HOUSE JOINT RESOLUTION NO. 28 Proposing an amendment to the Constitution of the State of Alaska relating to the production tax revenue fund, dedicating a portion of the petroleum production tax to the fund, and limiting appropriations from the fund. Vice-Chair Stoltze MOVED to ADOPT work draft 25-LS1217\L, Cook, 3/3/08, as the version of the bill before the Committee. There being NO OBJECTION, it was adopted. REPRESENTATIVE RALPH SAMUELS, SPONSOR, addressed previous discussion in the Committee comparing the long and short versions. He noted that by adopting the \L work draft, the short version had been adopted. The draft legislation removes funds from the progressivity and places it into the Constitutional Budget Reserve (CBR). At the same time, it changes the payout methodology into an endowment style payout. Representative Samuels pointed out the chart as submitted by David Teal at the Division of Legislative Finance. (Copy on File). The chart highlights assumptions from the Department of Revenue and was based on an $85 dollar per barrel for oil, indicating the automatic payment made into the fund and then the payout amount. The concept is to save as much as possible while oil prices are high. 2:26:05 PM Co-Chair Meyer asked if the sponsor supports the short version as adopted. Representative Samuels replied he does. The long version would phase in over time, however, the short one address concerns voiced during the Committee process. Representative Joule realized the Committee had previously passed a revenue sharing bill, which taps progressivity dollars. He asked if HJR 28 passes, what will happen to revenue sharing. Representative Hawker recalled the text of the revenue sharing bill uses progressivity as a measuring device, not an appropriation of funds. The bill clarifies an amount equal to a certain calculation based on progressivity. HRJ 28 actually dedicates funds. 2:28:13 PM Co-Chair Meyer referenced the handout, highlighting revenue versus expenditures, while providing a mechanism for the payout. Representative Kelly wanted to see more information on anticipated budget growth, which was not included in the handouts. Co-Chair Meyer pointed out the evenue Sources Book", which he thought addressed those concerns voiced by Representative Kelly. (Copy on File). Co-Chair Meyer agreed that the bill provides merit in how to use the savings for a long range benefit to the State. 2:31:14 PM Co-Chair Meyer noted the Department of Revenue fiscal note needs a replacement. Vice-Chair Stoltze MOVED to REPORT CSHJR 28 (FIN) out of Committee with individual recommendations and with the accompanying fiscal notes. Co-Chair Meyer OBJECTED in order that Representative Gara could ask a question. Representative Gara asked to make sure that the analysis from the Legislative Finance Division (LFD) had been distributed. Representative Samuels apologized that the chart previously mentioned had not been handed out. 2:34:50 PM Representative Gara understood that under the proposed bill, the model will become effective in 2009; he asked the projected spending as compared to anticipated revenues. He stipulated his concern about dedicating money to the point where the funding brings the State into a budget deficit. DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, referenced the graph, which highlights the information given an assumption based on a 3% General Fund spending growth, in which oil is at $90 dollars per barrel. He apologized that he had not had enough time to make the model legible. The Division did opt not to hand out the spreadsheet. The spreadsheet goes back to the November 2007 model, determining the percentage base. The Division has provided only one chart at $90 dollars per barrel; he added that at $40 dollars, there would be no surcharged revenue. Representative Gara noticed that all changes are projected onto the price of oil. He realized that when the Division was requested to project next year's surplus, they used the $60 dollars per barrel price. He requested the projected numbers used by the Department of Revenue. Mr. Teal responded that they (DOR) had projected oil at $66 dollars per barrel. A new forecast is due out soon and that the projected forecast simply determines the model. It is the actual price which determines how much flows into the proposed account. The model can configure any price entered. Mr. Teal offered to assist Representative Gara, entering various price assumptions. Representative Gara pointed out the 3% growth rate, which was chosen in the General Fund budget. He noted that in the last three years, it has been closer to 10%. Mr. Teal acknowledged that it has been 10% or higher, a lot of which is catch-up agency growth to the statewide operating costs. There is investment credit paid to the small producers. He reiterated that it is the statewide increases that are the cause of the 10% growth rate and that agency budgets are not growing, retirement costs will no longer be increasing and credits are fully funded. Those numbers were backed out. Representative Gara requested a projected oil price projection. He said that at the anticipated $66 dollars per barrel, he imagined the crossover point would be where expenditures start exceeding revenue at about 2012. Mr. Teal thought the start date would be 2011. Representative Gara requested a chart indicating the Department of Revenue's projected oil price at a 3% and a 6% General Fund increase. Mr. Teal replied he would provide that info. Co-Chair Meyer encouraged that Mr. Teal work directly with Representative Gara and Representative Kelly. 2:41:24 PM Representative Kelly mentioned growth in the General Fund budget. Representative Gara reiterated that he did not think the 3% increased number was correct. Representative Kelly recommended a 3%-6%-9% projection analysis. Mr. Teal offered to work with Representative Gara and Representative Kelly on various numbers used in the model. He added that the concern is the varying assumptions within the operating budget and in order to include many prices of oil, one would need to make many graphs. Each graph looks very similar unless it is closely scrutinized. Representative Gara maintained that if the State assumes a higher price of oil, the State will not hit deficit mode for many years; however, assuming a lower price, places the State in deficit mode much sooner [2011]. Either way, it will affect legislative judgment. He reiterated the request for the price used by the Department of Revenue. He asked if the State assumes $66 dollar a barrel for oil with a 6% budget growth, would it bring Alaska closer to 2011 projection on when the deficit mode is reached. Mr. Teal responded it would be 2010. In response to Representative Gara, Mr. Teal explained that the lower the price, the lower the anticipated revenue. The faster the growth rate chose for the appropriation, the higher the expenditures. The deficit is simply a function of revenue and expenditures. Representative Gara asked if the deficit was reached because the $66 dollars per barrel was used. He anticipated that in 2010, if that number was used, there could be that much less revenue. He questioned how much less would be deposited under the bill's proposal. Mr. Teal advised that under the official revenue forecast, the amount that goes into the fund is the CBR balance itself. When making the determination, he used the current CBR balance of approximately $3.2 billion dollars and assumed that the $2.6 billion dollar in the supplemental bill was accepted. The State would begin with a balance of over $5 billion dollars plus whatever is deposited in 2009. It is anticipated that in 2010, an approximate $400 million dollars would be deposited and would move through the life of the resolution, which is 2014. Representative Gara clarified that it would begin in 2010 @ $66 dollars per barrel. Mr. Teal said yes, the revenue forecast assumes that it would be in the mid $60's and then drops to the $45 dollar per barrel price, which means no revenue surcharge would be accessed. Representative Gara stated that beginning in 2010, assuming the $66 dollars a barrel price, all the CBR balance would have been swept; the State would be starting with an even budget by 2010. That year, no CBR money would be counted because the funds had been swept. In 2010, the State will hit the point where it will be spending $400 million more than it is taking in. Mr. Teal explained that the number starts out at $100 million dollars and stays that way through 2014, at which point, the revenue forecast falls into the $40 dollar range and the deficit increases over $2 billion dollars. Representative Gara wondered if that assumed that in 2014, the price of oil moved down to $45 dollars per barrel. Mr. Teal said yes. 2:47:16 PM Representative Kelly supported placing money into the proposed fund; he thought it could provide the State a "soft landing device" into the future. Mr. Teal noted that if the State uses the Department of Revenue's forecast for oil prices, there will be no soft landing cushion. He pointed out the graph indicates that expenditures are currently lower than revenue if oil stays at $90 dollars per barrel. It depends on what is done with that surplus savings. If spent, the money is gone; if saved, those dollars would be available in the future. He emphasized that all that moves into that account is the surcharge. When the oil revenue is high, there will be a surplus because the oil revenue will be sufficient. The surcharge goes away rapidly when oil approaches the $60 dollars per barrel price. At $60 dollars per barrel, the surcharge is zero. If oil prices fall rapidly, the account will not be stocked up. The model indicates that kind of information using various assumptions. Representative Samuels agreed that at $60 dollars per barrel oil price, no new money would be flowing into the CBR. He spoke to his philosophy of the bill, to save as much money as possible right now so that future generations will continue to have a safety net. 2:50:46 PM Vice-Chair Stoltze interjected that the State does not have a budget shortfall but rather a spending surplus. He added that it is always a delicate process to achieve a super majority vote. He indicated his support for the proposed approach. Representative Joule asked if the principle of the fund would be accessible. Representative Samuels said no. The CBR would become an endowment style fund with 5% available for spending by the legislature each year. Representative Joule believed that essentially, the State would then have two permanent funds. Representative Samuels disagreed given the methodology of the payout. Presently, the Legislature can access all the earnings; however, if the market tanks, the earnings go away. The payout methodology proposed in HJR 28 is different with two separate mechanisms. He predicted that as oil production declines over time, the State will be facing problems. Representative Joule stated he does not support "fencing the dollars off" completely. 2:55:01 PM Representative Gara assumed that most of the projected payout will come from the first two-year deposits at roughly $6 billion dollars. There is a projected deficit spending of nearly $400 million dollars per year. He noted concern for the out-years and voiced support in creating an endowment using present dollars. He was confused how a constitutional amendment would put something away that no one could ever touch. He realized that the bulk of this future payout comes from the first two years of deposits. Mr. Teal responded that is true under the Department of Revenue forecast and at $85 dollar per barrel oil, the deposits would amount to approximately $1.2 billion dollars per year for four years. Depending on the price of oil, there could be up to another $5 billion dollars placed into the fund between 2010-2014. Representative Gara inquired how it works once the voters approved it. Representative Samuels explained that the legislation would restructure the CBR. Representative Gara asked when the State would be able to start accessing those funds. Representative Samuels responded that at present time, legislators are not able to access the corpus of the Permanent Fund either. 2:58:11 PM Representative Crawford noted if there was a statewide disaster, the constitution can always be changed. The Legislature can always "right a wrong. He stated that he supports the legislation. Representative Samuels agreed with the comments made by Representative Crawford. Representative Joule addressed his concerns with any attempt to change the Alaska Constitution. TAM COOK, DIRECTOR, LEGISLATIVE LEGAL SERVICES, LEGISLATIVE AFFAIRS AGENCY, explained that the Constitution can only be amended by a 2/3 vote of the Legislature. A proposal must be approved by the voters and can be presented to the voters only during a general election. Co-Chair Meyer requested that the Department of Revenue revise fiscal notes 3 & 4. Co-Chair Meyer WITHDREW his OBJECTION. There being NO further OBJECTION, it was so ordered. CSHJR 28 (FIN) was reported out of Committee with a "do pass" recommendation and with zero note #1 by the Department of Administration, fiscal note #2 by the Office of the Governor, fiscal note #4 by the Department of Revenue and new note by the Department of Revenue. 3:02:04 PM