SJR 10-CONT. AM.: BUDGET RESERVE FUND  9:01:22 AM CHAIR WIELECHOWSKI announced that the first order of business to come before the committee was SJR 10, a Constitutional Amendment intended to ensure that the legislature continues to save during times of surplus. CHAIR WIELECHOWSKI reviewed the purpose of SJR 10. He said that with a large projected surplus this fiscal year and next, now is the time to talk about savings. SENATOR PASKVAN moved to adopt the proposed committee substitute (CS) for SJR 10, labeled 27-LS1091\D, as the working document. CHAIR WIELECHOWSKI objected for discussion purposes. 9:02:43 AM SAM GOTTSTEIN, staff to Senator Wielechowski, sponsor of SJR 10, discussed changes made in version D. He said the first change is on page 1, line 14; the words "in population" were removed to keep the $6 billion threshold from increasing too rapidly. The second change is on page 1, line 15; the words "on July 1" were removed to allow time to calculate actual annual unrestricted oil revenue. The third change is on page 2, lines 7-8; language was added to ensure that the proposed amendment will not apply to Permanent Fund royalty payments. MR. GOTTSTEIN stated that Alaska has benefited from substantial budget surpluses in recent years largely as a result of high oil prices. Alaska has the greatest amount of savings in the nation with about $16 billion in savings accounts and reserve funds. Oil revenue, which makes up about 90 percent of the state's revenue, is a non-renewable resource. Although Alaska depends on a non-renewable resource, it is possible for the oil revenue to be used like a renewable resource. If Alaska saves money now, it will be in a better position to have oil wealth in the future. He said the legislature is constitutionally required to develop Alaska's resources to the maximum benefit of its people. This includes managing resources for future generations. MR. GOTTSTEIN maintained that existing savings accounts do not save enough for the future. He described Alaska's three main savings accounts: the Permanent Fund, the Statutory Budget Reserve, and the Constitutional Budget Reserve. The Permanent Fund is the largest of the accounts, currently valued at approximately $39 billion. Dividends from the fund go to Alaska residents each year, and the earnings from the fund have not been used to fund public services. Putting more money into the account would not count as a way to save for the state's future budgetary needs. MR. GOTTSTEIN continued to say that the Statutory Budget Reserve (SBR), substantially smaller than the Permanent Fund, is currently valued at approximately $2.6 billion. Since the SBR's funds can be accessed by a simple majority, it is not likely that this fund will sustain the state in the future. MR. GOTTSTEIN related that the Constitutional Budget Reserve (CBR) is considered Alaska's rainy day fund. Established in 1991 through a constitutional amendment, the CBR acts as a stabilization fund. It was initially funded through settlements with oil and gas companies, and the value of the fund has grown from just under $600 million to approximately $10.3 billion today. Under most circumstances the CBR requires a three- quarters majority vote from both houses to access the fund for general fund use. After taking out the money, the legislature is obligated to pay it back, along with any non-appropriated funds, at end of any given fiscal year. Both requirements keep the legislature from appropriating money from the CBR unless it is a necessary stop gap measure. In years of high oil revenue, there is currently no automatic mechanism to appropriate additional funds into the CBR. SJR 10 would change that. Through this legislation, the constitution would ensure that the legislature continues to save for the future. MR. GOTTSTEIN continued that after reaching a threshold of $6 billion in unrestricted oil revenue for a fiscal year, SJR 10 provides that two-thirds of the remaining surplus would be deposited into the CBR. The $6 billion threshold would be adjusted annually for inflation. Unrestricted oil revenue includes royalties, production taxes, corporate income taxes, and property taxes for the oil industry. Unrestricted oil revenue, for the purpose of this legislation, would not include royalty payments to the Permanent Fund. 9:07:47 AM MR. GOTTSTEIN addressed the potential fiscal impact of SJR 10. He maintained that if this policy were in place today, Alaska would have over $7.5 billion of unrestricted revenue for general fund use and the ability to deposit over $1.475 billion into the CBR this year, while maintaining a $600 million surplus. The amount of the deposit would depend on the size of a given year's oil revenue surplus. For example, for the next three years, under current Department of Revenue projections, the state would deposit over $800 million into the CBR. MR. GOTTSTEIN stated that the goal of the legislation is to create a framework for saving. The Department of Revenue has not always been right about oil revenue projections. For example, back in 2008, the department's forecast ended up 47 percent lower than the prediction. Conversely, the department has also estimated revenue to be substantially higher than what it actually was. The goal of this legislation is not to deposit more money into the CBR every year. The goal is to deposit money into the CBR in years of high revenue surpluses. MR. GOTTSTEIN concluded that it is not the sponsor's intent to solve all of the state's fiscal problems with this legislation. It is the first step toward managing a non-renewable resource, such as oil wealth, like a renewable resource. 9:09:31 AM SENATOR MEYER asked for clarification regarding the figure of "two-thirds of the surplus after $6 billion." MR. GOTTSTEIN explained that it is a policy call. The amount of $6 billion has been adequate in the past. "Two-thirds" shows a commitment to savings after obligations are met. SENATOR MEYER speculated that the number could be changed. CHAIR WIELECHOWSKI stressed that all figures used are policy calls. Two-thirds is enough to meet financial obligations. In years with large surpluses, one-third is enough for capital projects and the remainder could go into savings. SENATOR MEYER noted the bigger policy call is how best to protect savings. Chair Wielechowski replied that the bill was his attempt to allocate savings for future generations, but he agreed that the issue should be discussed further. 9:12:41 AM SENATOR PASKVAN observed that the $2.6 billion in the SBR is subject to access by a simple majority for immediate needs; however, there is an overlying constitutional requirement to save when there are excess dollars. CHAIR WIELECHOWSKI recalled that when the CBR was established, there was a desire to make it hard to access. He agreed that the SBR is more accessible. He said he thought the people of Alaska like having a savings account that is harder to get to. SENATOR GIESSEL asked how long this type of plan would be in effect, based on oil revenue forecasts. She also inquired if changing the constitution would require a vote of the people. MR. GOTTSTEIN affirmed that it would require a vote of the people. He explained that under current projections, $800 million would be put into the CBR for three years. He added that those projections are questionable due to many factors. He gave a hypothetical example. The goal of the legislation is to create a framework for years into the future. SENATOR GIESSEL clarified that there would be a large surplus for just three years. MR. GOTTSTEIN agreed, under current projections. Projections are fairly simple today, but the goal is to create a framework to balance the highs and lows of revenue surpluses and deficits. SENATOR GIESSEL asked how much interest the fund would accrue. MR. GOTTSTEIN addressed the main account vs. the subaccount and various scenarios. He said the earnings from the CBR would be about a 4 percent rate of return in order to make sure the funds are available immediately. 9:17:45 AM SENATOR GIESSEL asked what the current rate of inflation was. MR. GOTTSTEIN believed it was projected to be 2.5 percent for this model. SENATOR GIESSEL speculated that the profit would be about 1.5 percent. MR. GOTTSTEIN agreed. CHAIR WIELECHOWSKI pointed out that some people would prefer to invest the CBR more aggressively. The bill is intended to be a framework. There are 33 or 34 new exploratory wells on the North Slope, as well as shale oil and heavy oil, not factored into future oil projections. He predicted that there would be an explosion of oil production on the North Slope in the next three to five years and substantial new revenue to the state. He said he would like to see that revenue put into savings. 9:19:52 AM SCOTT GOLDSMITH, Professor of Economics, University of Alaska, Anchorage, Institute of Social and Economic Research (ISER), testified as an individual, not as a representative of the university. He read from the following statement: I am here to testify in support of the two concepts embodied in SJR 10 - a petroleum revenue spending cap and a sweep of the surplus into savings to meet the fiscal needs of future generations of Alaskans. If we are careful and lucky, the pipeline will be carrying 1 million barrels a day in 2020 and activity in the oil patch will be growing, generating more and more petroleum jobs for the next generation of Alaskans. Unfortunately that production will likely not be generating the level of petroleum revenues we have come to expect and depend upon. Production of conventional oil, the basis for current revenues, has been falling for more than 20 years and that decline is projected to continue as the giant fields are depleted. Heavy oil and shale oil may supplant some of that decline, but because of high unit production costs, neither will generate large amounts of revenue. Likewise production from the OCS might help to keep the pipeline operational, but almost all its revenues will go to the federal government. Commercialization of gas seems to be permanently at least 10 years in the future-perhaps more than ever today as the world is awash in low cost natural gas. We all recognize the need to save some current petroleum revenues for the future, but how much saving is enough? Our current strategy of putting away the leftovers after the current budget is built is not the answer. Rather, the answer pops out if we stand the question on its head and ask, "How much of our petroleum wealth can we afford to spend today?" This is the right way to pose the question because, as we all agree, our petroleum wealth is finite. The more we spend today, the less will be left for the next generation of Alaskans. To answer the question of how much we can afford to spend today, we need to figure out how much our petroleum wealth is worth and we need to decide how much of that wealth we should share with the next generation of Alaskans. I have started to think about both of those issues and my thoughts are in some of the papers in the bill packet before you. Let me summarize each. I have estimated state petroleum wealth to be $140 billion. This consists of $55 billion of financial assets derived from past petroleum revenues as well as $85 billion in taxes and royalties on future production. The $85 billion is the value of those future revenues if we could bank them all today rather than waiting for them to trickle in over the next decades. Then how should we share this $140 billion grubstake among current and future Alaskans? One answer is to take a page from the successful management of our fisheries, where we restrict the current harvest to maintain maximum sustainable yield. By doing that future fishermen get the same harvesting opportunities as current fishermen. Applying that concept to our petroleum wealth, we could harvest, or spend, $5.5 billion this year. That amounts to about $7,000 for every Alaskan today and would guarantee that every future Alaskan would get the opportunity to spend an equal amount, $7,000 adjusted for inflation. Of course, this is just a different way of saying treat the petroleum wealth like a permanent endowment, or as the British would say, never spend principle. Is this a fair distribution? That is for all Alaskans to decide. But it is a discussion that needs to occur and this bill is a way to stimulate that discussion. Capping spending from petroleum revenues has a number of other positive features. It will reduce the FISCAL BURDEN we are currently shifting to the next generation of Alaskans by spending petroleum revenues at a non-sustainable rate. It will force us to weigh the benefits of increased public spending against the cost of new taxes to pay for them. It will give the governor and legislature a valuable tool to help instill fiscal discipline where none exists today. Of course many people will argue that putting our wealth into saving is a mistake because that money is not working for us and that the funds would be better spent on investments to build our infrastructure, particularly roads and energy projects. Without getting into that discussion I would simple say there needs to be a considered balance between those investments and savings. Saving for the future is never easy, as we all know from personal experience. But high oil prices have given us a second chance to do the right thing and we should not let this opportunity slip. Several times in the past we have taken the opportunity to create vehicles for saving when revenues were high and today we have the Permanent Fund, the Statutory Budget Reserve, and the Constitutional Budget Reserve. I think the best way to motivate the need to save more is to look to Norway and its $300 billion Petroleum Savings Account. Just as we have an oil production goal of one million barrels in the pipeline in 2020, we could and should have a savings goal of $100 billion by the year 2020. This bill is a first step toward achieving that goal. Let's get to work to make it happen. Thank you. 9:26:00 AM CHAIR WIELECHOWSKI thanked Professor Goldsmith for his work. SENATOR MEYER related that the Governor's current operating budget is $8 billion and the capital budget is $1.8 billion with additions probable. Under this legislation, he predicted cuts totaling $4 billion would have to be made. MR. GOTTSTEIN said he understood that the Governor had included $2 billion to go into the SBR. He offered to get back to Senator Meyer regarding the other $2 billion. CHAIR WIELECHOWSKI pointed out that there were also matching federal funds. He asked Mr. Gottstein if he listed unrestricted oil revenue at $7.5 billion. MR. GOTTSTEIN reported that current revenue projections are for about $8.2 billion of unrestricted oil revenue for this year. CHAIR WIELECHOWSKI noted that sometimes money budgeted for savings gets counted as an operating number. SENATOR MEYER agreed, but stressed that there would have to be a reduction in order to arrive at the $6 billion figure. 9:28:53 AM SENATOR PASKVAN requested a written copy of Professor Goldsmith's presentation. SENATOR GIESSEL noted she reads Professor Goldsmith's publications. She inquired if he had looked for projected costs for education and health care in the budget. She pointed out that 50 percent of the budget is formula-driven, and that pending national health care programs will significantly increase it. PROFESSOR GOLDSMITH said he hadn't looked at the most current projections, but agreed it was a major concern. SENATOR GIESSEL pointed out that Norway does not pay dividends to its citizens from its permanent fund. She asked Professor Goldsmith to comment on Norway's substantial personal income tax rate of 50 percent. PROFESSOR GOLDSMITH related that Norway's taxes were significant, and essentially all petroleum revenues were diverted into the permanent fund from which 4 percent is withdrawn to help support the cost of government. 9:32:43 AM STEPHEN HAYCOX, Professor Emeritus of History, University of Alaska, Anchorage, spoke in support of SJR 10. He described his theory of colonial economics as it applies to Alaska. He spoke of the difficulties in addressing Alaska's long-term future and thought SJR 10 would help. He recalled the periods of flush and lean in Alaska's history. He called the CBR savings a responsible step. 9:37:33 AM CHAIR WIELECHOWSKI thanked Professors Haycox and Goldsmith and closed public testimony. CHAIR WIELECHOWSKI pointed out that the fiscal note shows a cost of $1,500 to cover the cost of providing information about the amendment in the Official Election Pamphlet for the 2012 general election. CHAIR WIELECHOWSKI stated that SJR 10 would be set aside.