GENERAL SUBJECT(S): LONG TERM FISCAL GAP DISCUSSI0N The following overview was taken in log note format. Tapes and handouts will be on file with the House Finance Committee through the 21st Legislative Session, contact 465-2156. After the 21st Legislative Session they will be available through the Legislative Library at 465- 3808. Time Meeting Convened: 6:45 p.m. Tape(s): HFC 99 - 100, Side 1 HFC 99 - 100, Side 2 HFC 99 - 101, Side 1 HFC 99 - 101, Side 2 PRESENT: X Representative G. Davis X Co-Chair Therriault X Representative Foster X Co-Chair Mulder X Representative Grussendorf X Representative Austerman X Representative Kohring X Representative Bunde X Representative Moses X Representative J. Davies X Representative Williams ALSO PRESENT: REPRESENTATIVE SHARON CISSNA; REPRESENTATIVE LISA MURKOWSKI; REPRESENTATIVE BILL HUDSON; REPRESENTATIVE G. PHILLIPS; REPRESENTATIVE CARL MORGAN; REPRESENTATIVE BETH KERTTULA; REPRESENTATIVE ETHAN BERKOWITZ; WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE; CHRIS PHILLIPS, SENIOR INVESTMENT OFFICER, DEPARTMENT OF REVENUE. TESTIFIED VIA TELECONFERENCE: FRANK DILLON, ALASKA TRUCKING ASSOCIATION, ANCHORAGE; RALPH SAMUELS, CHAIRMAN, ANCHORAGE, CHAMBER OF COMMERCE, ANCHORAGE; KEN FREEMAN, RDC, ANCHORAGE; KAREN COWART, THE ALLIANCE, ANCHORAGE; CHERYL FRASCA, FISCAL POLICY COUNCIL, ANCHORAGE; SENATOR ARLISS STURGELEWSKI. LOG SPEAKER DISCUSSION TAPE HFC 99 - 100 SIDE 1 000 CO-CHAIR MULDER Convened the House Finance Committee meeting at 6:45 P.M. 104 CO-CHAIR MULDER Stated that each approach has merit. Each approach has excellent points. He introduced Representative Hudson, Representative Lisa Murkowski, Representative Carl Morgan and Representative Gail Phillips 194 REPRESENTATIVE BILL HUDSON Introduced the All Alaska Working Plan. He spoke to the packet of material distributed to Committee members. [Copy on File]. Additionally, a copy of HB 156 was distributed. [See Attachment #1]. 324 Representative Hudson Spoke to the presentation provided by the All Alaskan Plan. He noted that R. Phillips would review the assumptions of how the plans work. Additionally, R. Murkowski will explain how it would work on the dividend fund and the impact to that fund. 425 Representative Hudson Stated that the plan was formed by 12 members of the House and represents a wide variety of areas, both rural and urban areas of the State. 477 Representative Hudson Explained the process of the group and how the plan came into being. Initially, was functional research for the plan. Then the research began for the plan. The plan borrowed ideas from all research in the State. In the beginning looked at the Governor's plan. The governor proposed the personal income tax. Also, the groups looked at Dave Rose's plan. The group looked at the Minorities suggestions. 656 Representative Hudson Continued explaining the Alaskan Plan. Also, the treaties of HB 126 were included. The bill must be passed this session. The flexibility of achieving the full merits will bring billions of dollars of income. There has been wonderful cooperation with Jim Kelly of the PFD. 749 Representative Hudson Stated that Legislative Finance helped with the formation of this plan. This plan is an endowment plan. It was agreed that there would be no more overriding to reach the shortfall. There needs to be a revenue stream for the people at large and a plan that will sustain and grow our assets. 822 Representative Hudson There is a need for a long-term plan. The graph shows an improvement. The plan is needed because not one general funds budget has stayed on its own since 1972. With continued budget cuts it will require $1.2 billion from the savings account. At this pace, we will exhaust the PFD by 2003. Action needs to be taken now. If no action is taken the PFD will decrease and disappear. 935 Representative Hudson Spoke to the possibility of an income tax. A 5% income tax would leave the state short. The majority of the public rejects all these measures. The Legislature must devise a new plan this session. [Read from attachment]. 990 REPRESENTATIVE GAIL PHILLIPS Spoke to the plan. All the various plans and the endowment mechanism will fare well. The All Alaskan Plan is an endowment plan. Read from attachment statements. [See Attachment #2]. 1521 REPRESENTATIVE LISA MURKOWSKI Spoke to the All-Alaska Plan-Using Spring forecast for oil prices. [See attachment for full testimony]. She referenced the handout in Members packet. [See Attachment #3]. 1622 Representative Murkowski The continued pay out of the dividend is not certain under the current system. The possible reversible of the fund could impact the future dividend. 1713 Representative Murkowski Constitutional Budget Reserve will be exhausted without a plan there will no longer be a dividend. 1748 Representative G. Phillips The Plan closes the fiscal gap and will provide sustained funding for Alaska's needs. The legislation has been provided to the House Finance committee in hopes of creating a final proposal to bring to the people. 1806 Representative Hudson Noted that the two bills have been distributed to committee members. The Plan members offered to overview the bills. 1846 Vice-Chair Bunde Is the Plan have a savings account, earnings from the permanent fund go into that, the entire Constitutional Budget Reserve goes into that account. 1874 REPRESENTATIVE GAIL PHILLIPS The Constitutional Budget Reserve will grow by $100 million dollars every year from settlements and it can grow or it can be shut down. 1902 Vice-Chair Bunde How will the bill pass 1909 Representative G. Phillips It will take 30 votes. 1919 Representative Hudson This would be a bipartisan measure. 1930 Representative Hudson Recommend that the legislature would disband the constitutional budget reserve to retain a higher level of return into the savings. 1961 Representative G. Phillips Stated that the charts show how the gap would be filled. 1974 Representative Hudson Explained the larger the corpus the more stable the account will be over time. 1988 Co-Chair Mulder Agreed from previous testimony. Return would 8.7% return. 2003 Representative Foster Thanked the group and their effort. 2013 Representative J. Davies Spoke to the endowment concept. He asked if the 8% were applied to the total savings account. He asked what it would be called another account. 2045 Representative G. Phillips Stated that from an historic perception it would be cleaner to establish a new endowment account. Total disclosure. 2070 Representative Hudson Using the PFD for the original intention. 2081 Representative J. Davies It is essentially the same as the Earnings reserve Account. 2097 Representative Hudson By keeping it in the ERA it would essentially stay in the corpus of the PFD. The PFC but outside would manage it. 2124 Representative J. Davies Suggested that it could be Constitutional Budget Reserve could stay and commingled and achieve and receive the same results. 2151 Representative Austerman Reason to put everything into one account would keep it so that it could be invested as one unit. It would be invested so that the cash can grow. 2180 Representative J. Davies It could be invested long term and technically it would be available by 21 votes rather than 30 votes. 2199 Representative G. Phillips The public can understand it more clearly. TAPE CHANGE HFC 99- 100, Side 2 000 Representative G. Davis The dividend can not be guaranteed forever. 024 Co-Chair Mulder Why the assumption of the price of oil 044 Representative G. Phillips Agreed that it was a conservation figure, and the group believes that the oil price will stay that low within the near future. Making the plan work at a low price and continue to pay for state services and the continued Permanent Fund. 121 Co-Chair Mulder Did he understand correctly that the dividend would stay at $1000 in the future. 165 Representative Hudson That is correct. If there is not change in the State's fiscal policies, financial assets will disappear entirely by the year 2011. 209 Representative Austerman Explained that it would be better to have a program that works, even though the dividend will go down, eventually it will go up. The same scenario will happen with a flat funding and will include cuts for the next five years. In the next five years, the plan will hold inflation. It will allow the endowment plan to have a solid start. The plan will take dedicated work. 345 Vice-Chair Bunde Acknowledged the work put into the plan. He voiced appreciation of the conserve estimate price of oil. He listed the highest preference of his district. One area that was not conservation was the amount of cuts for the next five years. 507 Representative G. Phillips Responded to comments on cuts to the dividend. If the price of oil goes up, the Legislature will have the flexibility to increase the dividends. The general public has forgotten the days when our checks were $400 to $500 dollars. 567 Representative J. Davies Noted that his constituents have asked that there not be any more cuts. He summarized that the majority of people feel that the State has cut enough human services. People want the curve to be turned. The Fairbanks Assembly has asked that capping occur and specifically that there needs to be an income tax implemented. Long stability should add more revenue and that could happen through a income tax. There needs to be more revenue up front. 745 Representative G. Phillips Acknowledged that the group has gotten that feedback from residents throughout the state. She emphasized that this is a long-term plan. 791 Representative Hudson Followed up that the final curve does not include the tobacco tax settlement, the annual cig. Tax increase and the rental car tax increase. These are potential enhancements. He stated that it will be difficult to make these proposed reductions. 854 Representative Austerman Voiced concern that the last seven years the State has been spending the savings account. Had the proposed approach been taken in the last five years, this would not have occurred. This plan is a working document. It is not set in concrete. Each year it needs to be addressed piece by piece. 944 Representative G. Davis Noted that his involvement in the group always included flexibility. This plan could be implemented and things can be reduced and cut. That is where the flexibility of the plan happens. The revenues should be increased. The public always comes back to the dividend. Keep a sharp eye on spending and new revenue sources. This would diversify the economy. 1059 Representative Grussendorf He stated that there has not been a budget that has stood on its own since 1992. He spoke to the Constitutional Budget Reserve, which is meant to be used that way. He spoke to the enhancements that had been included. He asked if the cuts would be to the general funds or other funding sources. 1146 Representative Hudson Replied that would be to the general funds. There has not been increased to business license since 1949. When a plan is developed, one includes as many thoughts as possible to consider. There needs to be lost of flexibility. 1204 Representative Grussendorf Asked if the legislation was a serious draft. 1217 Representative G. Phillips Stated that they only wanted to put a plan together for the finance Committee to consider. 1241 Representative Williams Suggested that the plan was good 1253 Representative J. Davies Referenced the Capital Budget. He stated that there were aggressive projects in the Capital budget. He thought with those projects, there would not be a lot of headway on the plan. 1297 Representative G. Phillips Stated that the State needs to take a long-range goal. A goal must be established so as to make a long-term commitment. That will take a different philosophy of how to do government. [See Attachment #4]. 1352 Representative J. Davies Appreciated that concept and asked that there be consensus in that direction. The practical problem is how to reduce the budget. Even with privatization, there is little possibility of reducing the budget. All the fat has been squeezed out of the system. Setting priorities requires that less should be done. 1442 Representative Hudson Need to establish a sustainable source of money. He suggested the bond board. The entire general obligation bonds are tools. 1529 WILSON CONDON, COMMISSIONER, DEPARTMENT OF REVENUE Provided a handout on the Balanced Budget Plan for Alaska. [Copy on File]. He introduced Chris Phillips, Investment Officer, Department of Revenue. 1722 Commissioner Condon Agreed that there needs to be a plan for Alaska's future. He spoke to the current oil prices, which closed at $16.50/bbl today. Even with higher oil prices, the Constitutional Budget Reserve will go into a deficit in the future. Commissioner Condon provided an overview of the handout and how holding the line would affect the State's long term economical future. He stated that the oil price projected by the State is $1 a barrel more than that projected by the All Alaska Plan. 1835 Commissioner Condon The state has gone from 2 million barrels a day in 1988; now at 1 million barrels a day at this time. There will be four or five years at the 1 million barrels a day. 1921 Commissioner Condon Explained that even if they have mis- guessed on oil prices and they are higher action still needs to be taken now. 1945 Commissioner Condon Reviewed five principles that should be included in restructuring state finance, as contained in page 7. 2002 Commissioner Condon Reviewed page 8, concluded that a broad- based tax is needed to preserve a healthy dividend. 2036 Vice-Chair Bunde Noted that many of his constituents are not highly impacted by the dividend, but would be impacted by an income tax. He questioned why the government would give out money on one hand and take it back with the other. 2104 Commissioner Condon Observed that there are individuals that feel strongly about both the dividend and the tax. He noted that the permanent fund dividend (TAPE CHANGE, HFC 99 - 101, Side 1). 000 Commissioner Condon Noted that total use of the permanent fund dividend would mean that non- residents would not contribute anything on money made in Alaska 103 Vice-Chair Bunde Asked the percentage of people would fall into this category. 135 Commissioner Condon Noted that 10 to 11 percent of Alaska's workforce would fall into this category. 165 Commissioner Condon Discussed page 9, use of permanent fund earnings (PFE). The Governor's plan recommends a transfer of $4 billion in PFE to a separate fund CBRF. He noted that the Governor favors a broad general tax. He added that the Governor recognizes the need for responsible budget cuts. 340 Commissioner Condon Reviewed page 10. Noted that there are other approaches that could be used to balance the budget. Emphasized that only a balanced approach that includes PFE, a broad-based tax, and budget cuts would preserve a sizable permanent fund dividend. 492 Commissioner Condon Further discussed the need for a broad- based tax. 533 Commissioner Condon Discussed page 11, principles on which the Governor is weighing balanced budgets plans. 668 Co-Chair Mulder Observed that he is opposed to an income tax, but appreciates the Governor's putting it on the table. 721 Co-Chair Mulder Noted that 10 to 12 percent of the workforce is from out of state. He asked if it the data is broken down by industry. 753 Commissioner Condon Responded that an estimation could be made from Department of Labor data. 788 Representative Austerman Stressed that assumptions need to be agreed on. 868 Vice-Chair Bunde Spoke to the unfair depiction of the Legislature costing the hundreds of millions of dollars. 932 CHRIS PHILLIPS, SENIOR INVESTMENT OFFICIER, DEPARTMENT OF REVENUE Refuted that information. The Constitutional Budget Reserve and cash flow needs are evaluated often. Assets in equities were pulled in December and were placed into the bond fund and the cash fund. Those assets were moved because there was not a five-year horizon. 1005 Vice-Chair Bunde That action was based on cash flow. 1027 Representative J. Davies Stated that it all started seven years ago. He was speaking of the equity allocation in statute. 1071 Representative G. Davis Asked if there was a cap on a sizable PERMANENT FUND DIVIDEND. 1083 Commissioner Condon A sizeable dividend will be a political decision. 1098 Representative J. Davies Noted that in the plan, the dividend would be $1200 dollars and then growing. He asked if that was correct. 1122 Commissioner Condon Agreed that would be in the medium case. 1133 Ms. Phillips Stated that would tend to be depending on how it was calculated. It would naturally fall and would be around $1400 dollars. 1170 Representative Austerman Spoke to the endowment concept and asked if it was acceptable to the Governor. 1207 Commissioner Condon Stated that it was. He commented that the Governor would look closely at the plan and conclude that a rolling average of the market value would be used to establish the pay off. Otherwise, there will be volatility and that is attractive. Additionally, the Committee should think about the comfort with the implied equity allocation in the high 5%. That will place the State in the high 60% equity percentile. The Board of Trustees University would find itself in a different situation. The potential volatility to reach that return. 1346 Representative Austerman Mentioned the concern regarding the assumptions. 1363 Representative Williams Broad general tax for enhanced revenue sources. Would the out of state people would that be constitutional. 1418 Commissioner Condon Did not know until that would go to court. The tax was set a few years ago. Alaskans who receive the dividend pay nothing. In order to raise the revenue needed, there is no way to structure that. 1494 Vice-Chair Bunde Like to have defined quantities. Sizeable dividends. Reasonable deductions can be defined in many ways. A dollar figure needs to be placed on reductions. 1531 Representative Grussendorf Spoke to the assumptions that are crucial to the Alaska Plan. He asked if Commissioner Condon agreed with some of those assumptions that the Department agreed with the cost of oil. 1570 Commissioner Condon Yes agreed hesitantly with the assumptions. He stated that they are more conservative than the Governor has been on the oil price. Additionally, that plan is more aggressive in terms of the financial returns. All projections done by Department of Revenue have been 7.4%. The All Alaska plan was based on a 8% projection. Some of the is a judgement call. He acknowledged that this would be worked through. 1693 Representative J. Davies Echoed the comments to make an apples to apples comparison between these two plans and as the have evolved. 1732 Representative J. Davies Key assumption is growth and relates to budget cuts. Responsible plan relates to cuts in the last five years. 1768 Commissioner Condon A flat budget discussion. Over the longer term there will be a need to find a way to be more efficient so that the total expenditure can stay level. He stated that he believes that making investment in kids is a lot less expensive than taking care of prisons. 1844 Representative J. Davies Could a flat budget take care of U of A. 1872 Representative J. Davies Asked about the capital budget for the Governor. 1883 Commissioner Condon Stated that it was the same as the last number of years. 1898 Representative Foster Thanked the Commissioner. 1920 Representative Moses Spoke to the work force of the state and how it is different that other states. There are many people in the State that are only seasonal workers. He pointed out the transient workers. People do not want to pay taxes and want to keep having their dividends. Many people plan to leave the State when they get their "nest egg". They do not care about the future of Alaska. 2006 Vice-Chair Bunde Spoke to residency time requirement. 2016 Representative Moses Change the name to the Real Alaska Plan. 2057 Representative Austerman Referenced the letter he distributed regarding an endowment possibility. 2100 FRANK DILLION, (TESTIFIED VIA TELECONFERENCE), ALASKA TRUCKING ASSOCIATION, ANCHORAGE Provided recommendations made by the Alaska Trucking Association. Board members have reviewed the basic fiscal gap allocations. The focus of the review was on what the plans focus was. The most acceptable plan was the All Alaska Plan. TAPE CHANGE, HFC 99- 101, Side 2 000 Mr. Dillon Continued that the ATA endorses the All Alaskan Plan. This will make state government more efficient. The plan could several years to implement. This would put the State on a reasonable path to addressing the economic problems. Does not support putting this to a vote of the public. 143 RALPH SAMUELS, (TESTIFIED VIA TELECONFERENCE), CHAIRMAN, ANCHORAGE CHAMBER OF COMMERCE, ANCHORAGE Asked that a plan be implemented this session. Reduce state spending based on a model that produces results. Privatization should be examined everywhere. The state needs to get the confidence of the Alaskan people. Some programs must be phased out. Public sector versus private sector wages should be comparable. Revenue equation revenues between PERMANENT FUND DIVIDEND and Earnings reserve. Should continue to use the Constitutional Budget Reserve. The use of GO debts carefully considered. Lastly consider a broad-based tax. 623 Representative Foster Thanked the speaker. It is not as simple as it looks. In the village area essentials are different in each election district (40) that is related to health and safety. 675 Vice-Chair Bunde Commented on the impact of taxes. There are constitutional mandate places on the state. 760 Co-Chair Mulder Delicate economy and is not broad based. The economy will be in a turmoil for the next year. 817 Mr. Samuels Commented on previous comments. No one wants to be cuts. Everyone wants to make sure that they are getting something for their dollar. Need to establish a goal. Across the board cuts does not work well. 965 Co-Chair Mulder Stated that it is a delicate decision in making reductions. 984 KEN FREEMAN, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE DIRECTOR, RESOURCE DEVLEOPMENT COUNCIL, ANCHORAGE Gave a brief overview of the Resource Development Council (RDC). 1051 Mr. Freeman Expressed support for a long-term solution. 1105 Mr. Freeman Noted that there are a lot of good plans. RDC supports the following steps in the order that they are provided, responsible reductions in state government (performance standards, alternative ways of delivery such as privatization); diversification through the use of PFE; and implementation of a broad based tax. There is more support for a sales tax than an income tax. Emphasized that a combination of tools is needed to solve the problem. 1261 CHERYL FRASCA, (TESTIFIED VIA TELECONFERENCE), FISCAL POLICY COUNCIL, ANCHORAGE She gave a brief overview of the Fiscal Policy Council. She emphasized that it is important that any plan retains the value of the financial assets. She provide members with a copy of their plan (attachment 1) 1395 Ms. Frasca Discussed page 4. 1434 Ms. Frasca Stressed that the Council is ready to help. 1451 Representative J. Davies Asked if there is data on the All Alaskan Plan. 1466 Ms. Frasca Explained that the value in 2010 would be the same as it is today. 1479 Representative J. Davies Stressed that there is a shock absorber. 1494 Co-Chair Mulder Agreed. 1499 Representative Grussendorf Referred to page 2. He asked if the group has ranked taxes. 1524 Ms. Frasca Stated that the Council acknowledged that the All Alaska Plan proposes some new taxes. She noted that it reimposes the school tax. 1553 Co-Chair Mulder Stated that if the permanent fund dividend was used as a shock absorber there would be a correlation between the size of the dividend. 1607 Ms. Frasca Noted that it is new economic activity that does not bring a return to the state treasury with out a broad base or income tax. 1634 Vice-Chair Bunde Noted that the availability of additional state land would result in the need for additional services. 1688 ARLISS STURGELEWSKI, (TESTIFIED VIA TELECONFERENCE), ANCHORAGE Noted her appreciation of all of those involved. 1706 Representative Foster Expressed frustration that in his six terms he has seen numerous legislators come and go. During this time there has been little agreement on any plan. He noted the instability of the system. He questioned if the ability to design a long-range plan exists. He maintained that he spends his time defending himself and his people. 1799 Co-Chair Mulder ADJOURNMENT The meeting adjourned at 9:44 p.m. * [ATTACHMENT #1]. All-Alaskan Plan Finance Committee Presentation Today we have provided you with the following materials: 1. Sponsor statement 2. The All-Alaskan Plan with color copies of the plan's revised spreadsheets The next 3 documents have been previously presented to the committee, and you may already have these: 3. "The Case for Increased Flexibility: HB156" 4. "Alaska Permanent Fund" 5. "Alaska's Public Finances" Over the next 45 minutes we will make the following presentation: ? Hudson Presentation: how the working group began, how the concept of an endowment was adopted, how the plan works in general terms, the need for action now, etc. ? Phillips Presentation: review the major assumptions used in our endowment model, and a more specific explanation on how the endowment works. ? Murkowski: Explain to you the effects on the dividend under three different scenarios. ? Questions from Committee members The All-Alaskan Plan is the product of 10-12 deeply concerned House members who believe we must act this year. These members broadly represent all regions of Alaska- Hence: "All-Alaskan" The process was mostly kitchen-table discussions and dividing up the research. 5-6 worked on functional research identifying the essential services of government 5-6 worked on the revenue side The plan didn't hesitate to borrow other ideas. Looked at: ? Governors $4 billion-unrealized & personal income tax ? Dave Rose's-Rose Plan ? Minority and Majority thoughts ? Cremo Plan Took 2 months to reach our groups approval or comfort level. The plan drew upon several documents- ? Alaska Public Finances (prepared and presented by Commissioner of Revenue, Will Condon) ? Alaska Permanent Fund (a treatise on what elements and general history of the PF was and is) ? APFC case for increasing investment flexibility-HB 156 (which formed the basis for my vote to amend HB 156 to the 10% increased asset allocation.) This is a must pass bill!!! Our team conferred with Jim Kelly of the PF Corp. and our own finance analysts-Phil Oakuson and David Teal as well as Legislative Legal Tamara Cook. Our adopted concept was finally- an endowment plan. We agreed: ? No more overriding reliance on macro cutting to meet the $1 billion shortfall! ? Need to find a plan that would sustain and grow our financial assets ? The need to develop a sustainable, reliable flow of income from our financial assets: PF, CBR and ERA ? A plan that looks long-term and puts all options on the table, including potential enhancements for the future. ? A plan that would be based on conservative figures WHY DO WE NEED A PLAN? ? Because not one GF budget has stood on it's own since 1992. Over $4.3 billion has had to be borrowed from our savings account, the CBR, to balance those annual budgets despite over $275 million in spending cuts, plus eating inflation over these same years. ? Because even with continued budget cuts, we will have to withdraw another $1.2 billion from our savings account this year and $1.0 billion each year thereafter to balance our operating and capital budgets. At this pace we will completely exhaust our CBR by 2003 and will be forced to turn to our Permanent Fund Reserves and major new taxes, including both a Personal Income Tax and probably a Statewide Sales Tax, to balance our budget. ? Since PFD's are based upon P.F. earnings, if we take no action, we can expect the PFD's to decrease and eventually disappear as we are forced to turn to PF earnings once we have exhausted the CBR. Rep. Murkowski will speak in more detail on this later in our presentation. ? Adoption of an Income Tax, as some have suggested, cannot bridge the gap. An income tax is estimated to generate a maximum of $350 million per year. That still leaves almost $850 million short! ? A 5% statewide sales tax would produce only $300 million, still leaving us $900 million short. ? Since a majority of the public appears to reject either of these tax measures and it would be impossible to reduce the budget by even $100 million, let alone $1 billion, we believe the legislature must devise and implement a new plan, and implement it this session. I'm going to turn this over to Representative Phillips, who will explain the endowment plan and the assumptions we used in our model. *ATTACHMENT #2-REPRESENTATIVE GAIL PHILLIPS Brief Introduction and Comments ? Thank you for inviting us to present our plan ? My part of the presentation today is to go over the major assumptions contained in the All-Alaskan Plan. ? Phil Okeson from Legislative Finance is also here if there are questions requiring his expertise. ? We know that in the end, you will examine all the various plans under study to a standard set of assumptions so you can compare them and see how reasonable and sustainable they are. ? We believe the All-Alaskan Plan, with its endowment mechanism, will fare well in that process - even if you run it over 20 years and I encourage you to do so. THE ALL-ALASKAN PLAN IS AN ENDOWMENT PLAN ? Our plan stops the raid on Alaska's SAVINGS accounts and begins funding part of government as well as ongoing Permanent Fund Dividends from our endowment payout of our considerable savings accounts. ? The plan does not take one dime from the corpus of the Permanent Fund ? The plan would legislatively create the Alaska Income Account, which will replace and receive the balance in the Earning Reserve and the Constitutional Budget Reserve. The Alaska Income Account will be managed as an endowment fund by the Permanent Fund and will start out at $5.9 billion. ? Net income from the Permanent Fund will accrue to this account as well. ? The endowment works because we never "eat" the principle of our accounts. In fact we build both over time and that growth produces a steady growth in income revenues to fill our $ billion dollar gap and maintain a healthy Permanent Fund Dividend for years to come. ? If members will please turn to "revised" color spreadsheet in your packet. First - Revenue Assumptions ? Oil Prices - the working group wanted to take a very conservative stand when it came to oil prices in this plan and therefore we used $13.50 per barrel for oil for the entire 10 years. If member look across the spreadsheet you will see that the Spring Forecast is shown right above our models price of $13.50 and you can get an idea of the differences each year. It is substantial - varying from just 7 cents a barrel in FT00 to $7.41 cents a barrel in FY11. ? If oil prices increase above the model projections of $13.50 per barrel, or if Alaska brings on a new gas line or an increase in crude oil production, our plan could fulfill Alaska's fiscal needs, including the dividend, forever. ? Production Volume - while we did not adopt the spring forecast as far as prices, we did use the lower production numbers contained in the Spring Forecast - so we have a common element here. Turning to Market Assumptions ? Permanent Fund total return - we use 8.25% return for all assets of the All-Alaskan Plan which includes, the CBR, the new Alaska Income Account and the Corpus of the Permanent Fund itself. In our initial discussions with Permanent Fund management they feel comfortable with this rate of return. Also, as Rep. Hudson noted, and as the materials you have before you suggest, this return would likely increase if we grant the Permanent Fund Corporation the flexibility they have requested in HB156 - they estimate 8.69% could be returned. Inflation Assumptions ? General Inflation is 3% for all years ? Agency expenditures, Formula Programs, School Expenditures, and the Capital Budget are held "flat" for five years and then increase by 2% each year thereafter. Population Growth Assumptions ? We also increase School Expenditures by 2.65% in FY00 and then by 1.5% each year thereafter to account for growth. ? And, the population receiving dividends is increased by 1.6% a year ? Inflation Proofing Assumptions - this area shows 0 because our endowment payout method automatically inflation proofs. Endowment Assumptions ? The payout from the endowment begins at 5.55% in FY00, goes to 5.69% in FY01, and then is set at 5.75% until FY11 at which time it stabilizes at 5.25%. We believe that this is a sustainable amount. ? In our initial discussions with Permanent Fund management they feel comfortable with this rate of payout - particularly if they get the flexibility requested in HB 156. ? As you know, the difference between this endowment payout and the earnings of our savings accounts described earlier (8.25%) is left in our savings accounts for inflation proofing. ? As stated in the handout before you "The Case for Increased Flexibility" an income distribution using POMV or "percent of market value" like the All-Alaskan Plan has many advantages. It provides more predictability and stability. It helps disconnect investment decisions from short-term expenditure considerations. The Permanent Fund folks can speak to additional advantages using a POMV distribution. ? Turning to the Spreadsheet itself on the next page . . . . . . ? We show the new revenues mentioned earlier (school tax, rental car, etc) = flexible, anything other new revenues could be place in this fund as well. ? We (under expenditures - budget cuts) show the continuation of general fund spending beginning with $50 million in FY00 and dropping to $10 million in FY04 ? Finally - I would like to end by drawing your attention back to the color charts at the start of this packet. ? Let's look at "Alaska's Savings Accounts" to see what they look like at the end of ten years of the All-Alaskan Plan. ? The corpus of the Permanent Fund grows from $18.9 billion to over $20.6 billion! ? Unrealized gains grow from $3.6 billion to over $6.5 billion! ? The earning's reserve, now the Alaska Income Account when combined with the Constitutional Budget Reserve - grows from $5.3 billion to over $14.1 billion! In total, over ten years the All-Alaska Plan grows these savings accounts from around $28 Billion dollars to over $40 billion dollars! I would like to end with a few comments from Mr. Scott Goldsmith's (ISER) who has been kind enough to do an initial, independent review of the All-Alaskan Plan: ? "Using the base case scenario, it does a good job of sustaining the value of financial assets. This is due to the fact that all financial assets are automatically inflation proofed." ? "Recognizes the need to use all tools." ? "Retains flexibility in the use of earnings." ? "Including market value of all financial assets in the base for withdrawal formula contributes to sustainability." ? "Endowment rule creates potential for the Permanent Fund to earn maximum return consistent with the risk target by adopting a prudent man rule for the portfolio." ? "Dividend and GF spending compete directly for available revenues and this leads to accountability and public involvement in the allocations of scarce public resources." ? The other color graph we would like to highlight for you this evening is the one on "Dividends Per Capita" and Rep. Murkowski will be speaking about that shortly. *ATTACHMENT #3 - REPRESENTATIVE LISA MURKOWSKI Permanent Fund Dividends Per Capita - Four Scenarios As was mentioned earlier, the original spreadsheet included in the All-Alaskan Plan booklet contained an error. ? If we look at the revised spreadsheet, (base case) and under the assumptions that were detailed to you earlier, the permanent fund dividend is projected to hold at $1000 for nine years and then fall off due mostly to lower oil production. For the Committee, we also had Legislative Finance run three additional different scenarios: 1) The first one is using the Governor's Spring Forecast - as you can see moving to the higher oil prices secures a dividend at $1000 for the first ten years of this plan. 2) The second scenario is run with Permanent Fund Earnings adjusted up to 8.69% to reflect passage of HB156 - which gives them additional flexibility. The Dividend under this scenario is projected to stay at $1000 for almost seven years and then drop off to around $800 on year 10. 3) The third scenario is with both of the above, that is using the Spring Forecast for oil prices and higher Permanent Fund earnings. This scenario also shows the dividend staying at $1000 for length of this plan. We think it is important to remind everyone, that even under our current system, the continued payout of dividends is not certain. We have been blessed with a bull equities market for many years. The possible reversal of this market trend, combined with the required statutory inflation proofing of the fund and increased population growth could also severely impact our future dividends. Also, as you all know, if some plan is not adopted, we will continue to spend the Constitutional Budget Reserve (CBR), and then most likely turn to the only other pot of money readily available for appropriation, the Earnings Reserve. Using over one billion dollars a year to fill the deficit, the CBR will be exhausted in less than three years and the Earnings Reserve itself in about two years. It is reasonable to say that without a plan that within five years, the dividend will no longer exist and have no reasonable chance of ever being resurrected. *ATTACHMENT #4 CLOSING COMMENTS - REPRESENTATIVE GAIL PHILLIPS ? The All-Alaskan Plan closes the fiscal gap, is conservative in its estimation, and will provide sustained funding for Alaska's essential needs. ? The time to act is now. We must stop "eating our seed corn". ? We have included a number of bill drafts in the green book before you. We looked at a number of ways to establish this endowment account. With great respect for the House Finance Committee, we have not, ourselves, introduced any of this legislation. Instead we offer this legislation to this Committee in hopes that it aids you in your efforts. ? Members of the All-Alaskan Plan Working Group are more than willing to work with all of you to finalize a proposal to bring to the public. ? Once again, thank you for you time and interest. HOUSE FINANCE COMMITTEE LOG NOTES April 22, 1999 .F.C. 21 4/22/99 p.n.