Legislature(2015 - 2016)HOUSE FINANCE 519

04/12/2016 05:00 PM House FINANCE

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05:06:57 PM Start
05:07:50 PM HB245
06:22:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
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+ 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."                                                                          
Co-Chair Neuman MOVED to ADOPT the proposed committee                                                                           
substitute for HB 245 (FIN), Work Draft (29-GH2859\E).                                                                          
There being NO OBJECTION, it was so ordered.                                                                                    
5:08:17 PM                                                                                                                    
JANE PIERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, relayed                                                                     
the sectional analysis by reading from a prepared                                                                               
    Sec. 1.   Provides for a three year reevaluation of                                                                         
     the use of the earnings of the Alaska permanent fund.                                                                      
     Sec. 2.   Amerada Hess income no longer flows to the                                                                       
   Capital Income Fund. Segregation of Amerada Hess is no                                                                       
     longer legally required; associated language is repealed in                                                                
     sec 13.                                                                                                                    
     Sec. 3. Dedicated deposits of royalties to the                                                                             
     Permanent Fund are reduced from the current 25/50                                                                          
     split in old/new leases to the constitutional minimum                                                                      
     25 percent                                                                                                                 
     Sec. 4.                                                                                                                    
          (a) Requires the Alaska Permanent Fund                                                                                
     Corporation to determine the net income of the                                                                             
     earnings reserve account as the income is realized and                                                                     
          (b) Defines the Percent of Market Value payout as                                                                     
     5.25 percent of the average year-end market value of                                                                       
    the Permanent Fund and Earnings Reserve Account for                                                                         
     the first five of the most recently completed six                                                                          
     fiscal years. The payout may not exceed the year-end                                                                       
     balance of the earnings reserve account for the fiscal                                                                     
     year just ended.                                                                                                           
    Sec. 5 AS 37.13.145 is the Disposition of Income of                                                                         
     the Permanent Fund statute                                                                                                 
             a. (Unchanged) Establishes the ERA and                                                                             
               identifies the ERA as holding earnings of                                                                        
               the PF and ERA.                                                                                                  
             b. (Repealed) dividends based on statutory net                                                                     
             c. (Repealed) inflation proofing.                                                                                  
             d. (Repealed) segregation of Amerada Hess.                                                                         
             e. (New) The legislature may annually                                                                              
               appropriate the POMV payout from the ERA to                                                                      
               the general fund.                                                                                                
     Sec. 6. Dividends are comprised of 20 percent of the                                                                       
     5.25 percent PMOV outlined in Sec. 4(b), and 20                                                                            
     percent of the prior year's royalties, excludes those                                                                      
     dedicated to the Permanent Fund or School Fund (25.5                                                                       
     percent are dedicated)                                                                                                     
     Sec. 7. Mental Health Trust Fund may not be included                                                                       
     in the computation of the available income available                                                                       
     for distribution under the PMOV.                                                                                           
     Sec. 8.   Makes computation of the Mental Health Trust                                                                     
     Fund income consistent with computation of other                                                                           
     Permanent Fund Income.                                                                                                     
     Sec. 9. Transfer of money to the Dividend Fund                                                                             
     requires an appropriation                                                                                                  
    Sec. 10. The amount of each Permanent Fund Dividend                                                                         
     for fiscal years 2017, 2018 and 2019 shall be $1,000.                                                                      
     Sec. 11. Conforms to Sec. 9, which moves money to the                                                                      
     Dividend Fund by appropriation                                                                                             
     Sec. 12. Once the money is in the Dividend Fund, the                                                                       
     Department of Revenue shall annually pay dividends                                                                         
     without further appropriation                                                                                              
     Sec. 13. Repeals language relating to the former                                                                           
     dividend calculation, inflation proofing calculation,                                                                      
     and Amerada Hess language                                                                                                  
    Sec. 14. Repeals Sec. 10 - $1,000 dividend in three                                                                         
    Sec. 15. The Commissioner of Revenue and the Alaska                                                                         
     Permanent Fund Corporation may adopt regulations,                                                                          
     policies and procedures to implement this Act.                                                                             
     Sec. 16. Retroactivity clause.                                                                                             
     Sec. 17. Immediate effective date for sections 15 and                                                                      
     Sec. 18. Effective date of July 1, 2016                                                                                    
5:12:50 PM                                                                                                                    
AT EASE                                                                                                                         
5:15:32 PM                                                                                                                    
Co-Chair  Thompson invited  Mr.  Teal to  walk the  committee                                                                   
through the bill.                                                                                                               
5:15:58 PM                                                                                                                    
DAVID   TEAL,   DIRECTOR,   LEGISLATIVE   FINANCE   DIVISION,                                                                   
referred to  the 4 page handout  (copy on file)  titled: "LFD                                                                   
Fiscal Model."  He reported  that the  first page  containing                                                                   
four graphs  was the  status quo if  nothing was  changed. He                                                                   
pointed to  the graph on the  lower left side  titled "Budget                                                                   
Reserves"  that depicted  vanishing reserves  after FY  2021.                                                                   
He drew attention  to the chart in the upper  left corner. He                                                                   
reported that expenditures  were represented as  a black line                                                                   
and  revenue  was   portrayed  by  bars.  The   blue  portion                                                                   
represented  forecasted  combined  revenue,  the  orange  bar                                                                   
represented  draws  from the  Constitutional  Budget  Reserve                                                                   
(CBR), and  the red represented  the draws from  the Earnings                                                                   
Reserve Account  (ERA); both accounts  were used to  fill the                                                                   
budget  deficit.  The  white  space after  FY  22  under  the                                                                   
expenditure   line   represented    depleted   reserves.   He                                                                   
expounded  that the  state could  not maintain  the level  of                                                                   
spending  in  order  to  function   and  the  Permanent  Fund                                                                   
Dividend (PFD) would not continue to be paid out.                                                                               
Representative   Gara    asked   about   the    charts   that                                                                   
characterized  FY   16  and  wondered  whether   the  numbers                                                                   
represented  the balance at  year's end  or during  the year.                                                                   
Mr. Teal responded that they were all year-end balances.                                                                        
Mr. Teal  related that the purpose  of the first page  was to                                                                   
show that  the state had  a problem;  the state did  not have                                                                   
sufficient revenues  to address  expenditures in  the future.                                                                   
The bill  attempted to  address the issue.  He turned  to the                                                                   
second  page  of  graphs that  modeled  the  legislation.  He                                                                   
turned to the  data assumptions depicted between  the graphs.                                                                   
He noted  that all  of the  graphs were  based on the  spring                                                                   
forecast.  He highlighted  that the  operating budget  growth                                                                   
was  held  at  zero with  $247  million  in  reductions,  $30                                                                   
million  in   Community  Assistance,  and  $185   million  in                                                                   
Capital Budget  spending. He skipped  to the data  containing                                                                   
the Permanent  Fund (PF) Variables  that assumed  6.9 percent                                                                   
investment  return, in  the  blue shaded  area  the Point  of                                                                   
Market  Value  (POMV)  payout   was  5.25  percent,  and  the                                                                   
dividends  were 20 percent  of the  5.25 percent POMV  payout                                                                   
and 20  percent of  prior year royalties.  He added  that the                                                                   
dividend had  a floor of $1000  and were set at $1000  for FY                                                                   
17,  18,  and  19.  He pointed  to  the  data  under  Revenue                                                                   
Variables  and reported  that Tax  Credit Reform  was set  at                                                                   
the numbers in  the House Resources committee  version of the                                                                   
bill. The  figures on lower  left listed the  reserve balance                                                                   
at $10.4  billion, the  deficit was $624  million [in  FY 25]                                                                   
and  the  reserves  lasted  17  years.  The  table  on  right                                                                   
forecasted  the  PFD  real  value   at  97  percent  and  the                                                                   
effective  payout of  4.9 percent  while  the nominal  payout                                                                   
was  5.25 percent.  He  mentioned  that the  only  difference                                                                   
between page 2  and page 3 was that page 3  data was based on                                                                   
the House  Finance Committee version  numbers for  tax credit                                                                   
reform. He indicated  that dividends and the  PF changed only                                                                   
slightly.  The  only  difference was  the  projected  reserve                                                                   
change  to $11.9  billion  [FY 25]  under  the House  Finance                                                                   
Committee version  roughly $1.5  billion less than  the House                                                                   
Resources  version. He  examined  page 4  and commented  that                                                                   
the figures  were was the same  except for the  difference in                                                                   
investment  return  reported  at 7.45  percent.  He  detailed                                                                   
that the  data was based  on the Callan Associates  (advisors                                                                   
to the PF)  memo from December  24, 2015. He quoted  from the                                                                   
memo as follows:                                                                                                                
     "The most salient impacts of the revision are                                                                              
     reductions in the median projected 10 year annualized                                                                      
    total return from 7.8 percent versus 7.45 percent."                                                                         
Mr. Teal  deduced that based on  the 7.45 percent  figure and                                                                   
all  other  variables  remaining  the  same as  page  3,  the                                                                   
primary difference  resulted in  the reserves lasting  longer                                                                   
because more  earnings were  realized on the  PF and  ERA. He                                                                   
pointed  to the table  on the  lower right  showing the  real                                                                   
value of the PF at 102 percent in FY 25.                                                                                        
5:25:21 PM                                                                                                                    
Co-Chair  Thompson  asked  Mr.  Teal to  explain  the  middle                                                                   
column  listing  the CBR  earnings  at  6 percent.  Mr.  Teal                                                                   
answered  that  the CBR  was  currently  earning one  to  two                                                                   
percent. He  delineated that the  governor's solution  was to                                                                   
move the  CBR into the  ERA. The two  funds were  not legally                                                                   
required to  be physically  combined. The  CBR could  be more                                                                   
aggressively  invested,  if  the   draws  were  substantially                                                                   
lower,  and could  be  managed by  either  the Department  of                                                                   
Revenue  (DOR)  or  the  Alaska  Permanent  Fund  Corporation                                                                   
(APFC). The  assumption was set  at 6 percent but  the actual                                                                   
rate  was unknown.  Co-Chair Thompson  thought  the rate  was                                                                   
definitely  higher than  the current  rate  of CBR  earnings.                                                                   
Mr. Teal responded in the affirmative.                                                                                          
Co-Chair  Neuman  referred  to  top  left  graph  on  page  4                                                                   
depicting    the    Undesignated     General    Fund    (UGF)                                                                   
Revenue/Budget  in millions  and  noted that  the budget  was                                                                   
shown   at  nearly   $5  billion.   He   asked  whether   any                                                                   
significant  changes would result  in a  budget reduced  to a                                                                   
$4.5  billion or  $4.4 billion  range. Mr.  Teal answered  in                                                                   
the affirmative.  He added that any reduction  in expenditure                                                                   
reduced  the revenue  gap,  which  was filled  through  draws                                                                   
from the CBR.  A balanced budget eliminated draws  on the CBR                                                                   
and strengthened reserves.                                                                                                      
Co-Chair  Neuman  noticed  that   the  fiscal  note  analysis                                                                   
reported  a  $2000   dividend.  He  suggested   that  if  the                                                                   
dividend  was reduced  to  $1000 a  savings  of $700  million                                                                   
would  result. He  wondered  whether,  with the  addition  of                                                                   
$300 million in  cuts, $1 billion in reductions  affected the                                                                   
calculations     significantly.     Mr.     Teal     answered                                                                   
affirmatively.  He pointed  to the  table on  the lower  left                                                                   
that depicted the  deficit in the out years  at approximately                                                                   
$350  million  and  estimated   that  the  deficit  would  be                                                                   
eliminated  and  the  reserves  would  grow.  The  amount  in                                                                   
reductions each  year for ten  years totaled an impact  of $2                                                                   
Co-Chair Thompson  asked whether  taxes were included  in his                                                                   
calculations  on page 4.  Mr. Teal  affirmed that taxes  were                                                                   
not  included.   Co-Chair  Thompson   wondered  whether   the                                                                   
inclusion  of taxes  would  increase  the savings.  Mr.  Teal                                                                   
responded  that reductions  in spending  and increased  taxes                                                                   
had  the same  result;  both  closed  the deficit  and  saved                                                                   
Vice-Chair  Saddler asked  about the effect  of inflation  on                                                                   
the models  set at 2.25  percent. He  cited Section 6  of the                                                                   
bill  that recalculated  the  dividend  at one-fifth  of  the                                                                   
POMV  stream and  one-fifth of  the  prior year's  royalties.                                                                   
He  understood that  inflation  proofing was  built into  the                                                                   
corpus of  the PF  with the  POMV plan.  He wondered  to what                                                                   
degree  the PFD  was protected  against  inflation. Mr.  Teal                                                                   
responded  that as  the PF and  ERA balance  grew the  payout                                                                   
grew  and  a  constant  percentage  of  the  payout  went  to                                                                   
dividends.  He surmised  that  the dividends  were  protected                                                                   
from inflation  in  the same manner  as the  full payout  and                                                                   
the PF was.                                                                                                                     
5:32:47 PM                                                                                                                    
Vice-Chair  Saddler asked  about  inflation  proofing in  the                                                                   
royalty stream  into the Permanent  Fund. He did not  see how                                                                   
they  were covered.  Mr.  Teal answered  that  to the  extent                                                                   
that  oil  prices reflected  inflation  the  royalty  portion                                                                   
would also be  inflation proofed. However, royalties  did not                                                                   
"necessarily"  have the  same  inflation proofing  protection                                                                   
as  production   declined.  Vice-Chair   Saddler  asked   for                                                                   
clarification  on   the  "percent  realized"   listing  under                                                                   
Permanent  Fund Variables  on  the handout.  Mr. Teal  stated                                                                   
that  realized  earning  went  into the  ERA  and  unrealized                                                                   
earnings affect  market value  but were  not cash until  they                                                                   
were realized.  He delineated  that the model  differentiated                                                                   
between  the PF  total  investment rate  at  7.45 percent  of                                                                   
which  75  percent   was  realized  and  the   remainder  was                                                                   
unrealized,  which increased  the  market value  but not  the                                                                   
cash in hand.                                                                                                                   
Representative  Gara asked  whether Mr.  Teal spoke with  the                                                                   
permanent  fund managers  to determine  whether they  planned                                                                   
to  aggressively  invest  the  CBR  knowing  that  a  smaller                                                                   
portion was being  spent each year. Mr. Teal  answered in the                                                                   
negative  but  planned  to  engage  in  the  discussions.  He                                                                   
relayed   that  currently   the  CBR  was   managed  by   the                                                                   
Department  of  Revenue  (DOR). The  department  invested  in                                                                   
liquid  assets when  the reserves  were being  drawn. He  was                                                                   
trying  to find  a way to  get a  better return  on the  CBR.                                                                   
Representative  Gara  asked  whether  the  bill  contained  a                                                                   
provision authorizing  the PFD  to manage the  CBR and  if it                                                                   
was necessary. Mr.  Teal replied in the negative  and did not                                                                   
think that management  of the fund mattered.  He thought that                                                                   
the issue of investment parameters was more important.                                                                          
Co-Chair  Thompson mentioned  that the  attorney general  was                                                                   
in the audience and available for questions.                                                                                    
5:37:53 PM                                                                                                                    
Representative Gara  asked about the bottom right  hand chart                                                                   
on  page 4  that  denoted different  colors  for status  quo,                                                                   
governor's  plan,  custom  plan,  SB  114,  and  HB  224.  He                                                                   
wondered why only  two colors were represented  on the chart.                                                                   
Mr.  Teal  responded that  the  only  data included  was  the                                                                   
status quo and  the option with a "yes" value,  otherwise the                                                                   
chart was "too  busy." Representative Gara asked  whether the                                                                   
chart  represented the  status  quo compared  to the  "custom                                                                   
plan" which  was the  current version of  the bill.  Mr. Teal                                                                   
replied  affirmatively.  Representative  Gara  asked  whether                                                                   
savings  were still  realized in  ten years  if the  dividend                                                                   
was set  at $1500. Mr. Teal  answered in the  affirmative. He                                                                   
indicated that a  $1000 dividend equated to  $700 million per                                                                   
year and  when increased  by 50  percent would  equate  to an                                                                   
estimated additional  $300 million in expenditure;  therefore                                                                   
a $1500  cap on  the dividend  by FY  25 reduced the  reserve                                                                   
balance by roughly $2.5 billion.                                                                                                
5:41:40 PM                                                                                                                    
Vice-Chair Saddler  pointed to  "cost variables" on  the data                                                                   
that  contained a  targeted  cut of  $257  million. He  asked                                                                   
whether  that   was  projected   for  each  year.   Mr.  Teal                                                                   
responded  that included the  cut in  FY 2017 and  maintained                                                                   
the same level  of cuts in the out years.  Vice-Chair Saddler                                                                   
asked  why  the  specific  number   was  included.  Mr.  Teal                                                                   
relayed  that the  number was  based on the  changes made  on                                                                   
the current operating  and capital budgets in  both the House                                                                   
and  Senate. Vice-Chair  Saddler  asked  whether the  Amerada                                                                   
Hess case  [Alaska v. Amerada  Hess et al., officially  known                                                                   
as  State  v.  Amerada  Hess et  al.  (1JU-77-877)]  had  any                                                                   
implication  in  the equations.  Mr.  Teal replied  that  the                                                                   
Amerada  Hess case  represented  the "fenced  off portion  of                                                                   
the  Permanent  Fund"  and  amounted   to  $425  million.  He                                                                   
explained  that  the  legal  case  mandated  that  the  money                                                                   
earned on  it could not be  used to pay dividends  of roughly                                                                   
$21 million  per year. The  earnings were deposited  into the                                                                   
Capital Income Fund  and was typically spent on  items in the                                                                   
capital budget. The  extra earnings would become  part of the                                                                   
POMV payout. Vice-Chair  Saddler asked whether  the money was                                                                   
always  available  for spending.  Mr.  Teal stated  that  the                                                                   
funds  were  not available  until  about  5 years  prior.  He                                                                   
delineated  that  the  legislature   continued  to  inflation                                                                   
proof  the  portion   of  the  Amerada  Hess   money  and  it                                                                   
continued  to grow  until 5  years  ago and  began using  the                                                                   
earnings  in  the  capital  budget. The  net  effect  on  the                                                                   
current  legislation  was  zero  because the  money  was  not                                                                   
fenced off or  identified as Amerada Hess anymore  due to the                                                                   
expiration of the legal mandate.                                                                                                
5:44:55 PM                                                                                                                    
Representative  Edgmon  asked  Mr.  Teal to  discuss  page  2                                                                   
(House  Resources Committee  version)  versus  page 3  (House                                                                   
Finance Committee  version). He noted that both  versions set                                                                   
the rate  of return  on the  permanent fund  at 6.9  percent.                                                                   
The reserves  in FY  25 were $11.9  billion versus  the House                                                                   
Resources  Committee version  in FY 25  that showed  reserves                                                                   
of $10.4  billion. He remarked  that the graphs did  not look                                                                   
a "whole  lot  different" and  he asked  for an  explanation.                                                                   
Mr.   Teal agreed  that the graphs  looked similar.  He added                                                                   
that part  of the  problem with modeling  was a $500  million                                                                   
change  could be  lost. Representative  Edgmon cited  Section                                                                   
14 of the bill  that repealed the dividend in  2020. He asked                                                                   
for  clarification.   Mr.  Teal  indicated  that   the  $1000                                                                   
guaranteed dividend  was being  repealed and replaced  by the                                                                   
amount calculated  by the bill's  formula, which  amounted to                                                                   
approximately $1000.                                                                                                            
Co-Chair  Thompson added  that  the blue  bar  on the  bottom                                                                   
left showed  the amount  of reserves  remaining. He  reported                                                                   
that  reserves  lasted  17 years  with  the  House  Resources                                                                   
Committee  version   and  28  years  in  the   House  Finance                                                                   
Committee version.                                                                                                              
Representative  Edgmon cited the  inflation proofing  rate of                                                                   
2.25  percent  included   in  the  data  and   asked  whether                                                                   
inflation  proofing was  eliminated in  the legislation.  Mr.                                                                   
Teal  answered that  the bill  eliminated inflation  proofing                                                                   
specified  in statute.  The proposed  inflation proofing  was                                                                   
the difference between the earnings and the payout.                                                                             
Representative   Gara  suggested  that   there  would   be  a                                                                   
significant change  depending on the  version of the  oil tax                                                                   
credit  bill that  was  adopted. He  asked  how long  savings                                                                   
would last  if the governor's  original version figures  of a                                                                   
savings of approximately  $250 million per year  were used in                                                                   
the  model.  Mr.  Teal  did  not   remember  the  number.  He                                                                   
remembered  that  the  governor's  proposal  had  significant                                                                   
fiscal impacts and  the reserve lines went "upward."  The out                                                                   
years were  included to  provide perspective  and were  not a                                                                   
5:51:22 PM                                                                                                                    
Vice-Chair Saddler  inquired whether all of the  figures were                                                                   
real numbers.  Mr. Teal responded  in the negative.  He added                                                                   
that  the  numbers  were  all   nominal.  Vice-Chair  Saddler                                                                   
deduced  that the  bill's plan  to fill  the deficit,  extend                                                                   
the  CBR  and  ERA  included   reduced  payout  of  the  PFD,                                                                   
increased  interest   on  the  PF  corpus,   ended  statutory                                                                   
inflation  proofing, and  instituted  the  5.25 percent  POMV                                                                   
draw. He  asked for confirmation  of his summation.  Mr. Teal                                                                   
answered in the affirmative.                                                                                                    
Representative  Gara asked that  if the reserves  rose, would                                                                   
the CBR last over  a ten year period and whether  the balance                                                                   
would  decline.   Mr.  Teal  answered  that  the   CBR  would                                                                   
maintain  a positive  balance  due to  the  reduction of  the                                                                   
draws  on the  CBR.  Representative  Gara asked  whether  the                                                                   
reserves remained  "steady." Mr. Teal responded  that the CBR                                                                   
balance remained  higher than  shown and  the ERA would  also                                                                   
increase.  He elaborated  that the  result was  based on  new                                                                   
revenues or  less expenditures  through the tax  credit bill,                                                                   
which  reduced  the deficit  and  the  draw on  reserves.  He                                                                   
spoke  to the  House Finance  Committee version  of the  bill                                                                   
and  reported that  the  deficits were  smaller  and the  CBR                                                                   
maintained a  positive balance through  FY 25. He  added that                                                                   
in the House  Resource Committee version the  state's deficit                                                                   
was over  $600 million in  FY 25 but  fell over $200  million                                                                   
per year under  the House Finance Committee  version. Smaller                                                                   
deficits  mean less impact  on reserves  resulting in  higher                                                                   
reserve  balances. The  governor's version  used less  of the                                                                   
CBR and was roughly $4 billion.                                                                                                 
5:57:20 PM                                                                                                                    
Vice-Chair  Saddler referred  to page  4 and  noted that  the                                                                   
model assumed  a flat  budget. He  relayed that other  models                                                                   
reported  1.5 percent  budget  growth.  He wondered  how  the                                                                   
budget  growth and  inflation  impacted the  model. He  asked                                                                   
whether the  bill assumed a large  deposit from the  CBR into                                                                   
the corpus. Mr.  Teal replied in the negative  and added that                                                                   
the  bill assumed  the CBR  was  invested more  aggressively.                                                                   
Vice-Chair Saddler  referred to the lower left  chart on page                                                                   
4  and  noted  that  the  reserve   balance  "tipped  upward.                                                                   
He wondered  whether the bill  included a "reserve  threshold                                                                   
where the  money cascaded someplace  else in the  model." Mr.                                                                   
Teal  responded  in  the  negative.  He  indicated  that  the                                                                   
governor's  bill mandated  that if  the ERA  was more than  4                                                                   
times  the draw,  the excess  earnings were  placed into  the                                                                   
corpus.  He   informed  the  committee   that  he   left  the                                                                   
provision out of  the model considering that  the legislature                                                                   
had the  authority to do what  it wanted with the  excess. He                                                                   
mentioned that "from  the model perspective… it  was all just                                                                   
money  sitting in  a  reserve." Vice-Chair  Saddler  restated                                                                   
that the dividend,  predicated on investment returns  and the                                                                   
price of oil,  automatically included inflation  proofing and                                                                   
was  flat in  all of  the  models at  $1000.  He assumed  the                                                                   
amount  would decrease  by  2.25  percent compounded  due  to                                                                   
inflation.  He  requested  comment.  Mr.  Teal  replied  that                                                                   
"that was  driven to  some extent  by population growth."  He                                                                   
referred  to the  page  4 figures  on  the  lower right  that                                                                   
projected PF growth  of $10 billion by FY 25  to $65 billion.                                                                   
He concluded that  the PF was maintaining its  real value and                                                                   
the  constant  5.25  percent  ensured  that  the  payout  was                                                                   
larger and  larger over time.  He interpreted  flat dividends                                                                   
as  a combination  of  growing  dividends  due to  the  POMV,                                                                   
declining   dividends  due   to   royalties,  and   declining                                                                   
dividends  due  to  population  growth  that  in  combination                                                                   
resulted  in a flat  line. Vice-Chair  Saddler asked  whether                                                                   
population growth  estimates were built into  the models. Mr.                                                                   
Teal replied  in the  affirmative and  added that  population                                                                   
was growing by 1.3 percent.                                                                                                     
Representative  Pruitt  remarked that  the  models made  many                                                                   
assumptions. He stated  that if the spring 2016  forecast was                                                                   
correct  it  meant  that  Saudi  Arabia  no  longer  existed;                                                                   
therefore,  he believed  the forecast  was incorrect.  He did                                                                   
not see  a revenue cap that  prevented the state  from ending                                                                   
up back  in the same  position if the  price of oil  rose and                                                                   
spending increased.  He asked if a spending  cap or something                                                                   
like  it was  included  in the  bill,  it helped  manage  the                                                                   
growth in  government and  prevent up  and down spending  and                                                                   
deficit cycles. Mr. Teal answered  in the negative; including                                                                   
a limit was "an easy amendment."  He did not believe that any                                                                   
limits worked  very well  because limits  or caps were  rules                                                                   
that could  be broken  by the  legislature.  He spoke to  the                                                                   
fact that  if the  price of  oil spiked  the legislature  can                                                                   
spend the excess.  He felt that it was difficult  to devise a                                                                   
cap that granted  flexibility for spending while  providing a                                                                   
strong  enough rule.  He noted  that the  governor favored  a                                                                   
6:05:29 PM                                                                                                                    
Representative  Pruitt  was concerned  about  turning on  the                                                                   
tap from the PF  to pay for government. He  believed that the                                                                   
legislature  was  going to  increase  spending  and "did  not                                                                   
follow the rules."  He strongly favored including  a spending                                                                   
cap  rule.  He stated  that  it  was  necessary to  give  the                                                                   
public  assurance  that  the legislature  was  not  going  to                                                                   
increase  spending with  permanent fund  money and break  the                                                                   
public's trust.                                                                                                                 
Representative  Wilson  asked  whether  an  oil  trigger  was                                                                   
included in  the bill;  if oil rebounded  the funds  from the                                                                   
Permanent Fund were  no longer used. Mr. Teal  replied in the                                                                   
negative.  He  continued  that regarding  dividends,  as  oil                                                                   
prices rise  royalties increased  and as royalties  increased                                                                   
the  dividend   increased.  He   pointed  to   Representative                                                                   
Pruitt's remarks that  if the state did not  need the revenue                                                                   
from the POMV  payout why make it available.  He thought that                                                                   
"the rule  would make  the legislature  discuss breaking  the                                                                   
rule." The  discussion may  be helpful,  but he reminded  the                                                                   
committee that the POMV payout  was subject to appropriation.                                                                   
He  felt  that  the discussion  should  center  on  how  much                                                                   
discretion  the legislature  should have  to spend  available                                                                   
funds  with  or  without  rules.   He  illuminated  that  the                                                                   
governor's comparison  of the bill assumed that  if there was                                                                   
a  revenue spike,  all  of the  money  was  spent. His  model                                                                   
assumed any surplus revenue was  saved and others argued that                                                                   
an oil  price spike was  not expected. Representative  Wilson                                                                   
surmised  that   the  percentages   did  not  really   matter                                                                   
significantly because  the bill held  the PF payout  to $1000                                                                   
as well as the floor.                                                                                                           
6:10:33 PM                                                                                                                    
Mr. Teal replied that the bill  set the dividend at $1,000 in                                                                   
FY 17  through FY  19 and was  then based  on a formula  that                                                                   
still produced  roughly  $1,000 dividends.  He added  that if                                                                   
investment returns  or oil prices were higher  than projected                                                                   
the  dividend  would  increase  and  also  made  the  deficit                                                                   
disappear which  made reserves go  up. He voiced  that higher                                                                   
oil  prices   improved  the   model.  Representative   Wilson                                                                   
countered that  his conclusions were  true only if  the money                                                                   
was not spent. She reasoned that  a provision did not mandate                                                                   
that  the dividend  would increase  and  that excess  revenue                                                                   
would be  diverted to  spending. Mr.  Teal answered  that the                                                                   
dividend depended  on the calculation of the  POMV payout. He                                                                   
elucidated that  the dividend would increase  with higher oil                                                                   
prices, but  expenditures would not necessarily  increase and                                                                   
the  level of  spending was  decided by  the legislature.  He                                                                   
suggested that a  revenue or expenditure limit  could work if                                                                   
the legislature chose to follow the rule.                                                                                       
Representative  Wilson asked whether  the bill was  necessary                                                                   
to  accomplish   the  provisions   it  contained.   Mr.  Teal                                                                   
responded that  everything could be accomplished  through the                                                                   
appropriation process.  He qualified that bill  established a                                                                   
set of rules, but  appropriations were not part  of a plan or                                                                   
rule based  system. Representative  Wilson restated  that the                                                                   
legislature did not always follow rules.                                                                                        
6:15:08 PM                                                                                                                    
Representative Edgmon stated that  the models were predicated                                                                   
on assumptions.  He  articulated that  the chief  assumptions                                                                   
embedded in the  models were oil production,  oil prices, and                                                                   
investment returns.  He pointed out the one  constant that no                                                                   
other revenue  stream was  counted in any  of the  models. He                                                                   
wondered  how  assuming  that  no  other  new  revenues  were                                                                   
incorporated into  the model, the bond rating  agencies would                                                                   
view the legislature's  actions. Mr. Teal recognized  that he                                                                   
was asked  to give  his opinion. He  thought the  bond rating                                                                   
agencies  would look  at the bill  as the  very strong  first                                                                   
step.  However, he  thought the  bond  rating agencies  would                                                                   
react more favorably in combination  with additional revenues                                                                   
and additional  cuts. He noted  that new revenue  sources and                                                                   
expenditure reductions were independent  actions not included                                                                   
in the bill. The bill set up a framework for using the ERA.                                                                     
Representative Gattis  stressed the importance  of looking at                                                                   
the  worst  case  and best  case  scenarios  when  doing  the                                                                   
modeling. In addition, she suggested  that any plan needed to                                                                   
include a reduction in the size of government.                                                                                  
6:19:31 PM                                                                                                                    
Representative  Guttenberg  offered  that  the model  had  to                                                                   
consider the things that were  out of its control such as the                                                                   
price of  oil. He wondered whether  Mr. Teal had  applied the                                                                   
worst case scenario  into the model. Mr. Teal  replied in the                                                                   
affirmative  and offered  to return  when discussing  options                                                                   
beyond the  bill with interactive  models. He  explained that                                                                   
variables could be applied to the model.                                                                                        
Co-Chair Thompson thanked Mr. Teal for his presentation. He                                                                     
reviewed the agenda for the following morning.                                                                                  

Document Name Date/Time Subjects
HB 245 CS FIN Sectional version _E.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
HB 245 CS WORKDRAFT vE.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
HB 245 #1 model 4 12 16 CSSB128 690 sq.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
SB 128
HB 245 #2 model 4 12 16 CSSB128 690 Res.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
SB 128
HB 245 # 3 model 4 12 16 CSSB128 690.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
SB 128
HB 245 # 4 model 4 12 16 CSSB128 745.pdf HFIN 4/12/2016 5:00:00 PM
HB 245
SB 128