GENERAL SUBJECT(S): BALANCED BUDGET PLAN PRESENTATIONS: Senator Steve Rieger; Dave Rose The following overview was taken in log note format. Tapes and handouts will be on file with the Senate Finance Committee through the 21st Legislative Session, contact 465-2618. After the 21st Legislative session they will be available through the Legislative Library at 465-3808. Time Meeting Convened: 8:12 A.M. Tape(s): SFC-99 #82, Sides A and B PRESENT: X Senator Parnell X Senator Adams X Senator Torgerson X Senator P. Kelly X Senator Donley X Senator Green X Senator Leman X Senator Phillips X Senator Wilken ALSO PRESENT: SENATOR STEVE RIEGER, PHIL OKESON, Fiscal Analyst, Division of Legislative Finance, aides to committee members and other members of the Legislature. VIA TELECONFERENCE: DAVE ROSE, Anchorage LOG SPEAKER DISCUSSION 000 Co-chair Parnell Convened the committee at approximately 8:12 a.m. He introduced former Senator Steve Rieger. Senator Rieger Opening statement made to the committee. Encouraged the committee to find the plan they liked and make the appropriate switch. The State has moved a long way towards consensus on two significant points. First, they have reached a point where something needs to be done beyond budget cuts and budget reserves to fill in. Second, if it is a question of using a portion of the permanent fund earnings or to impose an income tax, the preferred choice was to use the permanent fund earnings. Third, if they were looking at using financial assets, one of the fundamental principals was that one can not spend more than they have. Looking at all the plans he would advise watching the situation carefully. Not prudent to shortchange inflation proofing. Proposed to look at the permanent fund. Take each year's return, take inflation off the top and split the earnings fifty-fifty. Concept has been this split. Beyond this, he proposed to use a similar approach with the remainder of the State's financial assets. AIDEA and ALASKA RAILROAD, for example. These suggestions go a long way in closing the fiscal gap, but do not solve all the financial problems. He referred to his "Rieger Plan, Spreadsheet". Concerned about the possibility that the IRS may want to tax the permanent fund earnings. The fifty-fifty split would pre- empt this possible tax. Would also prevent any other taxes being attached. He described his spreadsheet. Put new resources to work; new development. In referring to his spreadsheet he asked the committee to make several assumptions. Co-chair Parnell Asked Senator Rieger to explain the year 2000 according to his spreadsheet. Senator Rieger Explained how the spreadsheet calculations worked. Co-chair Parnell Thanked Senator Rieger. Senator Rieger Continued his presentation. He thought there were still tradeoffs between program "A" and "B". It was necessary to put whatever plan into perspective to make it work. He referred to volatility. Earnings can be volatile from year to year. Due to the involvement with oil Alaskans are used to volatility. It is possible to adopt all kinds of smoothing tactics so that everything will be stable. He noted there was talk this year of using some kind of endowment procedure. "Smoothing" is beneficial but has drawbacks. However, one can "smooth" too much. Other steps advised to the Legislature: change the restrictions on the asset allocations of the permanent fund because they need the versatility to adopt away from only investing in bonds; suggests looking at buffer accounts; AMERADA HESS earnings. Within reach to adopt a realistic budget plan. Would solidify the protection of the permanent fund in the long term. Senator Torgerson Half of the earnings available from the permanent fund for the fifty-fifty split? Senator Rieger Indicated that was correct. Senator Torgerson "How would inflation be dealt with?" Senator Rieger Said he would have to look into this. Senator Torgerson Calculations on the CBR and balance of the permanent fund. Not shown on the spreadsheet. Is the loss of 3% intended? Senator Rieger Intended to be that way. Senator Torgerson Losing something on the 3% interest. Was there a calculation for growth such as schools and population in general? Senator Rieger Said the plan only showed a base reference point. It does not contemplate any new revenues that might come along. For example, oil forecast only considers what is presently in use. Senator Wilken Asked which inflation indicator he used? Senator Rieger Consumer price index. Senator Wilken Asked if that was the Federal one? Senator Rieger Responded, yes. Could put it on a disc and send to Senator Wilken. Senator Adams Is there a spreadsheet referring to the use of the dividend? This would be a major concern to most Alaskans. Senator Rieger Responded briefly. Senator Leman Inflation proofing. He stated that the permanent fund was already inflation proofed. Senator Rieger Eventually all capital gains do get realized. Unrealized gains left to the last. It may be time to consider using the total return concept. Gains are utilized whether realized or unrealized. Senator Phillips Happy that the "Rieger Plan" is similar to what he thinks. Assumed all the plans will be compared toward the end of session, side by side. Senator Rieger Thought his plan was careful to not erode the principle. Spending has negative connotation when using savings. A spending plan is one that would use principle. One that uses savings has a negative connotation. Senator Adams Changing permanent fund investment portfolio. What change would you like to recommend? Senator Rieger Would recommend a partial step towards adopting a clean investment role with no legal list. Allow the bond portion to go down to at least 25% Co-chair Parnell Thanked Senator Rieger. He then referred to the Rose Plan. Dave Rose Via teleconference from Anchorage. He began his presentation. Cannot just look at a quick fix and to solving immediate problems. Must consider the long term, "where are we going". Advocates solving problems by increasing Alaska's asset base. Not managed to diversify successfully. Referred to the Alaska Permanent fund. Would like to be able to attract other companies help us diversify our funds. Need to lure major companies to Alaska. Advocates expanding Alaska's asset base. Distinction between savings and spending plan. Take earnings from the Permanent Fund and spend them. The money, however, would be gone. Take better approach, which is to save the monies to another fund, building up that second fund's interest. (Tape #82, switch to side B at log 597.) Dave Rose Continued presentation. Proposed to keep the CBR just as it is. This will allow them to tread water and buy time. Concurred with Senator Rieger to increase the asset allocation. This would prevent the appearance of a double dip. More money could be made available faster. Keep principle inviolate of the permanent fund. The earnings from the second fund could be appropriated by the Legislature. Suggested cloning the permanent fund since we did so well. He explained creation of the second fund. Has written a number of papers questioning the purpose of the permanent fund. Felt the second fund could be as successful as the permanent fund if the same procedure adhered to. Monies in the earnings reserve that could be shifted. In his plan no permanent fund dollars are spent; rather put into the second fund. Recommended that an annual amount be set for the fund. Second fund be allowed to build up and reach maturity; will throw off big dollars and can be used as the State's revenue base. Senator Phillips His constituents would not be in favor of a state income tax. He asked what would happen if voters do not accept the permanent fund concept? Dave Rose "Then you take the Rieger plan!" Co-chair Parnell Thanked Mr. Rose for his efforts. Dave Rose Impossible to cut the budget to zero. However, the public must be assured that reasonable cuts are being made and reasonable alternatives are being explored. Diligent effort must be made to cut State spending. Co-chair Parnell Asked if the permanent fund dividends would be paid from the tax aversion fund? Dave Rose Indicated no. Dividends would be paid out of the earnings reserve account. Co-chair Parnell Query. Dave Rose In reply to Co-chair Parnell asked him to remember that the TAF is a clone of the permanent fund. Co-chair Parnell Said he does not want the permanent fund to be put at risk. Trying to figure out how his plan would protect the permanent fund. Was this with the 5% pay out? Dave Rose Earnings reserve account has been used up until now as a buffer. No reason if we had an extreme year that we could not reach into the TAF. All the years that we have had the permanent fund only had a tough situation twice and that, at best, was minimal. Co-chair Parnell Thanked Mr. Rose. He noted that the floor session would begin at 9:30 A.M. this morning and therefore would be recessing the committee. ADJOURNMENT: Recessed at approximately 9:20 a.m., tape number 82, side B, log 390. SENATE FINANCE COMMITTEE LOG NOTES 04/08/99 Page 1