Legislature(2015 - 2016)HOUSE FINANCE 519

02/02/2016 01:30 PM House FINANCE

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01:32:55 PM Start
01:33:46 PM HB245
03:40:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 245                                                                                                            
     "An  Act   relating  to   the  Alaska  permanent   fund;                                                                   
     relating  to   appropriations  to  the   dividend  fund;                                                                   
     relating  to  income  of   the  Alaska  permanent  fund;                                                                   
     relating  to the earnings  reserve account;  relating to                                                                   
     the Alaska  permanent fund  dividend; making  conforming                                                                   
     amendments; and providing for an effective date."                                                                          
1:33:46 PM                                                                                                                    
Co-Chair Thompson discussed the meeting agenda.                                                                                 
1:35:00 PM                                                                                                                    
JERRY  BURNETT,   DEPUTY  COMMISSIONER,  TREASURY   DIVISION,                                                                   
DEPARTMENT  OF   REVENUE  (DOR),  introduced  the   bill.  He                                                                   
explained  that  the  bill  moved  the  volatility  from  oil                                                                   
revenue stream into  the Permanent Fund (fund  earnings would                                                                   
be taken  out in a predictable  and sustainable  fashion) and                                                                   
changed the way  the Permanent Fund Dividend  was calculated.                                                                   
He  deferred  to  his  colleague   to  speak  about  Alaska's                                                                   
economy  and  the   benefit  of  using  the   bill's  revenue                                                                   
approach to the long-term health of the state's economy.                                                                        
1:36:27 PM                                                                                                                    
JOHN  TICHOTSKY, CHIEF  ECONOMIST,  TAX DIVISION,  DEPARTMENT                                                                   
OF  REVENUE,   discussed  his  professional   background.  He                                                                   
shared that for  the past 25 years he had worked  in numerous                                                                   
locations worldwide  for the private sector,  government, and                                                                   
as a  consultant. He continued  to provide information  about                                                                   
his  background.   He  provided  a  PowerPoint   presentation                                                                   
titled  "Alaska  Permanent  Fund   Protection  Act:  Alaska's                                                                   
Economic  Story"  dated  February  2016 (copy  on  file).  He                                                                   
explained   that  the   bill  provided   an  opportunity   to                                                                   
restructure  government revenue  flows  to enable  government                                                                   
to  work  predictably  and  stably,   which  provided  fiscal                                                                   
certainty.  He detailed  that state  agencies, industry,  and                                                                   
the  private sector  needed fiscal  certainty  for a  healthy                                                                   
economic   environment.  He   explained   that  the   current                                                                   
structure could  not provide  fiscal stability or  certainty.                                                                   
He elaborated that  for the past four years he  had worked as                                                                   
the  economist  with  the  responsibility  of  informing  the                                                                   
legislature  about what  to expect the  future of  government                                                                   
revenues  to  be in  order  to  help  plan and  budget  state                                                                   
spending.  He concluded  that  it was  impossible to  predict                                                                   
revenues that  currently went  into the  General Fund  due to                                                                   
uncertainty.  He   stated  that  Alaska  in   particular  was                                                                   
suffering  because  General  Fund revenues  relied  on  price                                                                   
volatility  of oil. He  relayed that  four years earlier  oil                                                                   
had  been $112  per barrel  coming  off the  North Slope  and                                                                   
Cook Inlet. At  present, the price was about  $30 per barrel.                                                                   
He  continued  that the  price  of  oil  would be  even  more                                                                   
difficult to  predict in the  future. He believed  that given                                                                   
the uncertainty,  Alaska needed a structure with  the ability                                                                   
to harness the uncertainty to the state's benefit.                                                                              
1:39:27 PM                                                                                                                    
Representative  Wilson  asked if  the committee  was  hearing                                                                   
about specific legislation or about why a bill was needed.                                                                      
Co-Chair  Thompson  replied  that  DOR  Commissioner  Randall                                                                   
Hoffbeck and  Attorney General  Craig Richards would  present                                                                   
the bill later in the presentation.                                                                                             
Mr. Tichotsky  explained that the  bill would move  the price                                                                   
and  revenue volatility  from  the  budget to  the  Permanent                                                                   
Fund,  provided  a stable  sustainable  draw  for  government                                                                   
spending,  and  provided  a dividend  derived  from  resource                                                                   
revenues  that would  be connected  to  the resource  economy                                                                   
(the  primary engine  for  economic  growth in  Alaska).  The                                                                   
bill would result  in fiscal and economic certainty  that had                                                                   
eluded Alaska for  decades. He explained that  there would be                                                                   
a basic  building block  of predictable  revenue in  order to                                                                   
plan  for an  efficient  and  right-sized spending  plan.  He                                                                   
communicated  that  there  was an  "economic  playbook"  that                                                                   
could allow  the legislature  to create  a machine  where the                                                                   
flows of  revenue matched spending  and where the  risks were                                                                   
properly placed to  be managed. He furthered  that a rational                                                                   
and  scientific  approach  had  been used  to  construct  the                                                                   
1:41:48 PM                                                                                                                    
Representative  Guttenberg  remarked that  he  may not  agree                                                                   
with Mr.  Tichotsky's statement  about tying the  dividend to                                                                   
resource  development   and  extraction.  He   reasoned  that                                                                   
resource  development  and extraction  was  a roller  coaster                                                                   
ride.  He  wondered if  the  department  had looked  back  to                                                                   
determine what  the effect would  have been if the  state had                                                                   
been living with the scenario for the past 5 to 20 years.                                                                       
Mr. Tichotsky  replied that  the analysis  had been  done and                                                                   
would be  provided at a later  time. He continued  to address                                                                   
the fiscal  system and its relevancy  to the workings  of the                                                                   
Alaska  economy,  which  he  had studied  for  25  years.  He                                                                   
explained  that  the  modeling, numbers,  and  analysis  that                                                                   
went into  the bill  only made  sense in  terms of  having an                                                                   
understanding  of the overarching  framework. He  stated that                                                                   
having a  systematic approach  based on a rational  framework                                                                   
was  not new  for Alaska,  which he  intended to  demonstrate                                                                   
was based on work people had been doing for many years.                                                                         
1:43:25 PM                                                                                                                    
Mr.  Tichotsky  turned  to  slide  4  titled  "Framework  for                                                                   
Economic  Analysis." He  had learned  that  many people  were                                                                   
interested   in  understanding   how   economies   developed,                                                                   
especially those  based on  natural resources. He  elaborated                                                                   
that economists  had developed a standard  economic framework                                                                   
to explain  how the  economy worked  and grew,  which he  had                                                                   
used  to understand  how Alaska  grew. He  detailed that  the                                                                   
current  framework was  based  on the  work  of the  Canadian                                                                   
economist Harold  Innis. Mr. Innis had identified  items like                                                                   
furs,  fish, and  wheat  that Canada  exported  as staples  -                                                                   
resulting  in wealth  and  economic diversification  for  the                                                                   
country.  Mr.  Tichotsky  discussed   that  Alaska's  current                                                                   
staples  were oil  and  financial  assets. He  detailed  that                                                                   
after  WWII  a group  of  economists  had created  what  they                                                                   
called  the "new  economic history"  related  to how  regions                                                                   
developed.   The   group   had   added   concepts   including                                                                   
quantification  and the multiplier  mechanism, and  worked to                                                                   
make  Mr.  Innis's  concept  quantifiable  and  testable.  He                                                                   
referred to  concepts like economic-based  analysis, regional                                                                   
forecasting,  and impact analysis  that had  come out  of Mr.                                                                   
Innis's work  and had become  a standard  way to look  at the                                                                   
1:45:33 PM                                                                                                                    
Mr.  Tichotsky  turned  to  slide  5  titled  "Framework  for                                                                   
Alaska  Development."  Mr.  Innis  had  looked  at  the  19th                                                                   
Century  economic success  of  Canada, the  U.S.,  Australia,                                                                   
and  Argentina in  terms  of  how they  transformed  resource                                                                   
wealth by rejecting  colonial control and adapting  a market-                                                                   
based development  policy to optimize  wealth for  the region                                                                   
and  population. He  continued  that the  export-led  economy                                                                   
provided   Alaska   with   a  larger,   growing,   and   more                                                                   
diversified   economy.   Additionally,    it   had   provided                                                                   
political,  economic,  and social  well-being;  it also  made                                                                   
the population more  productive and wealthier.  He noted that                                                                   
the economists had  witnessed the items in the  early to mid-                                                                   
20th Century.  He moved to slide  6 titled "Major  Strands of                                                                   
Alaska   Development."   He  moved   forward   to  the   late                                                                   
1950s/early  1960s  and  highlighted   the  economist  George                                                                   
Rogers, the founder  of the Institute of Social  and Economic                                                                   
Research (ISER).  Mr. Rogers had  written at least  two books                                                                   
where he  had talked  about the concept  of major  strands of                                                                   
economic  development.  Mr.  Rogers  had  taken  Mr.  Innis's                                                                   
concept  and determined  that Alaska's  economy was  dictated                                                                   
by the  booms and busts of  the export of various  resources.                                                                   
For example, Russians  had come to Alaska to  exploit the fur                                                                   
industry and  the Yankee whaling  ships had plied  the Arctic                                                                   
waters  to harvest  whales in  order to sell  whale oil  used                                                                   
for lamps prior to kerosene.                                                                                                    
Mr.  Tichotsky  addressed  the  colonial  Alaska  time-period                                                                   
that  included  fur,  gold and  copper,  canned  salmon,  and                                                                   
military  Alaska. Currently  the  state was  in  the oil  era                                                                   
that  began in  the  1950s, which  had  been "supersized"  in                                                                   
1969 with the discovery of Prudhoe Bay.                                                                                         
1:47:57 PM                                                                                                                    
Vice-Chair Saddler  stated that it  was easy to look  back at                                                                   
history to  see that something  had to happen a  certain way;                                                                   
however,  he reasoned  that it  did not  necessarily have  to                                                                   
happen  that certain  way.  He asked  if  decisions had  been                                                                   
made  that had  resulted in  Alaska  having a  resource-based                                                                   
economy; he  wondered who  had made the  decisions if  so. He                                                                   
asked why the state was not a colony.                                                                                           
Mr.  Tichotsky  replied  with  slide  7  titled  "Development                                                                   
Alone is  Not Enough for  Economic Growth." He  detailed that                                                                   
ISER  had adopted  a  sophisticated  version of  the  concept                                                                   
started by  the economic  historians. Individuals  like Arlon                                                                   
Tussing,  Brad  Tuck,  Lee  Husky,  Scott  Goldsmith,  Gunnar                                                                   
Knapp, and others  had taken the approach. He  discussed that                                                                   
he had  worked with Mr.  Knapp and Mr.  Tussing and  had been                                                                   
made  aware that  there  was a  conscious  effort  to try  to                                                                   
understand  how  the  economy  worked.  He  shared  that  Mr.                                                                   
Rogers had testified  in front of the legislature  many times                                                                   
and had  acted as  an advisor to  many Alaskan governors.  He                                                                   
explained that the  concept had become part  of the narrative                                                                   
of the  Alaska political  scene. He  agreed that someone  had                                                                   
to put the  story together - it  was pretty clear that  40 or                                                                   
50  years in  the  past the  narrative  put  together by  Mr.                                                                   
Rogers and  others had  been picked up  by policy  makers. He                                                                   
stated that  current economists  like Mr.  Goldsmith and  Mr.                                                                   
Knapp  had  elaborated  on the  framework  and  provided  the                                                                   
numbers and structure.                                                                                                          
Vice-Chair Saddler  asked if the economic work  was passively                                                                   
describing how  the economy had developed.  Alternatively, he                                                                   
wondered  if the  economists  had  advocated for  how  Alaska                                                                   
should develop.                                                                                                                 
Mr.  Tichotsky  replied  that  it  was  a  bit  of  both.  He                                                                   
furthered that the  economists had tried to  identify the way                                                                   
the  economy had  developed,  in  addition to  making  policy                                                                   
suggestions.  He detailed  that in  the 1960s  and 1970s  Mr.                                                                   
Rogers  and  Mr.  Tussing  had   provided  testimony  to  the                                                                   
Representative  Wilson  asked if  Mr. Tichotsky  intended  to                                                                   
show  how  Mr.  Goldsmith believed  the  Permanent  Fund  was                                                                   
already protected  and that his  sustainable plan  could also                                                                   
Mr.  Tichotsky   replied  that   the  information   would  be                                                                   
included  indirectly. He  elaborated  that the  plan had  not                                                                   
been  developed by  DOR,  the Department  of  Law (DOL),  and                                                                   
administration   in  a   vacuum.   He  explained   that   his                                                                   
interaction  with  Dr.  Goldsmith   had  shaped  the  way  he                                                                   
thought; they viewed  things within the same  framework. They                                                                   
debated  some issues  as economists,  but  the ultimate  view                                                                   
and the  decision to restructure  the fiscal plan  was shared                                                                   
universally by economists in the state.                                                                                         
1:52:37 PM                                                                                                                    
Representative  Wilson   observed  that  Mr.   Tichotsky  was                                                                   
providing  a  history lesson.  She  wanted  to make  sure  to                                                                   
include  other strategies  that could be  used. She  remarked                                                                   
that the  state was  already protecting  the Permanent  Fund.                                                                   
She wanted  the presentation  to include  a whole picture  on                                                                   
the options  and to include  several slides showing  what Mr.                                                                   
Goldsmith believed.                                                                                                             
Mr. Tichotsky  answered that he  would touch on  the question                                                                   
throughout the  presentation. He  continued with slide  7 and                                                                   
explained  that Mr.  Rogers had  discovered that  development                                                                   
alone  was  not enough;  the  viewpoint  had also  been  held                                                                   
prior  to and  immediately after  statehood.  Mr. Rogers  had                                                                   
brought examples  forward including  the Kennecott  Mine (the                                                                   
largest copper mine  in the world at the turn  of the century                                                                   
and  largest   population  of   any  settlement   outside  of                                                                   
Southeast)  - after  the mineral  stopped  being produced  in                                                                   
the late  1920s there  had been no  lasting growth.  He added                                                                   
that  Kennecott Mine  was  currently "a  hole  in the  ground                                                                   
with  some  abandoned  buildings."  The  second  example  was                                                                   
related  to fish traps  where revenue  flows were  controlled                                                                   
by outside  owners and economic  growth within the  state had                                                                   
been  curtailed.   He  explained   that  the  situation   had                                                                   
prompted the  move to statehood.  He stated that to  grow the                                                                   
Alaska  economy, the  political structure  and local  economy                                                                   
needed to  control the  resource and have  a policy  to guide                                                                   
economic development.                                                                                                           
Co-Chair Thompson  remarked that  the presentation  was meant                                                                   
to provide a background for the bill.                                                                                           
Mr.  Tichotsky shared  that  the administration  believed  it                                                                   
was important to  demonstrate that the bill  had been crafted                                                                   
within a  context of considering  the history,  understanding                                                                   
basic  economics,   and  looking   towards  the   future.  He                                                                   
referred to  Vice-Chair Saddler's  question about how  to use                                                                   
economics to be able to craft a policy looking forward.                                                                         
Mr.  Tichotsky   moved   to  slide  8   titled  "Policy   and                                                                   
Governance." He  stated that policy  and governance  that had                                                                   
come out of the economic view were not unimportant.                                                                             
     · Comparative advantage in oil and gas                                                                                     
        o Export-led growth                                                                                                     
        o Engine of economic growth                                                                                             
     · Market-based economy                                                                                                     
     · Rule-based, democratic government                                                                                        
     · Capture economic rents and revenue                                                                                       
        o Taxation as sovereign                                                                                                 
        o Royalty as owner                                                                                                      
Mr. Tichotsky shared  that there were other  issues of policy                                                                   
and governance  that had  come out of  the time period.  Some                                                                   
looked  at strategies  to  deal  with "white  elephants"  and                                                                   
opportunity  costs  - how  to  use  the dollars  gained  from                                                                   
export  economic  growth  to  increase  economic  growth.  He                                                                   
quoted  former Governor  Jay  Hammond  as saying  "you  don't                                                                   
plant dollars to  harvest nickels." He explained  that Alaska                                                                   
had saved  surplus revenue  in the  Permanent Fund  and other                                                                   
funds, which had been revolutionary at the time.                                                                                
1:57:16 PM                                                                                                                    
Mr.  Tichotsky continued  that  at the  same  time there  had                                                                   
been a  debate about  whether the  Permanent Fund should  act                                                                   
as an  investment fund  or a development  bank. The  decision                                                                   
had been  made to  structure the fund  as an investment  fund                                                                   
and the investments  were almost exclusively  located outside                                                                   
of Alaska;  the investments reaped  the benefits  from global                                                                   
economic  growth  and brought  revenues  back  to the  state.                                                                   
However, it  had been  recognized that there  was a  need for                                                                   
developing  the state and  its economy,  which was  addressed                                                                   
by independent  agencies that  could address economic  change                                                                   
domestically (e.g.  Alaska Industrial Development  and Export                                                                   
Authority   (AIDEA),  Alaska   Housing  Finance   Corporation                                                                   
(AHFC), and the  Alaska Municipal Bond Bank  Authority). With                                                                   
opportunity  costs,  Alaska  realized  it  could  not  buy  a                                                                   
balanced  economy; at  the time,  it had been  an issue  that                                                                   
was outstanding.  He elaborated  that there had  been regions                                                                   
and  countries that  decided  they could  rebuild  everything                                                                   
once they  had created economic  wealth (e.g.  Soviet Union).                                                                   
Having  a  desire to  have  a  balanced  economy and  to  not                                                                   
receive  the  gains  of  trade was  a  policy  decision  that                                                                   
needed to be  made; Alaska had made the policy  decision that                                                                   
it was easier to  trade for the benefits or  goods it needed.                                                                   
One  of the  results was  that  Alaska's economy  was not  as                                                                   
diversified  as  it  could  be  and it  did  not  have  grand                                                                   
examples   of  white   elephants   [opportunity  costs].   He                                                                   
concluded   with  slide   9  and  relayed   that  the   state                                                                   
distributed  part of its  resource wealth  to the  population                                                                   
as  dividends, which  was  not done  by  any other  sovereign                                                                   
wealth  fund (with  the exception  of an  experiment done  in                                                                   
1:59:39 PM                                                                                                                    
Representative  Wilson pointed to  slide 9. She  believed the                                                                   
presentation left  out a major component associated  with the                                                                   
slide's bullet point  about distributing part of  the state's                                                                   
resource wealth.  She believed  that government was  intended                                                                   
to  get a  certain  percentage  of  the resource  wealth  for                                                                   
General  Fund  spending,  while the  remaining  portion  went                                                                   
into the  Permanent Fund  for constituents.  She stated  that                                                                   
there  was a  reason  the funding  had  been  split into  two                                                                   
parts.  She detailed  that  a portion  went  to General  Fund                                                                   
spending  and the  other  portion benefitted  Alaskans  given                                                                   
that they did  not own the subsurface rights.  She elaborated                                                                   
that  the  dividend was  a  payment  to residents  for  their                                                                   
portion of  the oil  royalties. She  believed the plan  under                                                                   
the bill basically  looked like government thought  its share                                                                   
was not  large enough and  that it should  take a  portion of                                                                   
the people's  share.  She noted  that soon  there would  be a                                                                   
conversation  about why it  would be good  or bad  to utilize                                                                   
the funds for government as well.                                                                                               
Mr. Tichotsky  believed the observations  framed some  of the                                                                   
discussions  that would take  place related  to the  bill. He                                                                   
stated that  there had been  significant thought  put towards                                                                   
the issue.                                                                                                                      
Representative  Wilson  wanted  to ensure  that  constituents                                                                   
understood  that the conversation  was  about their share  of                                                                   
the  resource wealth  because  the government's  portion  had                                                                   
been used.                                                                                                                      
Mr. Tichotsky  turned to  a production  history and  forecast                                                                   
chart  (from 1977  to 2025)  related  to the  North Slope  on                                                                   
slide 10  [mistakenly labeled  in the  presentation as  slide                                                                   
9]. He  noted that he  had shown the  chart to the  committee                                                                   
for  the  past four  years  as  part  of DOR's  fall  revenue                                                                   
forecast. He explained  that the chart showed  the importance                                                                   
of Prudhoe  Bay as a single  resource. The chart  showed that                                                                   
Alaska  continued to  have a  competitive  advantage for  oil                                                                   
and  gas,  but it  was  greatly  diminished relative  to  the                                                                   
Co-Chair  Neuman  spoke to  his  problem  with the  chart  on                                                                   
slide  10. He  pointed to  a flat-line  in revenue  forecasts                                                                   
around 2019  and 2020, which  subsequently began  dropping at                                                                   
a pretty good rate.  He remarked that people who  had not had                                                                   
the discussion  previously would  not know that.  He observed                                                                   
that the  department did  not know what  was going  to happen                                                                   
in the future  and he doubted that oil production  would drop                                                                   
100,000 barrels in five years (from 2020 to 2025).                                                                              
Mr.  Tichotsky  replied  that   he  had  included  the  chart                                                                   
because  of the  past  conversation.  He explained  that  the                                                                   
modelling  done for  the  legislation was  based  on the  DOR                                                                   
forecast of production  (included in the chart  on slide 10).                                                                   
He expounded  that the forecast was admittedly  conservative,                                                                   
but  it was  realistic in  the sense  that it  was backed  up                                                                   
with  actual  resources. Additionally,  it  reflected  status                                                                   
quo,  investment, and  effort.  He added  that  there was  an                                                                   
upside  that could  be  released through  technology,  market                                                                   
conditions,  industry  decisions,  and  government  policies.                                                                   
There was  a potential  of monetizing gas  on state  land, in                                                                   
addition to  more oil -  including heavy  oil and shale  - on                                                                   
state land.  He elaborated that  there was potential  for oil                                                                   
and  gas on  federal  and private  land.  He  pointed to  the                                                                   
National Petroleum  Reserve Alaska, Alaska  National Wildlife                                                                   
Refuge,  and offshore  resources. Many  of the  opportunities                                                                   
had existed  for decades  and still  showed great  potential;                                                                   
however,  converting potential  to  reality  was exactly  the                                                                   
heart  of  what   uncertainty  is.  He  explained   that  the                                                                   
department  had taken the  approach that  it was not  prudent                                                                   
to  determine  a  budget  and   sovereign  wealth  fund  draw                                                                   
without taking the uncertainty into account.                                                                                    
2:05:02 PM                                                                                                                    
Vice-Chair   Saddler   asked   for  verification   that   the                                                                   
[production history  and forecast] chart  on slide 10  it was                                                                   
the  mean  case  from  the  department's  2015  fall  revenue                                                                   
forecast. Mr.  Tichotsky responded that the  forecast portion                                                                   
of the chart reflected the mean case.                                                                                           
Vice-Chair  Saddler clarified  that he  had meant  production                                                                   
Mr. Tichotsky  continued  to address slide  10. He  explained                                                                   
that the  production shown  was bankable;  the revenues  that                                                                   
would  come from  the  conservative  base were  bankable.  He                                                                   
explained that  it was not  possible to  bank on some  of the                                                                   
other   projects   "be   they  quite   desirable   or   quite                                                                   
Co-Chair  Neuman  remarked  that  the  goal  was  to  produce                                                                   
information  that was as  accurate as  possible in  order for                                                                   
the public  to understand. He  did not believe the  chart was                                                                   
accurate and  that no one knew  what the number would  be. He                                                                   
stated that  the decline over  the past year had  leveled off                                                                   
substantially.  He believed  that  people could  look at  the                                                                   
chart  and  determine  that  the   administration  wanted  to                                                                   
convey that  the state  could not continue  to "kick  the can                                                                   
down  the  road"  and  that  the   administration  wanted  to                                                                   
convince  the public  that the  bill  needed to  pass in  the                                                                   
current  session because  the  amount of  oil production  was                                                                   
going  to  drop.  He  did not  believe  it  was  an  accurate                                                                   
presentation of the facts.                                                                                                      
Mr. Tichotsky  stated  that the  chart on slide  10 showed  a                                                                   
median  case, which  he had  used to  introduce the  concept.                                                                   
During  the  course  of  the   information  outlined  in  the                                                                   
presentation  the  department  would  present  a  significant                                                                   
amount of  modelling. He clarified  that there was  one model                                                                   
(with  two aspects)  the  department  had developed  for  the                                                                   
case.  One was  the  core aspect  that  was deterministic  in                                                                   
nature;  the  means  showed  a single  pathway  of  what  the                                                                   
future  could be  depending on  what variable  was used.  The                                                                   
other  way the department  would  look at the  issue -  which                                                                   
was  a  common   way  to  look  at  investment   returns  and                                                                   
calculate annuities  - was  with probabilistic modelling.  He                                                                   
detailed   that  the  probabilistic   modelling  included   a                                                                   
realistic  range of  several variables,  which addressed  the                                                                   
problem  outlined  by  Co-Chair  Neuman.  There  would  be  a                                                                   
probabilistic  distribution  of  production, oil  price,  and                                                                   
investment returns.  He explained  that the distributions  of                                                                   
the  three  variables   drove  the  fiscal  system   and  the                                                                   
economy.  He concluded  that the  department  would focus  on                                                                   
the issue.                                                                                                                      
2:08:59 PM                                                                                                                    
Mr. Tichotsky moved  to slide 11 titled "Economic  and Policy                                                                   
        · Before 1960 - Statehood and resource control                                                                          
        · 1960s and 1970s - State establishes basic system                                                                      
          over oil revenues and creates Alaska Permanent                                                                        
          Fund in 1976 Rapid economic growth                                                                                    
        · 1980s - increasing oil production, changes in oil                                                                     
          price Economic expansion followed by contraction                                                                      
        · 1990s - oil production begins to decline, changes                                                                     
          in    oil    price   Economic    expansion,    some                                                                   
          diversification, contraction                                                                                          
        · 2000s - production declines, but commodity prices                                                                     
          increase Slow, steady economic growth                                                                                 
        · 2015 - Production continues decline, commodity                                                                        
          prices collapse between 2014 and 2015                                                                                 
Mr. Tichotsky  elaborated on slide  11 and noted that  he had                                                                   
moved  to Alaska  in  1988  and had  been  one of  the  first                                                                   
people who came  to the state after the economic  decline. He                                                                   
recalled  hearing stories  about  people  losing their  homes                                                                   
and  jobs and  leaving the  state.  He remarked  that in  the                                                                   
2000s  there had  been fiscal  opportunities  - revenues  had                                                                   
been  flowing into  savings and  the  General Fund.  However,                                                                   
between   2014   and   2015    commodity   prices   collapsed                                                                   
Mr. Tichotsky  turned to  slide 12  titled "Alaska  Budget is                                                                   
Heavily  Reliant  on  Petroleum Revenue."  The  chart  showed                                                                   
petroleum revenue  as a percent of Unrestricted  General Fund                                                                   
(UGF).  He explained  that  in most  cases  the General  Fund                                                                   
relied on oil revenues  for over 80 percent of  its funds. He                                                                   
remarked in years  that looked to be improving with  60 or 70                                                                   
percent  petroleum revenue,  it was not  because the  economy                                                                   
was  becoming  diversified  or there  were  economic  sectors                                                                   
able  to provide  revenue; it  was just  because prices  were                                                                   
low  and there  was less  revenue  that the  state was  stuck                                                                   
with a non-oil based revenue that was relatively stable.                                                                        
2:12:42 PM                                                                                                                    
Mr.  Tichotsky addressed  slide 13  titled "US  Resource-Rich                                                                   
States,"  which showed  the percentage  of  real gross  state                                                                   
product  in  constant  dollars   for  Wyoming,  Alaska,  West                                                                   
Virginia, Oklahoma,  and Texas. He explained that  during the                                                                   
development  of the bill  the department  had looked  at what                                                                   
was  going on  worldwide and  around the  county. The  states                                                                   
included on  the chart reflected the country's  resource-rich                                                                   
states.  The chart  also showed  oil and  gas production  and                                                                   
mining as  a share of the  states' economies. He  pointed out                                                                   
that  Alaska  dwarfed  other resource-rich  states  with  the                                                                   
exception  of Wyoming. He  noted that  Wyoming and  the other                                                                   
states  (excluding   Alaska)   were  integrated  within   the                                                                   
economy of  the Lower  48. The  level of diversification  the                                                                   
other states had  was far greater than Alaska;  Alaska was by                                                                   
far the most dependent state on oil and gas revenues.                                                                           
Mr.   Tichotsky  addressed   one   of  Alaska's   competitive                                                                   
advantages on  slide 14  titled "Alaska's Financial  Assets."                                                                   
The  chart  showed  the Permanent  Fund  balance,  which  had                                                                   
basically  doubled in  the  past 15  years  despite dips  and                                                                   
bumps in  the road. He relayed  that the one thing  the state                                                                   
could bank  on was its financial  assets that were  large and                                                                   
were finally large  enough to make a difference.  He stressed                                                                   
that  financial  assets  and  their  revenues  acted  like  a                                                                   
reverse  Prudhoe Bay;  the revenues  could  be harvested  and                                                                   
the  assets continued  to grow.  He  stressed that  financial                                                                   
investments  were  the ultimate  renewable  resource.  Unlike                                                                   
underground  oil and  gas  resources, financial  assets  were                                                                   
already monetized  and contained  no risk  that they  may not                                                                   
be monetized. A  large part of the financial  plan focused on                                                                   
financial  assets  for that  reason  and  was driven  by  the                                                                   
economic analysis.                                                                                                              
Representative  Wilson   wondered  why  the  state   was  not                                                                   
looking  at living  within  its means.  She  referred to  the                                                                   
charts and times  when oil had dipped down  and reasoned that                                                                   
if  the state  had kept  the standard  instead of  increasing                                                                   
spending  with   oil  to  have  a  sustainable   budget.  She                                                                   
wondered why using  the "other pot of money"  outlined in the                                                                   
legislation  was more  important to  the administration  than                                                                   
the  state living  within its  means. She  noted that  people                                                                   
had to live within their means in their own homes.                                                                              
2:15:57 PM                                                                                                                    
Mr.  Tichotsky replied  that the  question was  foreshadowing                                                                   
where he  was headed in  the presentation. He  discussed that                                                                   
one of the issues  the state had was that it  engaged in pro-                                                                   
cyclical spending  (i.e. roller  coaster spending).  He moved                                                                   
forward to  slide 22 titled  "Alaska Pro-Cyclical  Spending."                                                                   
He explained  that the  situation occurred  when there  was a                                                                   
significant  amount   of  money,   it  was  spent,   and  the                                                                   
situation   wound   up  overheating   the   economy   through                                                                   
government  spending.  The  opposite  was  also  true  during                                                                   
economic downturns.  He explained  that in times  when Alaska                                                                   
did not have  as much resource revenue, the  contraction went                                                                   
the other  way. He  detailed that the  state doubled  down on                                                                   
the times when  revenue contracted, which  further contracted                                                                   
the  economy.  Alternatively,   when  there  was  significant                                                                   
petroleum  revenue  coming  in,  there  was  more  government                                                                   
spending and the  economy was overheated. The  volatility and                                                                   
the  volatility in  the budget  that  drove the  pro-cyclical                                                                   
spending  was  the  issue.  The   department  had  worked  to                                                                   
determine the magic  number the state could  sustainably draw                                                                   
from  savings (from  financial  and other  assets). Once  the                                                                   
answer was  known, it  could determine  what the state  could                                                                   
sustainably  spend.  He furthered  that  there  was a  method                                                                   
that  could  link  sustainable  spending  to  understand  the                                                                   
sustainable number that could be drawn.                                                                                         
Representative Wilson  remarked that Mr. Tichotsky  was going                                                                   
in  the opposite  direction  from  her question.  She  stated                                                                   
that  he was  trying to  determine  how much  money could  be                                                                   
taken from all  of the different sources and how  it would be                                                                   
spent.  Alternatively,  she  believed the  state  could  have                                                                   
determined a  sustainable budget  four or five  years earlier                                                                   
(to $4.5  billion, $4 billion,  and lower) based on  the kind                                                                   
of  government  it  wanted. She  thought  he  was  suggesting                                                                   
using  revenue to  determine budget.  She  thought the  state                                                                   
should determine  the right  size of  government first,  what                                                                   
it  was constitutionally  mandated to  do, and  then look  at                                                                   
its  resources. She  stated that  there may  actually be  too                                                                   
much  revenue  at  present  being  spent  on  more  than  was                                                                   
2:19:32 PM                                                                                                                    
Mr.  Tichotsky noted  that Representative  Wilson had  raised                                                                   
two issues.  The first was related  to how Dr.  Goldsmith and                                                                   
others at ISER  were looking at the sustainable  spend, which                                                                   
was  based  on the  nest  egg  approach. The  one  difference                                                                   
between   what  Dr.   Goldsmith   did  with   petroleum   and                                                                   
investment  assets  (related  to the  production  number  the                                                                   
presentation  used)  was  that  Dr.  Goldsmith  believed  the                                                                   
state  should be  able to  keep in  mind that  it would  have                                                                   
potential revenues  coming in from  projects in the  long run                                                                   
(e.g.  ANWR or  other large-scale  project) -  from there  he                                                                   
pulled back  the number  to determine  the sustainable  draw.                                                                   
The department focused  more on the financial  assets because                                                                   
it looked  at production with  a more conservative  approach.                                                                   
He  noted that  ISER and  DOR  came up  with essentially  the                                                                   
same number  and scale.  The ISER modeling  was in  many ways                                                                   
analogous  to DOR's method.  The second  issue was  that from                                                                   
the  perspective of  an economist  or  business person  there                                                                   
were  two sides  to the  equation (i.e.  supply and  demand);                                                                   
there was  a balancing act that  had to occur  between supply                                                                   
and  demand in  a household  or  other. He  furthered that  a                                                                   
business had  to consider  how much money  it could  make and                                                                   
how  much  money it  wanted  to  spend.  He noted  that  when                                                                   
defining  issues   such  as  living   within  means   it  was                                                                   
important  to  know  what the  revenues  were.  He  addressed                                                                   
times of  surplus and discussed  that someone  could identify                                                                   
what they  needed to spend and  what they wanted to  put into                                                                   
savings for  spending at a  later time or further  investment                                                                   
savings  in  the  form  of  a   trust  fund  or  annuity.  He                                                                   
explained  that individuals  used  the same  process at  home                                                                   
with  checking,   savings,  and   retirement  accounts;   the                                                                   
spending  depended on what  was needed.  For example,  Alaska                                                                   
had invested  in infrastructure,  primarily on  a pay  as you                                                                   
go system, which  many regions did not do (many  regions used                                                                   
debt financing).  There were many  ways to look at  how money                                                                   
was spent, but  it was important to structure  and know where                                                                   
revenues were  and what  could sustainably  be drawn  and how                                                                   
to  predictably  know  what  spending  was. One  of  the  key                                                                   
issues of  the legislation was  that it took  away volatility                                                                   
(risk  and uncertainty)  and placed  it in  a location  where                                                                   
they could be very well managed.                                                                                                
Representative  Wilson requested to  hear from Dr.  Goldsmith                                                                   
again. She did  not believe his statements from  the past few                                                                   
years  were being  interpreted correctly  by the  department.                                                                   
She stated  that if  the goal  was to look  at all  models it                                                                   
would be helpful for the committee to hear from him.                                                                            
Representative  Munoz  believed   the  restructuring  of  the                                                                   
Permanent Fund into  a sovereign wealth fund  would provide a                                                                   
sustainable  draw similar  to the earnings  on the  Permanent                                                                   
Fund as  it was  currently structured.  She wondered  about a                                                                   
sustainable   draw  using  the   current  framework   of  the                                                                   
Permanent Fund.                                                                                                                 
2:24:45 PM                                                                                                                    
Mr. Tichotsky  replied  in the affirmative.  He relayed  that                                                                   
the  committee would  hear several  presentations  associated                                                                   
with the  topic. The department  had defined the  sustainable                                                                   
draw as  follows - if an  amount of money was  drawn annually                                                                   
with annual  increases for inflation  it would  not undermine                                                                   
the real  value of  the fund  within a  certain period  (they                                                                   
had selected  a 24-year period).  He continued that  the real                                                                   
value  of the  fund would  be  maintained the  same over  the                                                                   
period  of  time  and  the  draw   would  be  increased  with                                                                   
inflation. The number  was about $3.3 billion  per year based                                                                   
on the model and assumptions worked out by the department.                                                                      
Representative Munoz  asked about the current  structure. She                                                                   
wondered  what  the  sustainable  draw  would  be  under  the                                                                   
current structure.                                                                                                              
Mr.  Tichotsky  replied  that  the  bill  looked  to  operate                                                                   
without a constitutional  change. He detailed that  an annual                                                                   
$3.3   billion   draw   from   the   earnings   reserve   was                                                                   
sustainable;  the money all  came from  the same pie  whether                                                                   
it was  used to fund the  dividends or government.  Under the                                                                   
current formula  50 percent of  the earnings reserve  went to                                                                   
the dividend program.                                                                                                           
Representative   Munoz  asked   for  verification   that  the                                                                   
sustainable  draw was  the  same under  both  models and  was                                                                   
$3.3 billion.                                                                                                                   
Mr.  Tichotsky  answered  in the  affirmative.  He  explained                                                                   
that when  developing an  annuity the  question would  be how                                                                   
much could be  drawn indefinitely. The answer  in the state's                                                                   
case was $3.3 billion.                                                                                                          
2:27:39 PM                                                                                                                    
Mr. Tichotsky moved  to slide 16 titled "Alaska  - One of the                                                                   
Wealthiest  Regions   in  the   World."  He  referred   to  a                                                                   
presentation to  the committee  from Malan Rietveld  from the                                                                   
previous week (the  source of the charts on slide  16 was Mr.                                                                   
Rietveld).  He  pointed  to the  left  chart  showing  assets                                                                   
under   management   in  billions   for   various   countries                                                                   
including  Norway,  Abu  Dhabi,  Saudi  Arabia,  Kuwait,  and                                                                   
others  down  to  Alaska.  Alaska's   $54  billion  fund  was                                                                   
dwarfed by  funds like  those in  the other listed  counties.                                                                   
He moved to a  chart on the right showing the  size of assets                                                                   
relative to  the budget and  explained that a  different view                                                                   
was immediately  achieved. He detailed  that on a  per capita                                                                   
basis, Alaska was  probably one of the wealthiest  regions in                                                                   
the world. He turned  to slide 17 titled "Moving  Alaska to a                                                                   
Safe  Harbor,"  which  included   another  chart  from  Malan                                                                   
Rietveld  related  to oil's  percentage  of revenue  and  the                                                                   
fiscal break-even  price. The left  axis [y axis]  showed the                                                                   
oil  price required  to  balance the  budget  and the  bottom                                                                   
axis  [x  axis]  showed  oil's   share  of  total  government                                                                   
revenue.  Mr.   Rietveld  had   addressed  why  a   group  of                                                                   
countries like  Norway, Alberta, and  Wyoming were in  a more                                                                   
desirable  or stable place  than Alaska.  The answer  was due                                                                   
to   the   locations'  highly   diversified   economies.   He                                                                   
furthered  that it  would probably  take Alaska  a decade  or                                                                   
more  to  achieve  diversification   at  the  same  level  as                                                                   
Wyoming.  He  pointed to  economies  without  diversification                                                                   
such  as Qatar,  Kuwait,  Abu Dhabi  and  other. He  stressed                                                                   
that Alaska  had the  ability to  join the "winner's  circle"                                                                   
within a  short time period of  one year. He believed  it was                                                                   
an important takeaway from Mr. Rietveld's slide.                                                                                
Vice-Chair  Saddler asked  if anything  in the  work done  by                                                                   
Mr.  Innis  or  Mr. Rogers  presumed  that  a  resource-based                                                                   
economy   could   not   be  diversified.   He   referred   to                                                                   
constituents  who often  asked  why the  state's economy  was                                                                   
not more  diverse. He remarked that  oil had paid so  much of                                                                   
the  state's budget  for a  long  time period  and there  had                                                                   
been some unsuccessful  efforts to force  diversification. He                                                                   
wondered   if  having  a   single  commodity-based   resource                                                                   
economy  precluded anything  other  than  that commodity  and                                                                   
financial  management.  For example,  he  wondered if  Norway                                                                   
had telecommunications  and agriculture  and whether  Alberta                                                                   
had  petrochemicals  and  other.   He  wondered  if  Alaska's                                                                   
resource-based   economy  model   precluded   diversification                                                                   
other than financial assets.                                                                                                    
Mr.  Tichotsky replied  that the  reality was  the state  was                                                                   
not  diversified for  several  reasons. The  state had  found                                                                   
that it  was better off  to trade for  what it needed  rather                                                                   
than to  develop the industries  at home. Places  like Norway                                                                   
were located in  the old world and had an economy  upon which                                                                   
diversification  was brought. He  emphasized that  Alaska was                                                                   
one of the  20th Century regions of recent  settlement; apart                                                                   
from   the   Alaska   Native   population,   the   additional                                                                   
population came to  Alaska after the 1850s and  mostly in the                                                                   
20th Century. He  addressed the strategy the  state needed to                                                                   
follow   next,   with   the  knowledge   that   it   was   an                                                                   
undiversified  economy.  Diversification  was  desirable  and                                                                   
worth  pursuing, but  it took  a long time.  He believed  the                                                                   
important thing  to do at present  was work to  stabilize the                                                                   
state's  economy. He  stressed that  the one  way to  achieve                                                                   
diversification  and  investor   confidence  was  to  have  a                                                                   
stable economy.                                                                                                                 
2:32:59 PM                                                                                                                    
Vice-Chair  Saddler  reiterated  his question  about  whether                                                                   
having a  resource-based economy  precluded having  any other                                                                   
diversification other than fiscal assets.                                                                                       
Mr.  Tichotsky replied  when an  economy  was developing  and                                                                   
looking  for an investment  it  was prudent  to focus on  the                                                                   
areas it was  competitive. Alaska was competitive  in oil and                                                                   
gas, minerals,  fish, tourism, and  money. There may  be some                                                                   
areas that the  state could diversify into that  were not yet                                                                   
known. Possibly  in telecommunications  technology  that took                                                                   
away  the  state's geographic  disparity.  He  reasoned  that                                                                   
Alaska was isolated  and had and there were  a limited number                                                                   
of things where it was easy to generate revenues.                                                                               
Co-Chair  Thompson  asked  Mr.   Tichotsky  to  work  towards                                                                   
wrapping up the presentation.                                                                                                   
Mr.  Tichotsky  addressed  the "natural  resource  curse"  on                                                                   
slide  19.  He detailed  that  resource-rich  countries  were                                                                   
poorer, had  slower economic growth,  and no lasting  wealth.                                                                   
He  explained that  the administration  would  like to  avoid                                                                   
the   resource  curse.   He  discussed   price  and   revenue                                                                   
volatility  on slides  20  and 21.  He  relayed that  revenue                                                                   
volatility had recently  been discovered by economists  to be                                                                   
the "quintessential  feature  of the resource  curse"  due to                                                                   
the  concept  of pro-cyclical  spending.  He  explained  that                                                                   
when there  were a  lot of incoming  revenues more  was spent                                                                   
in  the economy  and subsequently  state  spending drove  and                                                                   
overheated  the  economy.  The  opposite  is  also  true,  an                                                                   
absence   of  revenues   wound   up  contracting   government                                                                   
spending  and   there  was  a   doubling  down   on  economic                                                                   
stability.   He   expounded  that   the   situation   created                                                                   
institutional  and  political  instability,  economic  growth                                                                   
was difficult,  it was hard  to plan development  and attract                                                                   
outside  investment, and  the  well-being  of the  population                                                                   
was  difficult.  Additionally,   the  risk  of  destabilizing                                                                   
savings  was  increased.  During   times  of  budget  deficit                                                                   
savings were  used and  depleted (savings  were treated  as a                                                                   
checking   account  rather   than  an   investment  fund   or                                                                   
retirement annuity), which undermined social stability.                                                                         
Mr. Tichotsky  returned to slide  22 and shared  that history                                                                   
demonstrated  Alaska practiced  pro-cyclical spending  with a                                                                   
vengeance.  He noted  that the  R-Square values  on slide  22                                                                   
were  a  statistical  way  of  showing  the  state  had  pro-                                                                   
cyclical spending.  He moved to  slide 23 titled  "Volatility                                                                   
-  A Systemic  Issue."  He  explained that  price  volatility                                                                   
lead  to oil  revenue volatility.  Volatility  drove its  way                                                                   
through  the economy  until it  created general  instability,                                                                   
which  was  one  of the  reasons  the  legislation  had  been                                                                   
2:37:08 PM                                                                                                                    
Mr. Tichotsky addressed  slide 24 titled "Where  is Long-term                                                                   
Volatility  Good?" He  detailed  that financial  institutions                                                                   
looked at  volatility when they  created portfolios  - stable                                                                   
assets  were  included,  but growth  and  value  were  really                                                                   
derived  from  volatile  revenues.  He  furthered  that  when                                                                   
looking  for  volatility, investors  looked  for  inexpensive                                                                   
assets that  would appreciate  in a  portfolio. He  explained                                                                   
that  it made  sense to  manage volatility  in an  investment                                                                   
fund  where the  professionals  were used  to mitigating  the                                                                   
dis-benefits  of volatility and  maximizing the benefits.  He                                                                   
stated that the  worst place to manage volatility  was in the                                                                   
General Fund.  He explained that  it meant doubling  down the                                                                   
risk to  the General  Fund and  when volatility was  combined                                                                   
with other  risk (i.e.  political risk  or other),  the risks                                                                   
were magnified.  He relayed  that the  bill worked  to manage                                                                   
and mitigate risk.  He furthered that the volatility  risk to                                                                   
Alaska did not  go away; the question was about  where to put                                                                   
it.  He explained  that the  bill would  move the  volatility                                                                   
from the General Fund into the Permanent Fund.                                                                                  
Mr.  Tichotsky  addressed  items  that  an  effective  fiscal                                                                   
framework needed  to include on  slide 25. He  explained that                                                                   
the work DOR and  DOL were doing was not something  they were                                                                   
doing in  a vacuum. He furthered  that the rest of  the world                                                                   
and  resource-rich countries  were facing  the same  dilemma.                                                                   
He detailed that  in October 2015 the International  Monetary                                                                   
Fund  (IMF) had  focused its  efforts on  the problem  facing                                                                   
resource-rich countries  caused by the collapse  of commodity                                                                   
prices. He  expounded that  the IMF had  the ability  to look                                                                   
historically at  the regions and regions where  policy errors                                                                   
had   been    made   that   were   suffering    consequences.                                                                   
Additionally, the  IMF could show the decisions  made by some                                                                   
of  the winners  or people  successful  in mitigating  risks.                                                                   
The  IMF  had  established  four  basic  recommendations  for                                                                   
resource-rich  countries  facing  the  commodities  collapse.                                                                   
First, it  recommended creating  economic macro-stability  by                                                                   
saving money  and building financial  buffers. He  noted that                                                                   
Alaska had  taken that  step through  the Permanent  Fund and                                                                   
other savings  measures; however, without  restructuring, the                                                                   
state  had  the opportunity  to  lose  the benefits  and  the                                                                   
ability  of  the  buffers.  He furthered  that  it  would  be                                                                   
extremely  destabilizing  for  the economy  if  savings  were                                                                   
depleted  without  a  long-term  plan  or  understanding  the                                                                   
scale  of the  potential draws.  Alaska had  also engaged  in                                                                   
pro-cyclical  spending   in  the  good  and  bad   years.  He                                                                   
explained that  the state needed  spending that was  just the                                                                   
right size, which was addressed by the bill.                                                                                    
Mr. Tichotsky explained  that secondly the IMF  had looked at                                                                   
the  concept of  increasing  revenue stability  by  improving                                                                   
the taxation of resource and non-resource sectors.                                                                              
Co-Chair Neuman  asked if  the information  on slide  25 came                                                                   
from  the IMF.  Mr. Tichotsky  replied  that the  information                                                                   
had been sourced  directly from the IMF website  and included                                                                   
the  generic recommendations  the  organization  had made  to                                                                   
all resource-rich countries.                                                                                                    
Representative Gara  addressed the forms of revenue  put into                                                                   
a sovereign  wealth fund. He  furthered that as  proposed the                                                                   
sovereign wealth  fund that  would lead to  ten years  of the                                                                   
lowest  level  of school  funding,  infrastructure  spending,                                                                   
and renewable energy  spending in the past decade,  was not a                                                                   
"be all  and end all."  He believed the  real issue  was what                                                                   
resources  were going  to be  put  into the  fund. He  stated                                                                   
that  on its  own  the fund  would  not do  anything  without                                                                   
knowing what resources  would be put in. He  reasoned that it                                                                   
was  the  level of  funding  put  into  the fund  that  would                                                                   
determine  the stability  of the economy.  He submitted  that                                                                   
continuing  to  flat-fund  education  did  not  constitute  a                                                                   
stable economy.  He asked for verification that  the elements                                                                   
of the revenue  sources going into  the fund more or  just as                                                                   
important  as the  concept of  the fund  itself. He  reasoned                                                                   
that a fund could  spin off so little income  that no economy                                                                   
would remain.                                                                                                                   
Mr. Tichotsky  responded  that it  would be  great to have  a                                                                   
Permanent Fund that  was over $100 billion.  He detailed that                                                                   
if the  savings were  generated over time  and the  fund grew                                                                   
to  that  amount,  the  state  could  easily  draw  about  $5                                                                   
billion and the  state would probably not be  having a fiscal                                                                   
crisis.  At  the current  point,  investment  revenues  could                                                                   
only  produce  what they  could  produce.  He noted  that  it                                                                   
would  have been  great to  save more  in the  past, but  the                                                                   
second  best  time  to  take   action  was  at  present.  The                                                                   
restructuring  would  enable  a sustainable  spend  in  years                                                                   
where   oil  prices   were   low  and   resources   revenues,                                                                   
production,  and  development  did  not  come.  He  addressed                                                                   
Representative  Gara's question about  what kind  of revenues                                                                   
the administration  wanted to put  in the Permanent  Fund. He                                                                   
explained that  the goal was  to place the volatile  revenues                                                                   
in the Permanent Fund.                                                                                                          
Mr. Tichotsky  concluded his  remarks on  slide 25.  He spoke                                                                   
to  stability  of  revenues  and   relayed  that  in  a  non-                                                                   
diversified  economy,  the non-resource  sector  and a  small                                                                   
population  base  made  it  difficult   to  generate  sizable                                                                   
revenues;  therefore the investment  revenues were  important                                                                   
to  the future  sustainability  of  the state.  He  addressed                                                                   
better   use  of   resources  and   affirmed  that   spending                                                                   
efficiently was  a major part  of a total fiscal  package. He                                                                   
noted that  the topic needed  further discussion.  The fourth                                                                   
point on  slide 25 related  to an effective fiscal  framework                                                                   
was  the  need   for  strong  institutions,   which  included                                                                   
improving medium-term  planning and investments  and having a                                                                   
rules-based  system that  had  some certainty.  He  addressed                                                                   
fiscal certainty  and believed the  bill solved the  issue of                                                                   
volatility  for  Alaska -  it  moved  the volatility  in  the                                                                   
budget to the  Permanent Fund, provided a stable  draw to the                                                                   
General  Fund  at  a sustainable  scale,  and  it  moved  the                                                                   
dividend  where  it  could  be   connected  to  the  resource                                                                   
economy. He and  the other economists in Alaska  (in addition                                                                   
to  other  economic experts)  believed  it  was the  kind  of                                                                   
action  that  needed  to  be   taken  to  regain  fiscal  and                                                                   
economic certainty and stability that had eluded the state.                                                                     
2:47:53 PM                                                                                                                    
RANDALL  HOFFBECK,   COMMISSIONER,  DEPARTMENT   OF  REVENUE,                                                                   
provided a  PowerPoint presentation titled  "Alaska Permanent                                                                   
Fund Protection  Act" (copy on  file). He discussed  that the                                                                   
governor's plan had  some basis in what was  considered to be                                                                   
the proper  way of  dealing with  sovereign wealth  funds. He                                                                   
communicated  his intent  to  "drill down"  into  how it  fit                                                                   
within the legislation.                                                                                                         
Representative  Edgmon  felt   that  Commissioner  Hoffbeck's                                                                   
comments  were a  bit of  an understatement.  He stated  that                                                                   
creating  a sovereign  wealth  fund in  the next  one to  two                                                                   
years would  be a  historic moment  and was  on par  with the                                                                   
Permanent Fund  that had been  created in the 1970s  and with                                                                   
big  decisions on  oil taxes.  He  stressed that  it was  not                                                                   
merely a  theoretical discussion. He  observed that it  was a                                                                   
turning point in  Alaska's history, where it  could no longer                                                                   
depend on oil.  He recalled the former Department  of Natural                                                                   
Resources  (DNR)  commissioner  Dan  Sullivan  prefacing  the                                                                   
conversation   on  SB   21  [oil  and   gas  production   tax                                                                   
legislation   passed  in   2013].  He   furthered  that   Mr.                                                                   
Tichotsky  had properly  framed  the historical  significance                                                                   
of  the discussion.  He noted  that many  people doubted  the                                                                   
fund would  be established in  the current year;  he believed                                                                   
it would  be the following  year. He implored  the governor's                                                                   
team to  put more  emphasis on the  historical nature  of the                                                                   
2:50:25 PM                                                                                                                    
Commissioner Hoffbeck  shared his  intent to address  how the                                                                   
administration had  arrived at the  plan it had  put forward.                                                                   
He  informed  the  committee   that  the  administration  had                                                                   
started working the  process in two ways. They  had looked at                                                                   
the  standard  tools  that  government   always  had  at  its                                                                   
disposal including  what it  could cut  in the budget,  where                                                                   
it  could achieve  new revenues,  and  what it  should do  in                                                                   
years one, two,  and three. Additionally,  the administration                                                                   
had worked  to determine how  much Alaska's sovereign  wealth                                                                   
could be used  to balance the budget. He referred  to various                                                                   
discussions in  newspapers about  how much of  the government                                                                   
could   be   funded   by   the   state's   wealth.   As   the                                                                   
administration  had  worked  through   the  process,  it  had                                                                   
determined that both  of the processes only got  them part of                                                                   
the  way there.  The state  could  get to  a balanced  budget                                                                   
with cuts,  savings, bringing  in new  revenues, and  leaving                                                                   
everything  in the silos  they were  currently in (spent  the                                                                   
way they  were always spent);  however, the solution  did not                                                                   
take volatility  out  of the system.  One of  the things  the                                                                   
administration  had heard  clearly  from  the private  sector                                                                   
was  that   volatility  in   government  spending   inhibited                                                                   
private sector investment;  the private sector  wanted to see                                                                   
some kind  of stable  platform of  government spending.  When                                                                   
the   administration   had  looked   in   depth  at   funding                                                                   
government  with the  sovereign  wealth model,  it had  found                                                                   
that  the model  could  not generate  enough  revenue on  its                                                                   
own.  Therefore, the  separate  considerations  had begun  to                                                                   
merge together into the plan in front of the committee.                                                                         
Commissioner  Hoffbeck furthered  that  the sovereign  wealth                                                                   
model  could function  to provide  a systematic,  rules-based                                                                   
way of  using the state's wealth,  as opposed to  a haphazard                                                                   
expenditure of  the state's wealth  and spending  down faster                                                                   
than it  could accommodate.  The administration  also  had to                                                                   
look  at additional  spending  reductions  and new  revenues.                                                                   
The  three  items  together  created   the  "new  sustainable                                                                   
Alaska" plan -  the three components each had a  set of bills                                                                   
associated with  them. The sovereign  wealth fund  fell under                                                                   
the  Alaska   Permanent  Fund   Protection  Act,   which  was                                                                   
included  in the  bill  before the  committee  [HB 245].  The                                                                   
budget bill  dealt with spending  reduction areas,  and there                                                                   
were a whole  series of new  revenue tax bills that  had been                                                                   
introduced.  The  current meeting  would  only  focus on  the                                                                   
Alaska  Permanent Fund  Protection  Act -  a methodology  for                                                                   
using the  state's sovereign  wealth and  taxes from  oil and                                                                   
gas  and other  minerals to  create  a stable  cash flow  for                                                                   
funding government.                                                                                                             
2:54:10 PM                                                                                                                    
Commissioner  Hoffbeck  addressed  slide  4 titled  "The  New                                                                   
Sustainable  Alaska Plan."  He detailed  that under the  plan                                                                   
the  state would  still  have very  low  taxes, continue  the                                                                   
dividend,  grow savings  at a  rate of  inflation or  higher,                                                                   
maintain most  of the state's  public services, and  money to                                                                   
invest  in the  future. He  noted  that the  items would  all                                                                   
continue,  but  at a  different  level  than at  present.  He                                                                   
turned to  slide 5 titled  "Alaska Permanent Fund  Protection                                                                   
Act" and addressed the bill's three components:                                                                                 
     1. Sustainably draw from the Earnings Reserve                                                                              
     2. Minimize oil price volatility on the General Fund                                                                       
     3. Adjust the dividend                                                                                                     
Commissioner  Hoffbeck  turned to  slide  7 titled  "Defining                                                                   
the Problem."  He addressed the short-term,  medium-term, and                                                                   
long-term problems  going forward and relayed that  all three                                                                   
problems  needed to  be solved.  The  short-term problem  was                                                                   
the drop in  oil prices. He elaborated that  it was necessary                                                                   
to   determine  how   to   handle  the   short-term   problem                                                                   
immediately  - there  was currently  a $3.6  billion to  $3.8                                                                   
billion budget shortfall  in the current year  that needed to                                                                   
be  taken  care  of. The  medium-term  problem  was  that  if                                                                   
nothing was  done the state's  savings would be spent  in the                                                                   
next  four to  five years,  which  would take  away an  asset                                                                   
that  could  be  used efficiently  to  help  fund  government                                                                   
going   forward.    The   resulting    budget   hole    would                                                                   
substantially  damage Alaska's  economy. He  did not  want to                                                                   
fall  off the  edge  of the  cliff, which  he  did not  think                                                                   
would  occur  -  there  were   many  different  proposals  to                                                                   
consider.   Additionally,   dividend    payments   were   not                                                                   
sustainable   under  the   status  quo.   He  detailed   that                                                                   
currently  there  were  counter-cyclical   dividend  payments                                                                   
where  the largest  dividend payment  in the  history of  the                                                                   
state was  paid at the time  when the state's  economics were                                                                   
worse than  they had  been in  a very long  time or  ever. He                                                                   
explained that the  dividend needed to flow  with the economy                                                                   
of the state.                                                                                                                   
2:57:08 PM                                                                                                                    
Representative  Wilson  referred to  Commissioner  Hoffbeck's                                                                   
statement about  status quo and  remarked that no one  at the                                                                   
table thought the  state could continue its  current level of                                                                   
spending.  She  asked  if  Commissioner  Hoffbeck  meant  the                                                                   
dividend  was unsustainable  if  spending  was maintained  at                                                                   
the   current   level.   Alternatively,   she   wondered   if                                                                   
Commissioner  Hoffbeck meant  that the  dividend would  still                                                                   
be   unsustainable  if   the   budget  were   reduced  to   a                                                                   
sustainable level.                                                                                                              
Commissioner  Hoffbeck answered that  status quo  meant using                                                                   
the current formula  to calculate the dividend  that was tied                                                                   
to  the  investment  earnings  from the  Permanent  Fund.  He                                                                   
stressed that  no matter  what the state  did to  address the                                                                   
problem,  the  dividend  formula would  change  if  Permanent                                                                   
Fund  earnings were  used.  He explained  that  a Percent  of                                                                   
Market  Value model  or  any other  model  would require  the                                                                   
dividend to  be calculated in  a different way.  He furthered                                                                   
that some of the money currently  paid in the dividend needed                                                                   
to  be incorporated  within a  sustainable draw  in order  to                                                                   
come  to  a  level  of  draw   that  worked  for  sustainable                                                                   
government. He stated  that it was a balance  of the numbers.                                                                   
He concluded  that the dividend  needed to be smaller  to get                                                                   
to a sustainable draw.                                                                                                          
Representative    Wilson    asked   what    percentage    the                                                                   
administration  was proposing  to cut  as part  of its  plan.                                                                   
Commissioner  Hoffbeck   replied  that  the   current  budget                                                                   
contained $100  million in cuts  to agency spending  and $400                                                                   
million  to  oil and  gas  tax  credits. The  long-term  plan                                                                   
included  another $50  million in  cuts in  each of the  next                                                                   
two  fiscal years.  The  governor was  proposing  a total  of                                                                   
about $600 million in cuts.                                                                                                     
Representative  Wilson  stated  that the  administration  was                                                                   
really  only  looking  at  increasing   revenue  and  not  at                                                                   
spending,  which would  keep government  at  status quo.  She                                                                   
did  not  believe  the  same  message  was  coming  from  the                                                                   
Vice-Chair  Saddler replied  that the  governor had  promised                                                                   
16  percent cuts  during his  campaign. He  discussed that  a                                                                   
deficit could be  filled by new revenue or  less spending. He                                                                   
wondered  what had  happened  to the  promise  of 16  percent                                                                   
Commissioner  Hoffbeck deferred the  question to  Pat Pitney,                                                                   
Director,  Office of  Management  and Budget,  Office of  the                                                                   
Governor.  He relayed the  governor was  working towards  the                                                                   
cuts  that he  believed  would create  a  stable economy  and                                                                   
that reflected  the  desires of  the people  in terms of  the                                                                   
services  they  wanted to  see  delivered.  The cuts  on  the                                                                   
agency  side were  fairly substantial,  but he  did not  have                                                                   
them on hand.                                                                                                                   
3:01:02 PM                                                                                                                    
Representative  Edgmon wondered  why  the changes  had to  be                                                                   
made  in the  current year.  He  wondered why  there was  not                                                                   
time to get the  consent from the rest of the  state that may                                                                   
or  may not  think the  proposal was  a good  idea. He  asked                                                                   
about the rush.                                                                                                                 
Commissioner  Hoffbeck  replied   that  it  would  have  been                                                                   
better  if  the  proposal  had  been  implemented  two  years                                                                   
earlier  - the  state was  already  late to  the game.  There                                                                   
were  three  components  that  changed the  math  within  the                                                                   
equation: how  much the state  was spending, the size  of the                                                                   
dividend, and whether  any new revenues could  be introduced.                                                                   
The  idea of  how  the state  used  its existing  wealth  was                                                                   
really  just about  which pot  of money the  funds came  from                                                                   
(e.g.  Constitutional   Budget  Reserve  or   Permanent  Fund                                                                   
earnings). He furthered  that the dynamic did  not create the                                                                   
critical  nature.  The critical  nature  was related  to  the                                                                   
other  three  components.  First,  how  much  the  state  was                                                                   
paying  out  in dividends.  He  detailed  that the  more  the                                                                   
state paid out  in dividends, the more it took  from savings;                                                                   
currently  the  state  was paying  everything  with  savings.                                                                   
There  was essentially  no oil  and  gas tax  revenue in  the                                                                   
current year  at the  low oil prices  and the Permanent  Fund                                                                   
was  showing   negative  earnings  on  investments   for  the                                                                   
current year. Second,  how much the state could  decrease the                                                                   
size  of  government  in order  to  reduce  spending.  Third,                                                                   
whether new revenues  could be introduced into  the system in                                                                   
order  to avoid  relying entirely  on  savings. He  explained                                                                   
that  part  of what  made  the  proposed  plan work  was  the                                                                   
return  on investments  from  the  savings; the  smaller  the                                                                   
amount, the  lower the sustainable  draw became,  which meant                                                                   
the  need  for   either  more  cuts  or  more   revenues.  He                                                                   
concluded that the sooner the action was taken, the better.                                                                     
Representative  Edgmon  surmised   that  it  was  more  about                                                                   
opportunity  costs versus  the absolute  necessity of  having                                                                   
to  take action  in  the  current  year from  a  mathematical                                                                   
standpoint. He reasoned  that the state had  savings to carry                                                                   
the state over  into the next year, which was  a non-election                                                                   
year.  He believed  they had the  ability to  take the  issue                                                                   
out to  voters to explain  why the dividend  would be  cut in                                                                   
half,  that  the  construct of  the  Permanent  Fund  program                                                                   
would  be changed,  and why  the sovereign  wealth model  was                                                                   
the best  for future generations  of Alaska. He  believed the                                                                   
change was inevitable,  but he struggling with  the fact that                                                                   
the political  gap needed to be  traversed. He had  not heard                                                                   
a  compelling  reason  the  change needed  to  occur  in  the                                                                   
current year.                                                                                                                   
3:05:09 PM                                                                                                                    
Representative  Guttenberg referred to  a comment  made about                                                                   
the  governor's promise  to cut  the budget  further. He  had                                                                   
appreciated the effort  the governor had put  into the issue.                                                                   
He also knew  there were promises made by legislators  in the                                                                   
committee room on  taxation to achieve 1 million  barrels per                                                                   
day  out of  the pipeline,  which people  knew was  factually                                                                   
impossible. He wondered  how long it was sustainable  to make                                                                   
cuts  and  take $3.5  billion  from  the Permanent  Fund.  He                                                                   
stated it should  have been done the past year.  He furthered                                                                   
that  the preceding  year  the legislature  had  not had  the                                                                   
excuse  of it being  an election  year; they  had been  aware                                                                   
that a  crisis was coming,  but they  did not know  the price                                                                   
would  drop as  significantly  as it  had.  He remarked  that                                                                   
some  people  were  saying  it  should not  be  done  in  the                                                                   
current  year because  it  was an  election  year. He  stated                                                                   
that maybe  the legislature  would get to  it next  year, but                                                                   
maybe  not,  and  then  people   would  say  it  was  another                                                                   
election  year.  One  of  the rationales  he  had  heard  for                                                                   
taking action sooner  rather than later was  that the current                                                                   
higher level of  assets would be more sustainable  instead of                                                                   
spending  savings  down  and  not being  able  to  achieve  a                                                                   
sustainable  rate of return  in the future.  He asked  if the                                                                   
rationale was accurate.                                                                                                         
Commissioner  Hoffbeck   answered  in  the   affirmative.  He                                                                   
detailed  that the  more the  state spent  down its  existing                                                                   
assets,  the  less it  would  have  to create  a  sustainable                                                                   
draw. He  explained that  if the payout  of the dividend  was                                                                   
not  changed, substantial  cuts  were not  made,  and no  new                                                                   
revenue was  generated in  the current  year it would  equate                                                                   
to  about  $100 million  less  in  the sustainable  draw.  He                                                                   
elaborated that  it would mean  a base that was  $100 million                                                                   
lower, which would  carry through the state's  life. The more                                                                   
the of  the state's  assets that were  spent, the  less money                                                                   
the state would  have as it moved forward with  a sustainable                                                                   
Co-Chair  Neuman asked  about  the monetary  value of  taking                                                                   
action  in the  current year  as  opposed to  the next  year.                                                                   
Commissioner Hoffbeck  answered that  it was probably  in the                                                                   
range  of  $100 million  to  $200  million  per year  on  the                                                                   
sustainable  draw   [if  action  was  not  taken   until  the                                                                   
following year].                                                                                                                
Co-Chair  Neuman surmised  that  there would  be no  monetary                                                                   
impact  if the budget  could be  reduced by  $200 million  in                                                                   
the current  year. He reasoned  that the action could  be put                                                                   
off for  two years if there  were cuts totaling  $400 million                                                                   
in the current  year. His concern was making  sure the public                                                                   
understood the action.                                                                                                          
Commissioner Hoffbeck  answered that the assumption  was that                                                                   
some,  if not  all,  of the  cuts would  be  made anyway.  He                                                                   
explained  that it  did not  necessarily change  the math  in                                                                   
the long-term. He  noted that it would balance  in the short-                                                                   
term,  but there  would  still be  a lower  sustainable  draw                                                                   
going forward.                                                                                                                  
Co-Chair  Neuman asked  the department  to provide  modelling                                                                   
to show the  difference between taking action  in the current                                                                   
year  versus   the  following  year.  Commissioner   Hoffbeck                                                                   
3:09:37 PM                                                                                                                    
Representative Gara  did not think  it was useful  to discuss                                                                   
what  budget  cuts  had  been   discussed  in  the  past.  He                                                                   
believed the  governor had  probably made  a mistake  when he                                                                   
stated he  would cut  the budget by  16 percent.  The current                                                                   
legislature passed  a bill aiming for 10 percent  savings. He                                                                   
stated  that most  of  the committee  members  had voted  for                                                                   
that legislation.  He surmised the governor had  room to call                                                                   
the  legislature  out on  the  issue.  He reasoned  that  the                                                                   
conversation would  not be productive.  He assumed  that half                                                                   
the   legislature   had   campaigned    on   increasing   oil                                                                   
production,  which had  not occurred.  He was  done with  the                                                                   
conversation. He  was also done  with the conversation  about                                                                   
continuing to cut  more and more. He supported  taking action                                                                   
sooner  rather  than later.  He  spoke  to a  scenario  where                                                                   
there  was not  legislative  support to  do  the fiscal  plan                                                                   
until the  following year. He  reasoned that the  state would                                                                   
still  have savings,  but that  was  not what  would cause  a                                                                   
recession.  He  believed  a  recession  would  occur  due  to                                                                   
excessively steep  cuts that laid  off people and  cut grants                                                                   
that  would ripple  into the  private  sector and  negatively                                                                   
impact retail,  restaurants, and  other. He  asked if  he was                                                                   
correct that excessive cuts would result in a recession.                                                                        
Commissioner    Hoffbeck    agreed    that   one    of    the                                                                   
administration's  larger  concerns  was  cuts that  were  too                                                                   
draconian would have a ripple effect through the economy.                                                                       
Representative  Gattis believed  that if  action was  decided                                                                   
on in the current  year, further cuts would not  be made once                                                                   
revenues  backfilled the  deficit. She  addressed the  belief                                                                   
that a  recession would  come if  further cuts to  government                                                                   
were  made.  She  countered  that   the  private  sector  was                                                                   
already making the  cuts, which would result in a  dip in the                                                                   
economy.  She  stated  that  everyone  was  tightening  their                                                                   
belts. She  thought it  was insulting to  Alaska to  not take                                                                   
government cuts.  She believed making the cuts  was doing the                                                                   
right thing  for Alaskans.  She stressed  that if  government                                                                   
was  not  cut,  it  would  continue  backfilling  and  taxing                                                                   
Alaskans to keep  growing government. She remarked  that cuts                                                                   
were not  the complete answer,  but they  were a part  of it.                                                                   
She opined  that if government  was not cut, the  state would                                                                   
continue backfilling  and would  continue taxing  Alaskans to                                                                   
keep growing  government. She stated  that there was  a large                                                                   
number  of individuals  who believed  the cuts  needed to  be                                                                   
made in  order to prevent  backfilling. She was  adamant that                                                                   
due  diligence   should  be  done   on  the  bill   prior  to                                                                   
backfilling  government with  revenue. She  wanted to  do the                                                                   
right  thing for  Alaska for  the  long-term. She  reiterated                                                                   
that the private sector was laying people off.                                                                                  
3:14:10 PM                                                                                                                    
Representative Munoz  relayed that she had recently  met with                                                                   
former Representative  Bill Hudson.  She discussed  that when                                                                   
he had  been in  the legislature  the state  had been  facing                                                                   
similar  fiscal issues,  but the  deficit was  not nearly  as                                                                   
large.   At   that   time,   the    legislature   had   close                                                                   
conversations  with   former  Governor  Jay  Hammond   in  an                                                                   
advisory  role.   Representative  Hudson  had   relayed  that                                                                   
former Governor  Hammond recognized  that excess  earnings of                                                                   
the Permanent Fund  would at some point be used  to help with                                                                   
the  funding  of  state government,  but  that  the  dividend                                                                   
should not  be decoupled from  the earning power of  the body                                                                   
of  the  account.  She  struggled with  that  aspect  of  the                                                                   
proposed plan, which  would tie the dividend  to the royalty.                                                                   
She reasoned  that under  the scenario at  some point  in the                                                                   
future  the  dividend  would   not  be  available  to  future                                                                   
generations. She  referred to Mr. Tichotsky's  testimony that                                                                   
the  sustainable  draw from  the  current framework  and  the                                                                   
sovereign  wealth model was  $3.3 billion.  She asked  if the                                                                   
department had  looked at formulating  a plan that  would use                                                                   
excess earnings  and the sustainable  target of  $3.3 billion                                                                   
and  possibly recalculate  the  dividend based  on a  formula                                                                   
similar to  the one  used at present.  She believed  it would                                                                   
get the  state significantly  closer to  closing the  deficit                                                                   
without reprogramming the entire system.                                                                                        
Commissioner  Hoffbeck  answered   that  the  department  had                                                                   
looked  at many  different options.  The  current option  had                                                                   
been adopted  from a  proposal by  Senator Lesil McGuire  [SB
114]. He had  initially thought her proposal  was "too clever                                                                   
for its  own good," but as  the department worked  through it                                                                   
he  had realized  there was  substantial logic  to tying  the                                                                   
dividend  with  the  economic   vitality  of  the  state.  He                                                                   
furthered  that when  things were  going  well, the  dividend                                                                   
would  be  larger,  but  when things  were  going  poor,  the                                                                   
dividend  would  be  smaller.  He relayed  that  the  concern                                                                   
about  decoupling  the  dividend   from  the  Permanent  Fund                                                                   
earnings   had  been  expressed   by  others   as  well.   He                                                                   
communicated  that the  administration  was  not attached  to                                                                   
its  proposed way  of  treating  the dividend;  the  proposal                                                                   
worked and  fit in  the plan,  but if  some dynamic  could be                                                                   
created  where   the  dividend  was  pro-cyclical   with  the                                                                   
economic  health  of the  state  (higher  in good  times  and                                                                   
lower in bad  times), the administration was  willing to look                                                                   
at other ways to calculate the dividend.                                                                                        
3:17:35 PM                                                                                                                    
Vice-Chair  Saddler referred  to a  remark by  Representative                                                                   
Wilson that  cutting the budget  was as much of  a legitimate                                                                   
part  of the  discussion  as new  revenues  from a  sovereign                                                                   
wealth  fund.  Based  on  Mr.  Tichotsky's  presentation,  he                                                                   
observed  that stability  had  never  really been  a  driving                                                                   
force in  Alaska's economy.  He reasoned  that the  state had                                                                   
been  fairly comfortable  to ride  the  booms; a  significant                                                                   
amount of  money had  been made on  the volatility.  He asked                                                                   
if the  end of  addressing the  state's fiscal gap  justified                                                                   
the means of  using the Permanent Fund earnings.  He asked if                                                                   
the administration  would have  brought the proposal  forward                                                                   
if there was not a budget problem.                                                                                              
Commissioner  Hoffbeck  did not  believe  the  administration                                                                   
would  have  brought the  proposal  forward  if there  was  a                                                                   
balanced budget  with oil revenues.  He reasoned  that crisis                                                                   
brought  change. He  elaborated  that he  believed the  state                                                                   
"had been  headed here eventually.  I think we just  got here                                                                   
a lot quicker than  when we expected." He noted  that even in                                                                   
the  last years  of  the prior  administration  when oil  had                                                                   
been $110  per barrel,  the state  had already been  fighting                                                                   
with  deficits (in  the $1  billion  range at  some point  in                                                                   
time).  He  concluded  that  the  Walker  Administration  was                                                                   
dealing with the hand it was dealt.                                                                                             
Vice-Chair Saddler  wondered why the  action had to  be taken                                                                   
at  present. He  understood  the value  of  the proposal  and                                                                   
reasoned that  it may have been  good to take action  2 to 10                                                                   
years  earlier;  however, he  had  not heard  the  compelling                                                                   
case why it had  to happen in the current year  as opposed to                                                                   
1  to 2  years in  the future.  He  addressed volatility  and                                                                   
noted that  the state  had saved  money during high  revenues                                                                   
and had  spent the funds during  periods of low  revenues. He                                                                   
continued that the  situation persisted. He reasoned  that it                                                                   
was   not    the   most   advisable   of    situations,   but                                                                   
mathematically it did work out for additional time.                                                                             
Commissioner  Hoffbeck  answered  that the  department  would                                                                   
follow up with numerical data.                                                                                                  
Commissioner  Hoffbeck moved  to slide  8 titled  "Short-Term                                                                   
Problem." He  discussed that in  2008 the state  was bringing                                                                   
in almost  $11  billion between  petroleum and  non-petroleum                                                                   
revenues; currently  the state was  bringing in less  than $2                                                                   
billion. He  noted that a  swing that dramatic  was difficult                                                                   
to  deal with  -  it made  long-term planning  and  budgeting                                                                   
challenging.  He   moved  to  slide  9   titled  "Medium-Term                                                                   
Problem."  The slide  demonstrated that  there were  earnings                                                                   
that continued to  be generated from the Permanent  Fund even                                                                   
if "we fall  off the fiscal  cliff." He detailed that  if the                                                                   
state used  all of its  savings prior  to making any  type of                                                                   
sustainable  balancing  plan,  the state  would  continue  to                                                                   
have  $2.5 billion  to $3  billion  available for  government                                                                   
spending. The  current spend was  about $5.2 billion  to $5.4                                                                   
billion.  He  stressed that  it  was  a substantial  cut  and                                                                   
would leave  the state  with a  dramatic decline in  services                                                                   
Commissioner  Hoffbeck moved  to slide  10 titled  "Long-Term                                                                   
Problem." The  slide showed that  the state had  been chasing                                                                   
oil prices  up and  down over the  years. The state's  fiscal                                                                   
plan  had been  fairly simple  -  it had  mandated saving  25                                                                   
percent of  the Permanent Fund  royalties and had  saved more                                                                   
than 30  percent because more  money had been  deposited from                                                                   
some fields.  The strategy had  worked and had resulted  in a                                                                   
$50  billion  savings  account;   however,  the  state  never                                                                   
really had  a plan  for what to  do with the  money -  it had                                                                   
paid dividends,  inflation proofed, and saved  the remainder.                                                                   
Additionally,  any money  remaining at  the end  of the  year                                                                   
had  been  swept  into  the  Constitutional   Budget  Reserve                                                                   
(CBR). He detailed  that the function of the CBR  had been to                                                                   
take  care   of  short-term  ups   and  downs   in  available                                                                   
revenues, but  it had  never been intended  to deal  with the                                                                   
type of  deficit currently facing  the state that  would last                                                                   
for multiple years  (it was not large enough  to provide that                                                                   
option).  The state  had used  the remaining  funds to  chase                                                                   
oil prices up and down.                                                                                                         
Commissioner Hoffbeck  furthered that some of what  the state                                                                   
had been  chasing in the  past no longer existed;  production                                                                   
was only  one-quarter of what  it had been  at its peak  - it                                                                   
had been on  decline since the 1980s. Current  production was                                                                   
about  500,000  barrels  per  day,  which  should  be  fairly                                                                   
constant for the  next several years before  starting to fall                                                                   
off.  He detailed  that at  the current  level of  production                                                                   
the state  needed oil prices  of $109  to $110 per  barrel to                                                                   
balance  the budget.  He  explained  that due  to  technology                                                                   
changes  with shale  oil and  other things,  the numbers  did                                                                   
not  appear  to  be  viable  in   the  immediate  future.  He                                                                   
expounded that  it did not appear  the state would  even have                                                                   
the option of chasing  the oil price up to get  to a balanced                                                                   
budget;  therefore,  a  different  plan was  needed.  In  the                                                                   
past,  price and  production  had bailed  the  state out;  at                                                                   
present  the state  had its  wealth. He  elaborated that  the                                                                   
Permanent Fund  generated $2 billion  to $3 billion  per year                                                                   
in statutory net  income that could be used  for things other                                                                   
than paying a dividend and inflation proofing.                                                                                  
3:24:38 PM                                                                                                                    
Representative    Wilson   discussed    that   the    state's                                                                   
constitutional delegation  and founders had believed  that at                                                                   
some  point  the entire  state  would  be organized  in  some                                                                   
fashion  (i.e. city,  second-class  borough,  or other).  She                                                                   
asked whether  a solution would  be for boroughs  to organize                                                                   
in order  to get services they  wanted if the state  could no                                                                   
longer pay for things outside its constitutional mandate.                                                                       
Commissioner  Hoffbeck  was  aware   that  several  mandatory                                                                   
borough  bills had  been  introduced  in the  legislature  on                                                                   
several  occasions with  the idea of  increasing local  self-                                                                   
support.  He  relayed   that  the  strategy  alone   was  not                                                                   
sufficient.  He agreed  that it  would help  balance some  of                                                                   
what the  state was funding  versus what was  funded locally.                                                                   
He elaborated that  most of the state's  unincorporated areas                                                                   
did  not have  a large  economic base  and did  not have  the                                                                   
ability  to  generate  a substantial  amount  of  income  for                                                                   
local services.                                                                                                                 
Representative  Wilson  clarified that  she  was not  stating                                                                   
the  legislature should  mandate anything.  She believed  the                                                                   
whole  point  of   the  constitution  was  to   enable  local                                                                   
governments  to  provide things  outside  of the  state.  She                                                                   
reasoned  that there  was currently  no reason  for areas  to                                                                   
become  boroughs because  they had  to pay  more for  schools                                                                   
and  other  items;  there was  currently  no  benefit  unless                                                                   
communities wanted  to tax themselves  more and  receive less                                                                   
state  funding.   She  explained   that  Fairbanks,   Juneau,                                                                   
Anchorage, Mat-Su,  Dillingham, and  others had already  made                                                                   
decisions  that they  wanted more  than  the state  provided.                                                                   
She  reasoned that  because  the state  provided  all of  the                                                                   
services  [beyond what  was constitutionally  mandated]  that                                                                   
there  was  no  advantage  for  areas to  take  on  any  more                                                                   
responsibility.  She  wondered  if  more  organization  would                                                                   
occur on  its own;  towns would have  to decide whether  they                                                                   
wanted   a  service  or   not.  She   questioned  why   local                                                                   
governments  would  choose  to   pay  if  the  services  were                                                                   
provided for  free by  the state.  She believed the  strategy                                                                   
was another option  that was not currently  being considered.                                                                   
She remarked  that there were  counties in the Lower  48 that                                                                   
had  chosen to  offer services  beyond what  the state  could                                                                   
give them.                                                                                                                      
3:27:42 PM                                                                                                                    
Co-Chair Neuman  asked for an  explanation of  R-Square value                                                                   
(slide  10). Commissioner  Hoffbeck  answered that  it was  a                                                                   
measure  of how  much  of the  variance  in  the data  points                                                                   
could  be explained  for a  line  (on a  graph). He  detailed                                                                   
that  the best  line was  fitted to  data points  and the  R-                                                                   
Square value  showed how much  of the variance  was explained                                                                   
by the line. He  addressed the graph on slide  10 and assumed                                                                   
that  the  line  for  oil  price  had  been  plotted  against                                                                   
spending and had  determined that most of the  spending could                                                                   
be equated to the oil price.                                                                                                    
Co-Chair  Neuman the  department  to follow  up on  precisely                                                                   
how the data had been achieved on slide 10.                                                                                     
Representative  Gara  remarked   on  Commissioner  Hoffbeck's                                                                   
gracious  and calm demeanor  before the  committee. He  noted                                                                   
that sometimes  there were  terms used  in the building  that                                                                   
everyone started  using. He  requested that the  commissioner                                                                   
and  others refrain  from using  the  term "final  solution."                                                                   
Commissioner  Hoffbeck replied that  Co-Chair Kelly  had made                                                                   
the same request earlier in the day.                                                                                            
Commissioner   Hoffbeck  moved  to   slide  12  titled   "The                                                                   
Commodities Roller  Coaster." He  addressed that the  IMF had                                                                   
done a study of  85 economies over a period  of three decades                                                                   
and  had found  that government  spending in  commodity-based                                                                   
economies  tended   to  move  up  and  down   with  commodity                                                                   
revenue.  The  IMF  had  also  determined  that  pro-cyclical                                                                   
government  spending (moving  up and down  with a  commodity)                                                                   
tended to  stunt economic growth.  Additionally, the  IMF had                                                                   
found  that   stabilizing  fiscal  policy  had   the  inverse                                                                   
effect, which  could increase  gross domestic product  by 0.3                                                                   
percent annually.  He relayed that  there was some  logic for                                                                   
government spending  at a time  when the rest of  the economy                                                                   
was declining  because  it tended to  stabilize the  economy.                                                                   
He acknowledged  that it  was difficult  politically,  but it                                                                   
did make economic sense.                                                                                                        
Commissioner Hoffbeck  turned to slide 13  titled "Break-Even                                                                   
Oil  Price."  He  relayed  that  countries  such  as  Norway,                                                                   
Kuwait, and Abu  Dhabi that had been able to  diversify their                                                                   
revenue  streams   had  a  much  lower  dependency   on  oil;                                                                   
therefore,  they  had a  lower  breakeven oil  price.  Alaska                                                                   
fell in  the range with Russia  and Saudi Arabia and  was not                                                                   
nearly  as  bad as  countries  that  had not  saved  revenues                                                                   
Representative  Edgmon observed  than none  of the  locations                                                                   
on  the  chart  paid  a  dividend  (slide  13).  Commissioner                                                                   
Hoffbeck answered  that he did not believe so.  He noted that                                                                   
dividends could come  in many different ways and  many of the                                                                   
countries provided substantial subsidies for services.                                                                          
Commissioner Hoffbeck  addressed slide 14 titled  "Alaska: In                                                                   
the Middle":                                                                                                                    
     Alaska lacks                                                                                                               
        · Revenue diversity                                                                                                     
        · Fiscal rules to address pro-cyclical spending                                                                         
    But, like Norway, Kuwait, and Abu Dhabi, Alaska has                                                                         
        · A large sovereign wealth fund                                                                                         
        · Proven experience with rule-based fiscal policy                                                                       
        · An independent investment authority                                                                                   
     Alaska has a cash flow problem, not a wealth problem.                                                                      
Commissioner  Hoffbeck elaborated  that the  state needed  to                                                                   
develop  revenue diversity,  some  of which  would come  with                                                                   
economic diversity.  He detailed that some  revenue diversity                                                                   
came in  other forms of taxation  outside of the oil  and gas                                                                   
industry, which currently  carried 90 percent or  more of the                                                                   
load. He discussed  that the state had been  able to maintain                                                                   
the  dividend  program  purely  as a  legislative  rule;  the                                                                   
money had  always been  available for  appropriation to  fund                                                                   
government services.  The Permanent Fund money  had been used                                                                   
to  pay  a dividend,  inflation  proofing,  and  savings.  He                                                                   
discussed that  the Alaska Permanent Fund  Corporation (APFC)                                                                   
ran  independently   from  the  legislature,   governor,  and                                                                   
administration.  He stressed  the  importance of  maintaining                                                                   
that independence.  He noted that the proposed  bill included                                                                   
components honoring  that independence  because they  did not                                                                   
want  to be  in a  situation where  APFC  started making  bad                                                                   
investment decisions  because they  had to fund  something on                                                                   
the government side.                                                                                                            
3:34:30 PM                                                                                                                    
Co-Chair   Neuman  referenced   conversations  he   had  with                                                                   
Commissioner   Hoffbeck  and   others   about  preventing   a                                                                   
situation where  the Permanent  Fund board ended  up managing                                                                   
the  Permanent Fund  for the  sole purpose  of funding  state                                                                   
government  as  opposed to  growing  the  fund in  order  for                                                                   
Alaskans  to have  a  higher  dividend. He  had  communicated                                                                   
that his problem  with having administration  cabinet members                                                                   
holding  APFC board  positions was  that he  did not  believe                                                                   
the members could  stay autonomous. He clarified  that he had                                                                   
not known  the House speaker  [Representative Mike  Chenault]                                                                   
was  going   to  introduce  a   bill  on  the   concept;  his                                                                   
statements  had nothing  to do  with that.  He stressed  that                                                                   
under  the   current  administration  there  had   been  some                                                                   
serious problems  with the Alaska Gasline  Development (AGDC)                                                                   
Corporation board  interference in  the past. He  referred to                                                                   
challenges with  confidentiality and explained  that the AGDC                                                                   
board chair had  to get permission from the  attorney general                                                                   
to  look  at  confidential  information.  He  reiterated  his                                                                   
concern and wanted  to ensure that the boards  could maintain                                                                   
their    autonomy    under    the    current    and    future                                                                   
Representative  Wilson wondered if  the committee  would hear                                                                   
a presentation on the bill during the current meeting.                                                                          
Co-Chair  Thompson   replied  that  the   presentation  would                                                                   
happen at a subsequent meeting.                                                                                                 
Commissioner Hoffbeck  answered that the presentation  was an                                                                   
excerpt of the first 14 slides of a longer presentation.                                                                        
Representative  Wilson  voiced   her  preference  to  hear  a                                                                   
presentation on the bill.                                                                                                       
Vice-Chair Saddler  asked if  financial asset management  was                                                                   
the  only way  to reduce  volatility in  a single  commodity-                                                                   
based economy. He  remarked that it was one  potential way to                                                                   
expand  from  oil   to  oil  and  financial   management.  He                                                                   
wondered  if  there  was  another  path  forward  to  a  less                                                                   
volatile and  more diversified  economy other than  financial                                                                   
asset management.  For example, he  asked if the  state could                                                                   
be just  as advantaged  economically if it  was to  invest in                                                                   
something counter-cyclical to oil.                                                                                              
Commissioner  Hoffbeck answered  that the  state had  limited                                                                   
tools  at its  disposal. Other  states  largely dependent  on                                                                   
oil and  gas also  had more diversified  economies and  a tax                                                                   
structure  associated with  the diversified  economy so  that                                                                   
as  certain  components  grew,   money  also  went  into  the                                                                   
treasury.  He  believed  the   only  large  lever  the  state                                                                   
currently had  at its disposal  to deal with the  deficit was                                                                   
the use of  its investment earnings. He discussed  that there                                                                   
had  been  efforts  to  diversify  the  state's  economy  for                                                                   
years, but it was  a heavy lift and the state  was far from a                                                                   
significant number of things.                                                                                                   
3:39:33 PM                                                                                                                    
Vice-Chair  Saddler surmised  that it was  necessary  to have                                                                   
significant  discussion   on  attaining  the  right   mix  of                                                                   
things. He was  not saying the administration  was wrong, but                                                                   
he believed it  was a fair question to ask.  He remarked that                                                                   
the strategy may be the state's only diversification tool.                                                                      
HB  245  was   HEARD  and  HELD  in  committee   for  further                                                                   
Co-Chair Thompson addressed the agenda for the following                                                                        

Document Name Date/Time Subjects
HB245 - Alaskas Economic Story (Feb 1 2016 SSA).pdf HFIN 2/2/2016 1:30:00 PM
HB 245
HB245 - Sectional (Feb 1 2016 HF).pdf HFIN 2/2/2016 1:30:00 PM
HB 245
HB245 Sponsor Statement - Governor's Transmittal Letter.pdf HFIN 2/2/2016 1:30:00 PM
HB 245
HB 245 - Alaska Permanent Fund Protection Act Powerpoint (Feb 1 2016 HF).pdf HFIN 2/2/2016 1:30:00 PM
HB 245