board (ARMB) numbers, while LFD's
analysis used the board's draft numbers from December,
which were slightly higher. He noted ARMB would meet the
following week to adopt the official numbers. He assumed
that after the numbers had been adopted OMB and LFD's
numbers should align.
Mr. Painter addressed the capital budget difference on
slide 6. The governor's proposed capital budget was higher
by $56.5 million [for FY 22]. In subsequent years the
governor's plan used $150 million growing with inflation,
while LFD used $176 million growing with inflation. He
moved to the fund transfer line of the table and noted that
after FY 22 the governor's plan and LFD agreed on fund
transfers. He briefly mentioned the difference in
supplementals at the bottom of the table. The total
difference between LFD's baseline and the governor's
proposed numbers was relatively minor in the first couple
of years and grew significantly as the governor's proposed
cuts compounded. The governor was proposing a total of
$4.856 billion lower spending than the LFD baseline for the
current budget growing with inflation [through FY 30].
3:26:04 PM
Co-Chair Stedman remarked that it was hard to project ten
years in the future with any accuracy. He looked at the
projected $591 million difference in FY 25. He reasoned
that even if the actual spread was half the number, it
would still be $300 million the state would need to make
up. He remarked the number was significant. He suggested
that LFD include agency and statewide growth rates with
more detail on a slide in the future. He wanted to hear
where the cuts would be if someone talked about agency
reductions in the hundreds of millions of dollars. He
remarked that the legislature had struggled at the table on
every single agency.
Mr. Painter showed slide 7 titled "Fiscal Model: Governor's
PF Plan with LFD's Baseline Spending Assumptions." The
slide showed the effect of the Permanent Fund portion of
the governor's plan without the spending reductions or new
revenue to illustrate the importance of the two items to
pay for the plan. The lines in the top left chart reflected
spending assumptions and the bars reflected revenue
sources. The chart on the bottom left showed state
reserves. He pointed out that the LFD analysis assumed the
constitutionalizing of the Permanent Fund; therefore, the
ERA shown in green disappeared [in FY 23]. The chart on the
top right showed the PFD check compared to the current
statutory PFD. The chart below that showed the Permanent
Fund and its growth. He highlighted that the fund grew
significantly faster than inflation compared to FY 20,
primarily due to large market returns in the current year.
The next chart near the bottom of slide on the right showed
the impact of the $3 billion draw on the percent of market
value (POMV). He detailed that taking an additional $3
billion out of the fund would cause a reduction of around
$150 million in POMV over time as it was worked into the
average.
Mr. Painter continued to speak to slide 7. The slide
demonstrated that if the plan only included the 50/50
dividend and bridge funding, the bridge funding would run
out quickly. He noted the result was a broken model where
[expenditure] lines and [revenue] bars did not match up
[shown in the top left chart on slide 7], meaning there was
not sufficient funding to pay for the budget due to
persistent deficits that could not be filled. He noted that
the slide only included the Permanent Fund portion of the
governor's proposed plan. Slide 8 showed the same charts
with the governor's assumptions built in.
3:29:45 PM
Mr. Painter spoke to slide 8 titled "Fiscal Model:
Governor's PF Plan with Governor's Spending Plan and New
Revenues." The slide showed the governor's Permanent Fund
plan in addition to the proposed spending plan and $300
million in new revenue. He noted the numbers were very
close to the governor's model. He remarked there was a
slight difference in the growth rate of the Permanent Fund
[between the LFD analysis and the OMB numbers]; the numbers
were within a few million dollars. He stated that the slide
indicated that the differences between the LFD and OMB
modeling was a matter of the administration's policy
choices. The slide showed that state revenue would go from
deficits to surpluses and a CBR balance would be retained
and rebuilt throughout the given period as surpluses were
deposited into the account. The model demonstrated that if
the proposed reductions could be made and the new revenue
came in, the numbers presented in the governor's plan
worked.
Co-Chair Bishop highlighted that the governor's plan
assumed a 1.5 percent inflation rate, 50 percent school
bond debt reimbursement, and an REAA reduction from the
current amount. He stated the data shown in the middle
column [on slide 8] reflected the governor's numbers.
Mr. Painter agreed.
3:31:10 PM
Mr. Painter briefly highlighted slide 9 titled "Analysis of
Governor's Comprehensive Fiscal Plan":
? OMB 10-year plan for spending, which has $4.86
billion less spending over FY22-30 than current
policies reflected in the LFD baseline.
? Adds $300 million in new revenue (or additional
budget reductions) beginning midway through FY24.
? Constitutionalizes PFD at 50% of POMV draw (about
$2,350 per recipient in FY22).
? Transfers PCE Fund to Permanent Fund and makes some
funding for power cost equalization a constitutional
mandate.
? One-time transfer of $3 billion from ERA to CBR as
"bridge."
Co-Chair Stedman remarked that the administration had been
talking about taking $2 billion out of the Permanent Fund
and liquidating the Power Cost Equalization (PCE) Fund. He
thought it would in essence be transferring the payout to
the Permanent Fund and liquidating and spending the PCE
endowment.
Mr. Painter explained that in LFD's models and
administration's models, the PCE program had been switched
to a UGF expense, which added to spending. Additionally,
the community assistance program would become a UGF
expense; the program was currently funded primarily with
the PCE Fund.
3:32:45 PM
Mr. Painter addressed slide 10 titled "Analysis of
Governor's Comprehensive Fiscal Plan (cont.)":
? LFD's modeling and the Governor's modeling do not
have significant differences the numbers presented
by the Governor are technically sound. The question
for the legislature is whether you agree with the
policy choices in the plan.
? Currently, the legislature has four main levers to
use to balance the budget: drawing from savings
accounts (including the ERA), reducing the PFD,
reducing the budget, or increasing revenue. The
Governor's plan removes the first two options, leaving
only the last two.
Over the past nine years of deficits, we used
three of the four levers: budget reductions, PFD
reductions, and savings draws. We are now
essentially out of savings beyond the ERA.
If existing revenue sources do not meet DOR's
projections, the Governor's plan would require
additional budget reductions or new revenue.
? The $3 billion "bridge" allows time for increases to
existing revenue sources, the $300 million in new
revenue, and the spending reductions to balance the
budget while paying a 50/50 PFD. Without it, the CBR
would not have sufficient funds to avoid an ERA
overdraw during the transition period under this plan.
Mr. Painter elaborated on the last bullet point on slide
10. He communicated that the CBR's current balance was not
sufficient to get through the transition period. He
explained that for the administration's plan to work, the
$3 billion was an essential component of the governor's
overall plan to get to a balanced budget.
3:34:45 PM
Co-Chair Stedman was concerned about the opportunity cost
of the $3 billion overdraw or looting of the Permanent
Fund. He wanted to see a growth projection on the $3
billion going forward for 30 years and the payout that
would come out. He wanted to see the cost for future
generations.
Mr. Painter agreed to provide the information. He noted
that LFD's rule of thumb associated with the 5 percent POMV
was that every $1 billion taken from the Permanent Fund
reduced the POMV by $50 million. The $3 billion transfer
would reduce the POMV by $150 million in real terms. He
noted that it would take time to take effect due to the
five-year average and lag.
3:35:52 PM
Mr. Painter spoke to slide 11 titled "Analysis of
Governor's Comprehensive Fiscal Plan (cont.)":
? Evaluating a fiscal plan requires clear goals and
metrics: what problems are we trying to solve?
We can imagine a wide variety of goals or
metrics the Legislature may have in designing a
fiscal plan. Making those explicit may make
evaluating fiscal plans easier.
For example, is the goal to balance the budget
at current prices, or are current oil prices high
enough that we should be trying to generate
surpluses to rebuild the CBR? Is it more
important to avoid taxes or to have
distributional equity? Is it important to
maintain downward pressure on spending, or have
we cut too far already?
Mr. Painter elaborated on slide 11. He spoke to the first
bullet point and noted there were many ways to approach
designing a fiscal plan. He added that the success of a
plan would depend on the goals that needed solving. He
stated that depending on whether the legislature thought
current oil prices were a target, it would make a big
difference for the spending reductions and revenue needed
to make a plan work. He continued to review questions in
the last bullet on slide 11. A discussion the legislature
and public had heard frequently was about whether certain
options were regressive or progressive. The governor had
stated the goal was to avoid broad-based taxes; therefore,
he speculated the governor's $300 million in new revenue
would not include additional taxes. He remarked that others
would say a broad-based tax was acceptable. He believed
resolving the conflict would be important to creating a
plan that had majority support.
Mr. Painter addressed the final question on slide 11. There
had been discussion in the other body about the various
spending needs of the state such as deferred maintenance
and other. There could be debate over whether maintaining
the downward spending pressure was important or whether it
was no longer really possible. The differences would make
it difficult to say whether a fiscal plan worked or did not
work from a policy standpoint because the answer would be
different to different people.
3:38:36 PM
Mr. Painter provided a list of rhetorical questions on
slide 12 titled "Analysis of Governor's Comprehensive
Fiscal Plan (cont.)":
Some questions to consider:
? Which elements of a plan should be constitutional,
and which should be statutory?
? If the Legislature does not agree with the
Governor's spending reduction plan, should the
difference be made up with more revenue or with lower
PFDs?
This question could be flipped around in any
direction.
? If (when?) oil revenue declines substantially in the
future, will this system still be sustainable?
? Would voters approve this constitutional amendment
(HJR 7, Permanent Fund)? What about HJR 6 (spending
limit) and HJR 8 (voter approval of taxes)? Are all
necessary for the Governor's plan to work?
Mr. Painter elaborated on the first question. He asked if
it was important to set a new PFD formula in the
constitution versus in statute. He asked whether PCE should
be in the constitution or statutory. He asked if a new
constitutional spending limit was needed or whether a
statutory limit was sufficient. There were many differences
of opinion on what should be included in the constitution
versus statute. He noted that the bill number in the last
bullet point could be replaced with SJR 6 rather than HJR
7.
SJR 6 was HEARD and HELD in committee for further
consideration.
Co-Chair Bishop provided concluding remarks. There was
currently no future meeting scheduled.
ADJOURNMENT
3:41:17 PM
The meeting was adjourned at 3:41 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 6 OMB and LFD Fiscal Model Assumption Comparison 6.11.2021.pdf |
SFIN 6/11/2021 1:30:00 PM |
SJR 6 |
| SJR 6 Sectional Analysis ver. W 05.20.2021.pdf |
SFIN 6/11/2021 1:30:00 PM |
SJR 6 |
| SJR 6 DOR Presentation 06.11.2021.pdf |
SFIN 6/11/2021 1:30:00 PM |
SJR 6 |
| SJR 6 LFD Analysis of Gov Fiscal Plan Presenation 06.11.2021.pdf |
SFIN 6/11/2021 1:30:00 PM |
SJR 6 |
| SJR 6 Public Testimony Boutin.pdf |
SFIN 6/11/2021 1:30:00 PM |
SJR 6 |