02/16/2017 03:30 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB21 | |
| SB26 | |
| Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 21 | TELECONFERENCED | |
| += | SB 26 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 16, 2017
3:30 p.m.
MEMBERS PRESENT
Senator Mike Dunleavy, Chair
Senator David Wilson
Senator Cathy Giessel
Senator John Coghill
Senator Dennis Egan
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 21
"An Act relating to appropriations from the income of the Alaska
permanent fund; relating to the calculation of permanent fund
dividends; and providing for an effective date."
- HEARD & HELD
SENATE BILL NO. 26
"An Act relating to the Alaska Permanent Fund Corporation, the
earnings of the Alaska permanent fund, and the earnings reserve
account; relating to the mental health trust fund; relating to
deposits into the dividend fund; relating to the calculation of
permanent fund dividends; relating to unrestricted state revenue
available for appropriation; and providing for an effective
date."
- HEARD & HELD
DISCUSSION: Angela Rodell~ Executive Director~ Alaska Permanent
Fund Corporation.
- HEARD
PREVIOUS COMMITTEE ACTION
BILL: SB 21
SHORT TITLE: PERMANENT FUND: INCOME; POMV; DIVIDENDS
SPONSOR(s): SENATOR(s) STEDMAN
01/18/17 (S) READ THE FIRST TIME - REFERRALS
01/18/17 (S) STA, FIN
02/02/17 (S) STA AT 3:30 PM BUTROVICH 205
02/02/17 (S) Heard & Held
02/02/17 (S) MINUTE(STA)
02/16/17 (S) STA AT 3:30 PM BUTROVICH 205
BILL: SB 26
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/18/17 (S) READ THE FIRST TIME - REFERRALS
01/18/17 (S) STA, FIN
02/07/17 (S) STA AT 3:30 PM BUTROVICH 205
02/07/17 (S) Heard & Held
02/07/17 (S) MINUTE(STA)
02/16/17 (S) STA AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
SENATOR BERT STEDMAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Sponsor of SB 21, provided an overview.
RANDALL HOFFBECK, Commissioner
Alaska Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Reviewed SB 26.
ANGELA RODELL, Executive Director
Alaska Permanent Fund Corporation
Juneau, Alaska
POSITION STATEMENT: Answered question regarding the possible
impact on the permanent fund from SB 21 and SB 26.
ACTION NARRATIVE
3:30:44 PM
CHAIR MIKE DUNLEAVY called the Senate State Affairs Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Wilson, Giessel, Coghill, Egan, and Chair
Dunleavy.
SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS
3:31:34 PM
CHAIR DUNLEAVY announced the consideration of SB 21.
3:31:57 PM
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,
sponsor of SB 21, stated that the bill is before the committee
for the second time and provided an overview as follows:
In essence what this bill does, rather than address a
packet solution for the budget deficit is to take a
look at the permanent fund or big-earning engine of
roughly $55 billion and take a look at that as far as
how much it could produce in payouts that would
include dividends or other sources of expenditures,
and what percent we can pull out of that and how could
we manage that asset to protect if for future
generations of Alaskans.
We were fortunate enough to be here when we had the
massive wealth oil-bubble run through the state;
unlike some of our grandfathers or grandparents who
missed it just due to the age cycle or future
generations of Alaskans that aren't even born yet,
that they can see, especially the future generations,
can see that we secured a vast amount of the wealth
bubble for their benefit also, that we don't use it
over the next dozen year or less on ourselves.
3:33:43 PM
SENATOR STEDMAN specified what SB 21 does as follows:
This bill what it does it would limit the withdrawal
annually to 4.5 percent of the market value and
there's an averaging over the last five years that
takes place, so you don't take just the last year's
ending balance, but you back up six years and take the
first five of that, so it makes it very predictable
for the budgetary folks to know exactly what revenue
they would have.
A 4.5 percent withdrawal on average over time the
market should and returns should suffice and there
will be other presenters with better backgrounds that
can address that to the committee to ensure that we
don't diminish the purchasing power and or spend down
the fund. Of that 4.5 percent, 2.25 percent would be,
or one half of it would go to dividends automatically,
to the citizens, and that would grow over time. The
other 2.25 percent of the 4.5 percent, the other 2.25
percent or one half, could be added to the dividends
if we are so fortunate as to have robust economies and
an easy time balancing the budget, it could also go
back to the permanent fund, or could be used, which
would happen over the next several years go to the
general fund of the state to help us when we have
financial difficulties like we have today. So that
would ensure that the public gets 50 percent of it in
a dividend, the other 50 percent every year would come
before the Legislature and the elected body would
decide to add it to the dividends, send it back to the
permanent fund, or take it to core services like
education or health and human services or what have
you.
3:35:53 PM
SENATOR STEDMAN summarized as follows:
In a nutshell, that's what this bill does; again, it's
not a one-bill solution to our deficit issue, but it's
a protective mechanism to ensure that we have a very
valuable asset for future generations to be able to
rely on also, that we don't basically, we the
Legislature, including myself, all 60 of us, all good
intended elected officials, collectively we can be
dangerous, don't start taking chunks out, the
billions, and hurt the last 40 years of wealth
accumulation.
CHAIR DUNLEAVY remarked that during the past several years there
have been people trying to sell that using the permanent fund
would be immune from market fluctuations versus the volatile oil
markets. He asked Senator Stedman to confirm that the permanent
fund is not immune from fluctuations.
3:38:20 PM
SENATOR STEDMAN answered correct. He pointed out that SB 21 uses
five years of market values to smooth out volatility. He noted
that he worked with the City of Sitka 30 years ago in changing
their all-bond portfolio to a percentage of market value that
took a five-year average. He noted that unlike SB 21 with a 4.5-
percent payout, Sitka chose a 6-percent payout. He admitted that
Sitka's 6-percent payout has shown to be too high and their
fund's purchasing power has decreased. He emphasized that the
financial markets are not linear and noted that the economy has
experienced 3-economic shocks over the past 30 years; however, a
withdrawal based on averages from 4 to 6 years smooths out
fluctuations and makes things more predictable.
3:42:22 PM
CHAIR DUNLEAVY asked Senator Stedman to dispel the notion that
withdrawing funds from the permanent fund will take care of the
state's fiscal issue.
SENATOR STEDMAN concurred with Chair Dunleavy. He noted that SB
21 is a bill for statutory change rather than constitutional
change. He admitted that the Legislature could still get around
the bill's 4.5 percent withdrawal by spending the earnings
reserve which is not protected by the constitution. He disclosed
that approximately $14 billion is available for the Legislature,
"To get its hands on." He pointed out that if SB 21 was adopted
in the constitution as an amendment, the Legislature would never
be able to take more than the 4.5 percent in any given year
without the permission of the citizens.
He addressed scenarios on the Legislature sharing the 4.5
percent withdrawal with Alaskans as follows:
That 4.5 percent, if we gave them no dividend out of
it and took it all to the general fund we could
probably make it work and get out of this hole; I
think that's politically not attainable and I
personally would not support it. I think if we have a
sharing relationship with the dividends, with the
people, with the state, there's a balance clearly. If
we take it all to the general fund, the whole 4.5
percent, we are going to pretty much fix our problem,
make it pretty easy to get out of; but, if we take
none of it and it all goes to the dividends, we can't
get out of this hole, I don't see any mathematical way
we can do it. So somewhere there's a balance and that
in lies the 50 percent split and I think hopefully
gets the public's support behind it.
CHAIR DUNLEAVY reiterated that the permanent fund will not be a
constant flat stream and will not take care of the state's
fiscal problems. He pointed out that the state's fiscal problem
is so great that $1.2 billion to $1.5 billion draws would be
nowhere near the $2.8 to $3 billion deficit.
3:45:27 PM
SENATOR STEDMAN answered correct. He set forth that a withdrawal
from the permanent fund would act as a base, but other solutions
such as budget reductions and revenue enhancements will be
required to fix the budget deficit. He said the state's hole is
structural and the quicker the Legislature can dissolve the
structural deficit and get back to balanced budgets the better
off all of us are.
SENATOR WILSON noted that Senator Stedman's presentation showed
the permanent fund's balance growing. He asked Senator Stedman
to explain how he came up with the numbers that showed the fund
growing.
SENATOR STEDMAN explained as follows:
If the average rate of return is higher than 4.5
percent, it will get larger; if it's higher than 4.5
percent plus the rate of inflation, say the rate of
inflation is 2 percent, just as a number, and you made
over 6.5 percent, your real purchasing power will
start to increase. There will be times I can assure
you that the purchasing power will decline in the
short run just due to market reductions.
3:48:11 PM
SENATOR WILSON asked to confirm that the additional earnings
would go into the earnings reserve account.
SENATOR STEDMAN specified that the bill does not eliminate the
earnings reserve and detailed as follows:
The earnings reserve are trading profits and
potentially the unrealized gains. The corpus is what's
protected by the constitution, roughly $40 billion. So
we can, we the Legislature, if we adopt this in
statute, we still can get around the 4.5 percent and
spend the earnings reserve; it would take a
constitutional change to block that and limit us just
to 4.5 percent and that discussion would come later. I
personally support that, but it has to take the will
of the people. So you could adopt this statute, pay
out 4.5 percent and then have an election of
spendthrifts and they decide to come in and say, "We
don't like 4.5 percent, we want $4 billion or $5
billion because we want to do this project or we want
to build roads or more ferries," or whatever they are
going to build and go in and take it out of the
earnings reserve. There still needs to be some
prudence on sticking with the 4.5 percent to make sure
that that does not happen. If and when we take it to a
constitutional amendment, the earnings reserve then
would eliminated, it would have no, from what I can
see, no value.
SENATOR STEDMAN disclosed that SB 21 does not change the Alaska
Permanent Fund Corporation's structure and detailed as follows:
We are not turning the permanent fund on its head and
changing its time horizon or its liquidity needs and
things of that nature; it pretty much keeps the status
quo and it puts them out, kind of silos them off on
the side where we clearly would have in front of us a
deficit issue. We can't just look over to the
permanent fund and grab billions out and not make the
hard decisions because we have some tough ones as we
all know to make and they are not going to be fun.
3:50:55 PM
CHAIR DUNLEAVY asked if SB 21 sets an amount for inflation
proofing, not passive inflation proofing.
SENATOR STEDMAN answered that SB 21 does not and detailed as
follows:
What sets the trigger or the mechanism to allow it to
inflation proof itself is the payout rate, and the
asset allocation and performance of the fund itself.
So given roughly the current allocation and historic
performance of all of those asset classes helps derive
the payout rate and there's no magic number. I thought
4.5 percent just from my past professional experience
is reasonable and attainable, some folks might think
it should be 4.75 percent or 5.0 percent and the next
guy might think it should be 4.25 percent; I think
that should be left up to the discussion and
recommendations from the permanent fund and maybe the
Department of Revenue and debated in the finance
committees or whatever, I just picked that number from
professional experience of what I thought would work.
He addressed a scenario where the fund's rate of return was 5
percent over 10 years with a 4.5-percent withdrawal as follows:
We would be going backwards with purchasing power if
inflation is 2.0 percent, 2.5 percent, historically it
has been 2.5 percent the last century; but you have to
have an asset allocation mix that is in balance with
your payout. So if you ratchet the payout up,
sometimes you could push your performance requirements
of your portfolio managers to a point where your risk
level gets a little bit too high, in my opinion, and
that works with this or a retirement fund or your own
personal stuff also.
3:53:01 PM
CHAIR DUNLEAVY asked if SB 21 would automatically pay a
permanent fund dividend (PFD) or if paying a dividend would be
optional for the Legislature to appropriate.
SENATOR STEDMAN replied that the dividend would be 2.25 percent
of the market value. He noted that there has been a discussion
and debate as to whether the PFD is an appropriation, but the
bill does not address that. He emphasized that the dividend
payout would be a minimum of 2.25 percent. He said there is
almost a compact agreement with citizens on the split.
CHAIR DUNLEAVY asked Senator Stedman to address Section 3, line
13, which says, "The Legislature may appropriate." He asked what
would happen if the word "may" was changed to "shall."
SENATOR STEDMAN replied that Chair Dunleavy's question would be
a good question for the attorneys. He said he understood the
difference between "may" and "shall," and would be comfortable
with either one of the words.
CHAIR DUNLEAVY replied that the words are very different.
SENATOR STEDMAN responded that he knows the words are very
different and detailed as follows:
If I can put on my "elected official hat," it's 2.25
percent. I personally would not care speaking to my
constituents if it said "may" or "shall," it would be
2.25 percent and the check should be written and we
should deal with our fiscal issues however we need to
deal with them.
3:55:01 PM
CHAIR DUNLEAVY remarked that you would never hear from Alaskans
when the dividend was calculated by market outcomes, but they
have become suspicious and untrusting when the dividend was
vetoed last year. He said the suspicion by Alaskans is the
reason why he brought up the concepts of "mays" and "shalls." He
pointed out that legislation and appropriations could still be
vetoed, but constitutionalization gives Alaskans a little more
feeling that they and future generations are being treated as
partners.
3:57:55 PM
CHAIR DUNLEAVY thanked Senator Stedman and held SB 21 in
committee.
3:58:02 PM
At ease.
SB 26-PERMANENT FUND: DEPOSITS; DIVIDEND; EARNINGS
3:59:06 PM
CHAIR DUNLEAVY called the committee back to order and announced
the consideration of SB 26.
3:59:27 PM
RANDALL HOFFBECK, Commissioner, Alaska Department of Revenue,
Juneau, Alaska, addressed the comparison between SB 26, the
Permanent Fund Protection Act (PFPA), and SB 21 as follows:
· Rule-based:
ƒPFPA: yes;
ƒSB 21: yes.
· Stabilizing-investment income:
ƒPFPA: partial, 5-year averaging in
percentage of market value (POMV);
ƒSB 21: Partial, 5-year averaging in POMV.
· Stabilizing-total revenue:
ƒPFPA: partial, addressed in a mid-range of
oil prices;
ƒSB 21: no defined plan.
· Sustainable-protect the dividend:
ƒPFPA: yes;
ƒSB 21: yes.
· Sustainable-protect the fund's total and corpus:
ƒPFPA: yes, maintains value of the fund and corpus
over the long term;
ƒSB 21: partial, the total fund value is
maintained but the growth is not protected in the
corpus.
· Maximize the earnings reserve account (ERA) use:
ƒPFPA: yes, withdrawing less when oil
revenues are high allows higher draws when
oil revenues are low;
ƒSB 21: partial, withdraws same percent each
year regardless of budget need.
COMMISSIONER HOFFBECK said the state is facing a fiscal crisis
that requires steps to be taken that are not comfortable but are
necessary in order to actually resolve the fiscal situation that
the state is in. He emphasized that the permanent fund is the
state's largest tool for solving the fiscal crisis and its use
maximized. He disclosed that the Department of Revenue did the
modeling on what the largest-sustainable draw would be for the
permanent fund that would:
· Not put the fund's corpus in jeopardy;
· Allow the fund to grow with inflation over time;
· Allow the fund to maintain its real purchasing power;
· Allow as much money as possible to be used for paying
both the dividend and for providing money for funding
government services.
He set forth that the Department of Revenue determined that a
5.25 percent draw was aggressive with probabilistic modeling
that takes into account anomalies and down markets showed the
percentage still survived. He added that McKinsey and Company
reviewed the department's modeling and concurred that 5.25
percent was a realistic goal. He disclosed that McKinsey and
Company is internationally known on Wall Street and with
sovereign wealth funds all over the world.
4:02:00 PM
At ease.
4:02:45 PM
CHAIR DUNLEAVY called the committee back to order.
COMMISSIONER HOFFBECK explained that important components were
needed to be met when putting together the bill's structure. He
set forth that using the permanent fund's earnings must be rules
based to avoid overdrawing the fund as well as a draw that could
stabilize revenues for the state of Alaska. He noted that the
bill introduced in the previous session originally had a fixed
draw, but was rejected as being too constrained, so a POMV
approach was adopted which the Senate approved last year. He
added that other important components include protecting the
dividend and the fund's corpus, and maximizing the use of the
fund to generate as much revenue as possible for solving the
fiscal problem.
CHAIR DUNLEAVY asked Commissioner Hoffbeck to clarify that when
he said "stabilize revenues" he meant stabilizing the revenue
stream coming out of the fund, not stabilizing the entire
revenue stream.
4:04:31 PM
COMMISSIONER HOFFBECK replied that the PFPA does more by tying
to oil-price revenues that acts as a shutoff valve as oil prices
recover and the state gets more revenue from oil rather than the
permanent fund. He said PFPA stabilizes the state's major
revenue streams. He admitted that annual fluctuations will
occur, but five-year averaging will take a lot of the
fluctuations out of the equation. He concurred with Chair
Dunleavy and Senator Stedman that SB 21 and SB 26 do not get the
state to the finish line by itself.
CHAIR DUNLEAVY asked what Commissioner Hoffbeck meant by saying,
"Stabilizing the permanent fund."
4:06:27 PM
COMMISSIONER HOFFBECK clarified that he said, "Protecting the
dividend." He explained that the dividend has become a very
important part of Alaska's economic base and the administration
felt it needed to be protected, but not at the rate over $2000 a
year because it took too much and left the state too far away at
closing the gap. He continued as follows:
Essentially the size of the dividend at $60 oil
equates to the size of the deficit and it's not that
the dividend creates a deficit, it gives us kind of a
way to think in our mind just how big the deficit is
with various sizes of dividends. So if you pay a $2000
dividend, you have about a $1.3 billion deficit using
the 5.25 percent draw. If you pay a $1000 dividend,
you've got about a $700 million deficit and the
difficulty in closing $700 million is tremendous, but
to close $1.3 billion becomes almost insurmountable;
essentially that would require the entire $750 million
in cuts that the Senate has discussed and a full
broad-based tax to close that in order to pay the
$2000 dividend.
4:08:03 PM
CHAIR DUNLEAVY pointed out that the decades-old calculation for
the dividend was determined without interference from government
whereas the dividend in the PFPA is determined by the government
based upon the deficit or how much the state needs.
COMMISSIONER HOFFBECK confirmed that the entire 5.25 percent
draw from the permanent fund goes into the general fund. He
explained the formula for the dividend as follows:
Twenty percent of the draw, the 5.25 percent draw,
goes to pay the dividend as well as 20 percent of the
non-constitutionally deposited mineral royalties,
those two together create the dividend; so it's still
formula driven, but it goes directly through the
general fund and comes out of the general fund. If
that becomes a sticking point to getting this to the
finish line, we have no problem of just dumping it
into a dividend fund similar to how it is done now. We
just felt that it was cleaner to run it through the
general fund since it's flowing through there anyway,
but that is not a critical piece to the plan.
4:10:01 PM
SENATOR WILSON pointed out that Commissioner Hoffbeck keeps
saying, "Protecting the dividend." He asked what the purpose is
of protecting the dividend.
COMMISSIONER HOFFBECK replied that that the PFPA protects the
earning reserve from being drawn to the point where the state
won't be able to pay the dividend. He specified that the idea is
to protect the entirety of the permanent fund including the
portion that goes to pay the dividend.
SENATOR WILSON said he constantly hears from a lot of bills
similar to SB 21 and SB 26 that the permanent fund has to be
protected. He asked if the protection was needed because
government does not have the discipline to find another solution
other than to go the route of SB 26.
4:11:47 PM
COMMISSIONER HOFFBECK concurred with Senator Stedman when he
talked about "wolves." He commented as follows:
It's just kind of the reality of what we face when we
bump up against these decisions. If you are sitting
there with a $500 million hole that you need to fill
in the budget and that means either you put in a
broad-based tax and that fills the committee rooms
with angry people, or you put in $500 million worth of
expenditure cuts and that fills the rooms with angry
people, or $500 million you can just take it out of
your savings. There's a lot of incentive to just go
take it out of your savings and that's why we think
that structure needs to be there so that if you go to
take it out of your savings, you have to answer to the
public why you didn't follow the rules that you set
up, it's exactly what the administration is facing
right now because of the governor's veto. We believe
that the governor had all of the rights and authority
to make the veto or he wouldn't have done it; that
being said, the people stood up and said why didn't
you follow the rules, you've been following that same
rule for 30-plus years, why didn't you follow it this
time. I think by putting a structure around any
restructuring of how we use the dividend and a real
framework, we put ourselves in the position that any
time that we don't follow the rule, we have to answer
to the public why didn't we follow it.
4:13:27 PM
SENATOR WILSON asked why the government should get more than 50
percent than the people get in terms of the payout from the
dividend.
COMMISSIONER HOFFBECK opined that a 50-50 split is easy to
explain. He asserted that there is nothing structurally
significant about a 50-50 split. He explained that the current
dividend formula was the product of political compromise and
there was nothing magical with the calculation. He emphasized
that a 50-50 split does not get the government to the finish
line. He remarked that the administration did not say, "Let's go
grab some money from the citizens of the state of Alaska." He
asserted that the PFPA squeezes as much out for the dividend
while still having a reasonable expectation to be able to close
the rest of the fiscal gap.
4:15:16 PM
CHAIR DUNLEAVY referenced an earlier discussion with Senator
Stedman on constitutionalizing SB 21. He admitted that no matter
how much the legislation is ring-fenced in statute, the governor
is able to veto or one could change the statute in one session.
COMMISSIONER HOFFBECK replied that Chair Dunleavy's point is
well taken and agreed that not only could the administration
veto it, but the Legislature could just choose not to
appropriate a dividend in any given year as well under the
formula. He said the assumption is people are going to follow
the rules. He addressed the concern with constitutionalizing the
legislation as follows:
The concern with putting in the "constitutional" is
exactly what the founders, the ones who wrote the
constitution about this whole idea of "siloing"
revenues for set expenditures, they prohibited the
dedicated funds within the statutory language
specifically in the constitution because they saw the
issues that are associated with putting your money in
silos that can't be broken and when you put them in
silos that can't be broken, now you end up in
situations where often times you could have money
sitting here that you didn't need that you need to
spend over here, but you would have no access to it.
So that's the real danger you have by putting it in
the constitution is that you would tie it up to say
this is exactly where it's going to have to go, you
could be in a situation where you couldn't pay your
general obligation debt or you couldn't make payroll
or some other thing and you would not have access to
those funds. So it really ties, not so much the
administration's hands, it's the Legislature's hands,
you're taking away your own appropriation authority by
putting it into the constitution. The administration
can't spend what you don't appropriate, so it really
is an issue of some of your flexibility, your
appropriation authority that would be tied up by
moving it into the constitution; but, just as a
general statement, it's not good public policy to silo
your revenues and lock them up where they can only be
spent in a certain fashion and not have the
flexibility to move the money around if you need to.
4:18:00 PM
CHAIR DUNLEAVY pointed out that the state had a rules-based
system for decades that changed because it was statutory. He
reiterated that the PFPA does not provide protection, it just
changes the way the permanent fund is dealt with.
COMMISSIONER HOFFBECK clarified that the PFPA changes the
formula and provides no more or no less protection that the old
formula had.
CHAIR DUNLEAVY reiterated that the PFPA is still statutory and
amounts could be vetoed, and the Legislature could change it in
a 90-day session. He commented as follows:
What we are lacking right now from my perspective,
just from the feedback I'm getting, is a confidence in
the public that we are going to deal with this in a
manner that they thoroughly understand and potentially
could accept, but they are wading through the terms,
the terminology, the nuances, and some of this stuff
they are questioning.
4:19:25 PM
COMMISSIONER HOFFBECK summarized the plans to draw from the
permanent fund by addressing the current status quo option,
drawing from the permanent-fund-only option, and the differences
in using either SB 21 or SB 26 as follows:
· Status quo will eventually deplete the earnings reserve and
there won't be a dividend or money for government
expenditures.
· Permanent-fund-only plan has the same problems as status
quo if there is not a full-fiscal solution. The earnings
reserve will eventually be depleted and you won't have
money for government services.
· Whatever plan is selected needs the rest of the pieces to
solidify either of the plans.
· Both SB 21 and SB 26 are rules based.
· Both SB 21 and SB 26 stabilize the investment-income piece
by using the five-year-averaging strategy that will take
the wild swings out of it.
· SB 21 does not have the shut-off valve on the percentage of
market value (POMV) draw and potentially may result in
super-heated spending if oil production or oil prices
rebound.
· Total revenue is addressed more within SB 26, but only mid-
range oil prices is addressed. Once oil prices move past
the mid-range, oil-price volatility could still be present.
Other revenues that are part of the total fiscal package
would not be addressed in SB 26, the bill only addresses
the tie between oil and the permanent fund.
· Both plans are statutory.
· Both plans protect the dividend.
· Both plans have a formula-driven approach for the dividend.
· Both plans protect the fund by at least growing at the rate
of inflation.
· Both plans project the fund to have similar balances 24-
years out at approximately $104 billion to $105 billion.
· SB 21 will have more money in the earnings reserve and SB
26 will have more money in the fund's corpus.
· With money in the corpus at a 5.25 percent draw, SB 26 will
generate more revenue for funding government services than
the 4.5 percent draw under SB 21.
COMMISSIONER HOFFBECK addressed a final comparison between SB 21
and SB 26 that referenced FY2018 as follows:
· FY2018 unrestricted general fund (UGF): $4.2 billion;
· FY2018 existing UGF revenues: $1.4 billion;
· Planned earnings reserve account draws for UGF:
ƒStatus quo: not available,
ƒSB 21: $1.2 billion,
ƒSB 26: $2.0 billion;
· Additional measures required for a full-fiscal plan:
ƒStatus quo: $2.8 billion,
ƒSB 21: $1.6 billion,
ƒSB 26: $0.8 billion.
4:25:40 PM
SENATOR WILSON addressed the $1.4 billion in existing UGF
revenues in FY2018 and asked Commissioner Hoffbeck to provide
additional details.
COMMISSIONER HOFFBECK replied that he believes the $1.4 billion
includes the revenues that the governor proposed from the motor-
fuel tax. He opined that the motor-fuel tax is only $40 million
in the first year, so whether the tax is included or not does
not change the discussion.
COMMISSIONER HOFFBECK set forth that the $800 million "hole"
that needs to be filled under SB 26 will be a heavy lift;
however, the administration does not see a path to fill the $1.6
billion from SB 21. He opined that an unfunded liability is a
larger threat than a too large of a draw. He said a draw can be
turned down, but an unfunded liability creates the incentive for
unplanned draws. He asserted that unplanned draws really put the
risk and the volatility into the stability of any of the plans.
4:27:58 PM
SENATOR WILSON pointed out that Commissioner Hoffbeck stated
that he did not see another means to "fill the hole." He asked
if he thought about "making the hole smaller" by making the size
of government smaller instead of looking for revenues to fill
the hole.
COMMISSIONER HOFFBECK answered yes. He explained that the
governor intentionally did not "fill the hole" when he presented
his budget because he thought a discussion was needed regarding
how much is going to be revenue and how much is going to be
expenditure reductions. He asserted that "everything is on the
table." He opined that the $1.6 billion in additional measures
required for a full-fiscal plan from SB 21 would require massive
expenditure cuts and massive taxes. He admitted that the $800
million left from SB 26 is going to be a pretty big task in
itself.
CHAIR DUNLEAVY remarked that now is not the time to engage
Commissioner Hoffbeck on the philosophy of reductions and the
size of government. He opined that continued government spending
will be above the $600 million that is projected in additional
measures from SB 26.
COMMISSIONER HOFFBECK said he had no further comment.
4:29:36 PM
CHAIR DUNLEAVY thanked Commissioner Hoffbeck, and held SB 26 in
committee.
4:29:54 PM
At ease.
^DISCUSSION: Angela Rodell, Executive Director, Alaska Permanent
Fund Corporation
DISCUSSION: Angela Rodell, Executive Director, Alaska Permanent
Fund Corporation
4:31:10 PM
CHAIR DUNLEAVY called the committee back to order. He asked Ms.
Rodell to address the committee.
4:31:27 PM
ANGELA RODELL, Executive Director, Alaska Permanent Fund
Corporation (APFC), Juneau, Alaska, explained that the APFC's
one mission is to manage the Alaska Permanent Fund's assets. She
emphasized that APFC does not: determine spending, manage the
dividend, and manage payouts of any kind.
SENATOR COGHILL said one of the questions that continually comes
to the forefront is the use of the earnings reserve account
because that is something that APFC must manage. He pointed out
that continued payouts, including the dividend, presents a
liquidity issue for the earnings reserve account. He asked how
much was in the earning reserve account.
4:33:19 PM
MS. RODELL replied that the amount in the earnings reserve
account as of December 31, 2016 was approximately $10.3 billion.
SENATOR COGHILL asked what impact a $2 billion draw on the
earnings reserve account would have.
MS. RODELL cautioned that her answer will not be straight
forward because different draws have been proposed and each draw
requires different strategies. She explained how the earnings
reserve account receives cash as follows:
We routinely get cash every day in some format. We are
getting dividends off of stocks, we are getting
interest payments off of bonds, we are getting rents
from real estate, we are getting payments through the
sale of various assets, and then that cash is being
reinvested into the entire asset allocation of the
fund.
She detailed how the permanent fund is managed as follows:
The way that the corporation has managed the fund to
date is that we buy pro rata shares of each asset
between the earnings reserve and the corpus of the
account, so every asset is owned by both accounts.
She addressed Senator Coghill's question regarding the earnings
reserve account's feasibility going forward as follows:
What your question speaks to is whether or not that
continues to be feasible going forward if you are now
using this fund not as a long-term investment vehicle,
but rather a budget-stabilization fund and similar to
the restrictions that have been placed on the
constitutional budget reserve to recognize its role as
a budget stabilization fund and its need to have
principal protection and liquidity. We would want to
look long and hard at what the balances are in the
earnings reserve account and whether or not it can
continue to be invested in all of the same assets that
the corpus is currently invested in and continue to
take that strategy, and if the earnings reserve
account is being drawn down to such levels where it no
longer seems prudent to conduct that because we first
have a prudent fiduciary responsibility, we are going
to have to convert that into a different asset
allocation which is going to lower the expected
returns overall that you've been assuming in many of
these models. That's just the reality of managing the
fund and making sure that we have the cash-deliverable
that the Legislature and the administration are
expecting at the start of the fiscal year.
4:36:41 PM
SENATOR COGHILL remarked that using the earnings reserve account
to stabilize the government as well as payout a dividend is a
different process from the way the earnings reserve account is
currently used. He asked if the 50-50 allocation process
proposed in SB 21 would change the way APFC invested.
MS. RODELL answered no. She pointed out that APFC has never
managed to a dividend in the past. She reiterated that each draw
percentage is not as clean as everyone would like and opined
that modifications may have to be made as a result of what is
actually happening both to the fund itself in terms of market
performance, but also in terms of what compromises are reached
to address the budget issues around it.
4:38:58 PM
SENATOR COGHILL remarked that the committee has to talk about a
philosophy before legislation goes to the Senate Finance
Committee. He opined that one approach is to protect a dividend
into the future and then get some state benefit. He said the
other approach is to get some state benefit and make sure the
dividend is guarded. He stated that the two approaches differ in
many ways and would deliver different sets of assumptions.
MS. RODELL answered yes. She opined that APFC has had the luxury
in managing the permanent fund and the earnings reserve account
together as required in statute. She noted that everyone
understood the volatility in the market with a dividend payout.
She disclosed that APFC's previous executive director told her
that he did not receive a single phone call about dividend
payouts because everybody understood what was going on. She
opined that the conversation is different when it is a single
dividend and budget stabilization payment for the general fund.
4:40:22 PM
SENATOR WILSON noted that Ms. Rodell referenced "models" when
speaking about changing the way APFC would have to manage the
earnings account.
MS. RODELL explained that she was talking about pro rata asset
allocations between the corpus and earnings reserve account. She
noted that APFC prepares a monthly forecast of statutory net
income on its website. She specified that if an adjustment has
to be made to the earnings reserve account's asset allocation,
then the monthly model will have to be adjusted that results in
a different total return outcome because $45 billion invested
one way and $10 billion invested another way will create a
different outcome.
SENATOR WILSON remarked that there has been a lot of talks and
dialogs upon the need to inflation proof and asked Ms. Rodell to
explain what inflation proofing does and does not do in terms of
the permanent fund.
4:42:10 PM
MS. RODELL provided an overview of inflation proofing the
permanent fund as follows:
· Inflation proofing was identified as a priority by the
permanent fund's Board of Trustees in 1982.
· The dividend program was created in statute and APFC was
created to manage the permanent fund in 1982.
· 1982 was a very high inflationary period and there was
recognition that a mechanism was needed to generate income
for future generations.
· Legislative list of investments that the permanent fund
could invest in was removed and allowed for the fund's
current diversified asset allocation.
· Many of the fund's assets are considered inflation-proofing
investments; e.g., real estate investments go up over time
and therefore naturally inflation-proof investments.
MS. RODELL detailed that the fund's real estate investments are
sourced to different accounts and explained the process as
follows:
If we bought an office building ten years ago for $100
million with $20 million coming out of the earnings
reserve account and $80 million coming out of the
corpus and we go to sell it today for $200 million,
the earnings reserve account is going to get that $100
million gain, plus they are going to get the $20
million that the earnings reserve account originally
invested into it and all the corpus is going to get is
the $80 million of its original investment. If hotels
now cost $200 million, not $100 million and I don't
have the earnings reserve account to buy the building,
I've now lost the investment power of the corpus and
that's why the inflation proofing is so important to
protecting the corpus because this is about the value
to future generations and the benefit they will
receive.
4:45:47 PM
CHAIR DUNLEAVY asked that Ms. Rodell address inflation proofing
for SB 21 and SB 26.
MS. RODELL specified that SB 21 repeals the current statute, so
there is no formal or deliberate mechanism to move money into
the corpus of the account where it cannot be spent. She detailed
that SB 26 has the mechanism where if there's four times the
earnings reserve account balance, excess monies will move over
into the corpus. She said the challenge is there is not a
calculation based on lost earnings power where a mechanism
recalculates or recalibrates what the actual loss is due to
inflation to the corpus over a certain time period. She admitted
that recognizing money should move back into the corpus is good,
but SB 26 does not tie money going back into the corpus to
inflation or purchase power directly.
SENATOR WILSON asked what the bills do for long-term growth.
4:48:18 PM
MS. RODELL replied that she cannot answer the question because
she does not know what the markets are going to do and what the
ultimate draws are going to be.
SENATOR COGHILL commented as follows:
The 4.5 percent as told to us by Senator Stedman is
more of a passive inflation in that the historical
averages have been over that so that would leave the
money available, but it still goes to the earnings
reserve is what you are saying. The earnings reserve
can short change you on the purchasing capacity at the
corpus level.
MS. RODELL answered correct because money in the earnings
reserve is available for appropriation at any time.
4:49:24 PM
SENATOR COGHILL asked if the money from the earnings reserve has
only been drawn for the dividend.
MS. RODELL answered correct.
SENATOR COGHILL commented as follows:
So I think probably what I hear Senator Stedman saying
is at this point the public pressure of changing these
things is so huge that if that became the structure
that that would be a safeguard to itself just like
today changing our dividend; that's the philosophical
question, changing it has a huge public interest, no
doubt about it, but it is available now and people
need to know that.
MS. RODELL explained that inflation proofing is currently
statutory and appropriations were zeroed-out for FY2016 and
FY2017. She said the current statute at least recognizes the
importance of inflation proofing.
4:50:40 PM
CHAIR DUNLEAVY asked what would occur if the earnings reserve
account is drawn down and its impact on the corpus.
MS. RODELL explained that two scenarios would occur with a
zeroed-out earnings reserve account:
1. Market continues to go up and positive returns continue
where unrealized gains continue to build and realized gains
are moved over.
2. The earnings reserve acting as a cushion against losses is
lost, the corpus would diminish and there would be no
dividend.
4:53:25 PM
CHAIR DUNLEAVY asked that Ms. Rodell address some things that
the committee needs to ponder in order to protect the permanent
fund. He opined that there are at least a dozen different
approaches to the permanent fund, including the one that is
currently in existence. He concurred with Senator Coghill that
what's at play is deciding how the fund grows over time, how
much the draw should be, and how to deal with the dividend.
He opined that talk has not centered on the dividend. He said
one reason why the dividend was put into existence was because
of the statehood act and the constitution did not allow folks to
claim mineral rights underneath their property. He asserted that
the dividend is a way of sharing with Alaskans. He analogized
that the dividend was also put into existence to act as the
"chain" for the dog that guards the doghouse where a hand gets
bit if it is placed in the doghouse.
He disclosed that he has received close to 4,000 communications
from concerned Alaskans and attributed their concern to the veto
of the dividend as well as where the Legislature may go
regarding the permanent fund. He set forth that the permanent
fund has been allowed to invest politically-insulated from the
Legislature's "wolves." He remarked that the permanent fund does
well when politicians are kept as far away as possible from
making investment decisions.
4:56:05 PM
MS. RODELL called attention to APFC and the talent of its 45
members as well as its board of trustees who are dedicated to
managing the fund's money. She asked that the committee not lose
sight about the fund, the dividend, and that there is an entity
that relies on the earnings reserve account to fund its budget.
4:58:53 PM
CHAIR DUNLEAVY commented as follows:
There is a lot of philosophy and politics at play
here; again, the concern for me is I cannot think of
an endeavor, an issue, that when politicians touch it
or worse, get their arms around it, doesn't muck it
up. I know right now there's a sense of some
desperation that we need to do something right now,
today, yesterday, or we face untold horrors as we move
into the future. I for one believe that we could
probably get through a year or two and if we had to,
craft a really good approach that Alaskans, not just
politicians, this is part of the issue here, this
isn't just a politician fund, I mean we could spin it
that way, but I don't believe it is. Over 4,000 people
have contacted my office and they don't believe it is
either, but I think we could craft if we had to an
approach that involves the support of Alaskans. I'm
very concerned that if we rush this it's not going to
have, and Senator Stedman uses this term and I think
he's correct, it doesn't imbed stability if the people
of Alaska don't support something; at the same time,
whatever we do needs to, in my opinion, allow the
Permanent Fund Corporation to function as it has and
has done the good things that it has for us.
So there's a number of things that need to be
discussed and I put forth the concept and it wasn't my
concept, it just exists as it is now, that you can use
50 percent of the earnings if you so choose for
government and 50 percent that you can put into the
dividend, and I still believe at least in the short
term you could do that and get some of the money you
need for government.
We all agree today that no matter what approach we
take it's not a cure-all. I think we've debunked that
whole idea that you just do this with the permanent
fund and it's like a poultice, you just rub it on
yourself and you're all better now, it's not going to
work that way. There's going to be some hard decisions
that have to happen no matter what approach we take,
hard decisions including reductions and it's hard for
me to even say, but hard decisions on some other types
of revenue enhancement that some of us aren't very
fond of; but, guidance and wisdom in crafting this is
going to be crucial because we may be back here in a
year if whatever we do is not good, if whatever we do
is rejected by the people of Alaska, or if it just
doesn't function.
I want to thank the corporation for what it's done and
I for one would like to continue to allow you folks to
do your job in a professional manner and not in a
political manner.
5:02:24 PM
CHAIR DUNLEAVY addressed the committee's upcoming agenda and
noted that public testimony would be taken up at the next
meeting. He asked members to give thought to potential
amendments, changes or questions. He set forth that the
committee has lots to think about because SB 21 and SB 26 is
legislation that is a dramatic break in the history of the
permanent fund, the dividend, and the relationship with
Alaskans.
5:04:20 PM
There being no further business to come before the committee,
Chair Dunleavy adjourned the Senate State Affairs Committee at
5:04 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB26 Supporting Document - DOR POMV Test Document (02.06.17).pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB26 Supporting Document - APFPA Modeling Presentation 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Backup - Questions from 2.2.2017 - Inflation Proofing of the PF Corpus.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 Back Up - Questions for SSTA for SB 21, SB 26, & SJR 1.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 21 & SB 26 - Letters of Opposition.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 21 SB 26 |
| SB 26 Backup - DOR Response Letter to Senate State Affairs Committee - 2.16.17.pdf |
SSTA 2/16/2017 3:30:00 PM |
SB 26 |