Legislature(2003 - 2004)

03/29/2004 09:04 AM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     SENATE BILL NO. 374                                                                                                        
     "An  Act relating to  calculation of the  amount to offset  the                                                            
     effect  of inflation on the principal  of the Alaska  permanent                                                            
     fund,  and to  transfers  of money  from the  earnings  reserve                                                            
     account; and providing for an effective date."                                                                             
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair Wilken  stated this bill, sponsored by Senator  B. Stevens,                                                            
"establishes a mechanism  to repay the Constitutional Budget Reserve                                                            
(CBR)  after Permanent  Fund dividends  and inflation  proofing  and                                                            
maintaining a $250 million  balance in the earnings reserve account,                                                            
any excess  moneys are transferred  to the CBR. In addition,  Senate                                                            
Bill 374, new  deposits from natural resources [deposited]  into the                                                            
corpus of  the Permanent  Fund are considered  when calculating  the                                                            
amount needed to inflation proof."                                                                                              
Senator  B. Stevens testified  this legislation  would maintain  the                                                            
current dividend payout  calculation, and ensure dividend payouts as                                                            
the first  priority  of distribution  of earnings  of the  Permanent                                                            
Fund, as  has occurred since  the year 1980.  This bill would  amend                                                            
statutes pertaining  to the procedures  for inflation proofing.  The                                                            
existing inflation  proofing calculation  takes the market  value of                                                            
the Permanent  Fund and multiplies  it by the average of  two years'                                                            
Consumer Price Index figures.  The product would be transferred from                                                            
the Permanent  Fund's earnings reserve  account to the principal  of                                                            
the Permanent Fund. The  proposed method would deduct annual royalty                                                            
deposits from the inflation  proofing calculated amount. This method                                                            
guarantees  that inflation-proofing  requirements  are met and  also                                                            
provides a "baseline balance"  in the earnings reserve account. Over                                                            
the history  of the  earnings reserve  account  the legislature  has                                                            
made approximately  six modifications  to the  balance, and  in each                                                            
instance  at   least  $100  million   was  retained.  This   balance                                                            
consistently provided for  "ample" dividends. This legislation would                                                            
require  a conservative  minimum  balance  in the  earnings  reserve                                                            
account of $250  million allowing for the account's  first priority,                                                            
annual dividend distribution, to be achieved.                                                                                   
Senator  B. Stevens  continued that  this legislation  proposes  the                                                            
balance of the  earnings reserve account after dividends,  inflation                                                            
proofing, and  less the $250 million balance, be deposited  into the                                                            
Constitutional  Budget Reserve  (CBR) fund.  The balance swept  into                                                            
the CBR would  serve to repay the debt incurred by  withdrawals made                                                            
from that  fund to balance  the State budget.  If the deposits  into                                                            
the CBR  eventually  come to equal  withdrawals,  then the  proposed                                                            
statues will be repealed and the original statutes reinstituted.                                                                
Senator B. Stevens expressed  that the intent of this legislation is                                                            
to repay the  CBR when excess funds  remain in the earnings  reserve                                                            
account,  thus "maintaining  the life of  the Constitutional  Budget                                                            
Senator Bunde noted this  legislation would provide repayment to the                                                            
CBR until the existing  debt is settled. This bill would not provide                                                            
a  long-term   solution   to  restoring  the   CBR  because   future                                                            
withdrawals could be made.                                                                                                      
Senator B. Stevens explained  that once deposits into the fund equal                                                            
the  amount of  withdrawals,  the repayment  plan  proposed in  this                                                            
legislation   would  cease.   However,  he   remarked  that   future                                                            
legislatures would have  the ability to make appropriations from the                                                            
Constitutional  Budget Reserve.  While in  affect, this legislation                                                             
would provide  the ability to repay funds withdrawn  from the CBR in                                                            
the past and in the future.                                                                                                     
Senator Bunde  characterized  this proposal  as a revolving  line of                                                            
credit  the  legislature  would  provide  itself.  This  plan  would                                                            
"bridge  our [State legislatures']  current  problems" and  meet the                                                            
criteria of a long-range fiscal plan to fund State services.                                                                    
Senator B. Stevens  restated that the objective of  this legislation                                                            
would be  to provide  a long-range  plan to replenish  the CBR.  The                                                            
future use  of the CBR would be determined  by future legislatures.                                                             
Co-Chair  Wilken  commented that  the  proposal to  include  royalty                                                            
income  in the inflation-proofing  amount  is a  major component  of                                                            
this legislation.                                                                                                               
Senator  B. Stevens  stated  this legislation  is  comprised of  two                                                            
major components,  one being the method used to meet  the obligation                                                            
of inflation proofing the  Permanent Fund. The other major component                                                            
is a minimum  balance requirement  for the earnings reserve  account                                                            
and the allowance  of a transfer of  funds into the CBR.  If a State                                                            
savings account is to be  kept, it should be within the CBR, not the                                                            
earnings reserve account.                                                                                                       
ROB CARPENTER,  Fiscal  Analyst,  Division of  Legislative  Finance,                                                            
testified   that  the  projections   included   in  the  series   of                                                            
spreadsheets  prepared  by the  Legislative Finance  Division  dated                                                            
3/22/2004  9:32 am [copy  on file] were conservative  at Senator  B.                                                            
Stevens'  request.  The  data  on  the  spreadsheet   titled  "Model                                                            
Concept/Parameters"  assumes  a general fund  budget growth  rate of                                                            
two-percent  from   FY  05,  a  three-percent  rate  of   inflation,                                                            
population  figures  from  the Department  of  Labor  and  Workforce                                                            
Development and information  relating to the Permanent Fund from the                                                            
Permanent Fund Corporation monthly models.                                                                                      
Senator  Hoffman  asked the  reason  why  the spreadsheet  listed  a                                                            
negative growth rate for FY 04.                                                                                                 
Mr. Carpenter explained  this rate reflects the reduction in general                                                            
fund spending between the FY 03 to FY 04 enacted budgets.                                                                       
Co-Chair   Wilken   asked   for   clarification    on   the   "Model                                                            
Concept/Parameters"   spreadsheet  data,  and  using  FY  05  as  an                                                            
example. He asked if the  formula used in the "Statutory Net Income"                                                            
column  was the  same formula  used in  the "Statutory  Net  Income"                                                            
column of the  spreadsheet titled  "Alaska Permanent Fund  Financial                                                            
Projections  2004-2014  as  of  December  31, 2003"  issued  by  the                                                            
Permanent Fund Corporation [copy on file].                                                                                      
Mr. Carpenter  replied that yes, the  two columns were referring  to                                                            
the same  concept. He added  that the information  on the series  of                                                            
spreadsheets was  based on the January 2004 monthly  financials, and                                                            
did not take into account the February 2004 monthly financials.                                                                 
Senator  B.   Stevens  pointed  out   that  the  monthly   financial                                                            
projections fluctuate significantly.                                                                                            
Co-Chair Wilken asked the definition of "MV".                                                                                   
Mr. Carpenter responded "MV" is an acronym for "market value".                                                                  
Co-Chair  Wilken clarified  that the data  referenced on the  "Model                                                            
Concept/Parameters" spreadsheet represents a "snapshot in time".                                                                
Mr. Carpenter  outlined the data in the spreadsheet  included in the                                                            
packet prepared  by the Legislative Finance Division  titled "Status                                                            
Quo",  using  FY 05  as  an  example.  He proceeded  to  detail  the                                                            
information in the FY 05 column of this spreadsheet.                                                                            
Senator Dyson asked for  a definition of the phrase "reserved ending                                                            
Senator  B. Stevens referenced  the "Reserved  Fund Balance"  versus                                                            
"Unreserved  Fund Balance" sections  of the "Alaska Permanent  Fund,                                                            
Financial Projections  2004-2014"  spreadsheet. The unreserved  fund                                                            
balance  includes the  earnings reserve  account,  and the  reserved                                                            
fund balance consists  of the Permanent Fund's unrealized  gains and                                                            
the  dedicated  principal  of the  Fund,  which  includes  deposits,                                                            
inflation proofing and realized gains.                                                                                          
Mr. Carpenter  continued  to detail  the FY 05  data in the  "Status                                                            
Quo" spreadsheet.                                                                                                               
Co-Chair  Wilken  asked  which  figures  were  used  to  derive  the                                                            
Permanent  Fund's  FY 05  market  value ending  balance  of  $29.443                                                            
Mr. Carpenter  answered that the market value ending  balance is the                                                            
sum of the Fund's  principal ending balance, accumulated  unrealized                                                            
earnings and the ending balance of the earnings reserve account.                                                                
Co-Chair Wilken  clarified that the  ending balance of the  earnings                                                            
reserve account  reflects the balance  after dividend distribution,                                                             
inflation proofing, and  potential withdrawals to compensate for the                                                            
State's fiscal gap.                                                                                                             
Senator  B. Stevens  referred  to the  "Status Quo"  spreadsheet  in                                                            
pointing out that the ending  balance of the CBR would be zero in FY                                                            
07  because withdrawals  would  exceed  the balance.  Following  the                                                            
exhaustion  of the CBR,  the spreadsheet  assumes that the  earnings                                                            
reserve account  would be  the only resource  available to  fill the                                                            
State's  fiscal  gap. The  projection  predicts  that  the  earnings                                                            
reserve account would reach a zero balance in FY 11.                                                                            
Co-Chair Green  asked if the projections included  in the status quo                                                            
model are based  on hypothetical evaluations of the  actual price of                                                            
oil rather than outdated forecasts.                                                                                             
Senator B. Stevens answered no.                                                                                                 
SFC 04 # 61, Side A 10:39 AM                                                                                                    
Senator B. Stevens clarified,  using the spreadsheet included in the                                                            
packet provided by the  Legislative Finance Division titled "Model",                                                            
that the projected unrestricted  general fund revenue amounts for FY                                                            
03, FY 04 and FY 05 are  derived from the adjusted fall forecast oil                                                            
prices  and  current  production  levels.  Beginning  in FY  06  the                                                            
general fund revenue projection  assumes a rate of $22 per barrel of                                                            
oil under current production levels.                                                                                            
Senator  Bunde understood  the status quo  model demonstrates  that,                                                            
after the CBR  Fund is depleted and funds are appropriated  from the                                                            
earnings  reserve  account to  balance  the State  budget,  adequate                                                            
funding remains  in the earnings reserve account to  issue dividends                                                            
and inflation proof the Permanent Fund.                                                                                         
Senator  B. Stevens  affirmed and  added that  dividend payouts  and                                                            
inflation proofing are required statutorily.                                                                                    
Mr. Carpenter  and Senator B. Stevens then outlined  the spreadsheet                                                            
titled   "Model",  which   assumes   the  implementation   of   this                                                            
Senator B.  Stevens explained  that beginning  in FY 05 the  "Model"                                                            
spreadsheet  demonstrates that transfers  from the earnings  reserve                                                            
account  into the CBR  are visible  in the CBR  ending balance.  The                                                            
primary  dissimilarity  in  the  balance  of  the  earnings  reserve                                                            
account between  the "Status  Quo" and "Model"  spreadsheets  is the                                                            
amount "swept"  into the Permanent  Fund for inflation proofing:  in                                                            
FY 05  the "Status  Quo"  spreadsheet reflects  a  transfer of  $712                                                            
million whereas the "Model"  spreadsheet reflects a transfer of $460                                                            
million. The  divergence exists because  in the "Model" spreadsheet                                                             
the  Permanent  Fund's  dedicated  revenue,  consisting  of  royalty                                                            
deposits,  is counted towards  the inflation  proofing calculation.                                                             
Thus, the inflation proofing  calculation of $712 million is arrived                                                            
at by adding  the Fund's dedicated  revenue in FY 05, $252  million,                                                            
to  the  inflation  proofing  transfer  from  the  earnings  reserve                                                            
account: $460 million.                                                                                                          
Senator B.  Stevens clarified  the amount of  the transfer  from the                                                            
earnings reserve  account to the CBR in FY 05.  He  pointed out that                                                            
the balance  of the  CBR fund  increases from  FY 04  to FY 05,  but                                                            
reduces after FY 05 until FY 12.                                                                                                
Senator  Dyson referenced  discussions and  arguments made  that the                                                            
Permanent  Fund is currently  double inflation  proofed because  the                                                            
value of the Fund's  assets naturally increase with  inflation, and,                                                            
in addition, money is transferred  from the earnings reserve account                                                            
to compensate  for inflation. He stated that this  legislation would                                                            
not address  this argument because  it continues to inflation  proof                                                            
the Fund using the current calculation.                                                                                         
Senator B.  Stevens replied that under  the proposed model  the Fund                                                            
continues to be  inflation proofed at the required  amount; however,                                                            
by applying  dedicated  revenue  towards the  inflation calculation                                                             
amount, the actual inflation proofing deposit would be reduced.                                                                 
Senator B.  Stevens next explained  the spreadsheet included  in the                                                            
packet prepared  by the Legislative Finance Division  titled "Output                                                            
- Status  Quo vs  Model". According  to the  February 2004  Consumer                                                            
Price Index  the rate of  inflation in the  State for 2004  was 2.15                                                            
percent. The inflation  proofing calculation for the  Permanent Fund                                                            
for FY 05 assumes  an inflation rate of 4.2 percent.  Thus, assuming                                                            
the  FY 05  inflation rate  is comparable  to  the FY  04 rate,  the                                                            
Permanent  Fund will be  inflation proofed  at approximately  double                                                            
the rate  of inflation.  In addition, referring  to Senator  Dyson's                                                            
comments, the  value of the Fund's  assets naturally increases  with                                                            
inflation.  Therefore,  it is arguable  that the  Permanent Fund  is                                                            
actually  being  inflation  proofed  at  three  times  the  rate  of                                                            
inflation.  Under this legislation  only the  principal of  the Fund                                                            
would be inflation proofed as required by statute.                                                                              
Senator   Dyson  restated   the  inflation   proofing  method   this                                                            
legislation would implement.                                                                                                    
Senator  Dyson addressed  the discrepancies  in  the subtraction  of                                                            
percentages  in the "Effective  Inflation  Proofing" section  of the                                                            
"Output - Status Quo vs Model" spreadsheet.                                                                                     
Mr.  Carpenter specified  the  discrepancies  are from  a  "rounding                                                            
error" in the spreadsheet computer program.                                                                                     
Senator Bunde  asked, assuming this  legislation is implemented,  if                                                            
the fiscal  gap would  be zero  until FY  12 at which  time the  CBR                                                            
would be fully funded and  no longer used to fund fiscal shortfalls.                                                            
Senator B.  Stevens corrected that  no fiscal gap is represented  in                                                            
the "Output -  Status Quo vs Model" spreadsheet until  FY 12 because                                                            
the CBR  would be used to  fill any fiscal  gap until then.  The CBR                                                            
would be drained as of FY 12.                                                                                                   
Senator Bunde  commented that this legislation does  not prevent the                                                            
CBR from being exhausted, but rather delays the process.                                                                        
PHELAN  STRAUBE, staff  to  Senator B.  Stevens,  affirmed that  the                                                            
model representing  this  legislation utilizes  the assumption  that                                                            
the average  price  of oil is  $22 per  barrel and  that no new  oil                                                            
sources are developed.  The model also assumes that no new taxes are                                                            
Senator  B.  Stevens  furthered  that the  model  assumes  that  the                                                            
State's only  means of satisfying  the fiscal gap would be  the CBR.                                                            
The model also presumes an actual growth rate in the budget.                                                                    
Senator Hoffman  noted that  in the "Output  - Status Quo vs  Model"                                                            
spreadsheet  the  status  quo  projects  the  market  value  of  the                                                            
Permanent  Fund  in  FY 14  at  $40.2  billion,  whereas  the  model                                                            
projects a  market value that is approximately  $2.25 billion  less.                                                            
He asked what  the dividends would be under both the  status quo and                                                            
model projections.                                                                                                              
Senator  B. Stevens  replied that  appropriations  to the  Permanent                                                            
Fund would begin  to decline in FY 06 under both the  status quo and                                                            
the model  projections. The  dividend would  continue to grow  under                                                            
the model,  but  not as rapidly  as  under the  status quo.  Despite                                                            
efforts to accurately project  realized earnings, actual amounts are                                                            
the result  of management  decisions for the  Fund and could  not be                                                            
precisely forecasted.                                                                                                           
Co-Chair Wilken  requested a chart detailing the dividend  transfers                                                            
from  the earnings  reserve account,  as listed  on  line 26 of  the                                                            
"Model" spreadsheet.                                                                                                            
Senator B.  Stevens referred to the  "Output - Status Quo  vs Model"                                                            
spreadsheet,  specifically  the "Per Capita  Dividends" section,  in                                                            
highlighting  the comparison  between the  dividend transfer  in the                                                            
status quo and model projections.                                                                                               
Co-Chair Green asked if  this legislation would increase scrutiny of                                                            
funds  available  to  balance  the  State  budget  by reclassifying                                                             
funding. She suggested  the reclassification would  require a three-                                                            
quarters  majority  vote of  the legislature  to  appropriate  funds                                                            
rather than the current simple majority vote requirement.                                                                       
Senator B. Stevens affirmed.                                                                                                    
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             

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