Legislature(2015 - 2016)SENATE FINANCE 532

02/02/2016 09:00 AM Senate FINANCE

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10:23:03 AM Start
10:24:17 AM SB138 || SB139 || SB140
10:24:20 AM Presentation: New Sustainable Alaska Plan
11:27:01 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: New Sustainable Alaska Plan TELECONFERENCED
Pat Pitney, Director, Office of Management
and Budget
Randall Hoffbeck, Commissioner, Department
of Revenue
Heard & Held
Heard & Held
Heard & Held
SENATE BILL NO. 138                                                                                                           
     "An  Act   making  appropriations,   including  capital                                                                    
     appropriations,     reappropriations,     and     other                                                                    
     appropriations;  making  appropriations  to  capitalize                                                                    
     funds; and providing for an effective date."                                                                               
SENATE BILL NO. 139                                                                                                           
     "An  Act making  appropriations for  the operating  and                                                                    
     loan  program  expenses  of state  government  and  for                                                                    
     certain    programs,    capitalizing   funds,    making                                                                    
     reappropriations,  making supplemental  appropriations,                                                                    
     and making  appropriations under  art. IX,  sec. 17(c),                                                                    
     Constitution  of   the  State   of  Alaska,   from  the                                                                    
     constitutional budget  reserve fund; and  providing for                                                                    
     an effective date."                                                                                                        
SENATE BILL NO. 140                                                                                                           
     "An  Act making  appropriations for  the operating  and                                                                    
     capital    expenses   of    the   state's    integrated                                                                    
     comprehensive mental health  program; and providing for                                                                    
     an effective date."                                                                                                        
10:24:17 AM                                                                                                                   
^PRESENTATION: NEW SUSTAINABLE ALASKA PLAN                                                                                    
10:24:20 AM                                                                                                                   
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
discussed  the  PowerPoint,  "New Sustainable  Alaska  Plan:                                                                    
Pulling Together  to Build  Our Future"  (copy on  file). He                                                                    
stated that  there were short-term, mid-term,  and long-term                                                                    
issues that must be addressed.                                                                                                  
Commissioner   Hoffbeck   highlighted   slide   2,   "Fiscal                                                                    
     Unrestricted General Funds Gap                                                                                             
          $3.8 billion (30 percent)                                                                                             
     Unrestricted General Funds                                                                                                 
          $1.6 billion (13 percent)                                                                                             
     Designated General Funds and Other State Funds                                                                             
          $1.5 billion (12 percent)                                                                                             
     Permanent Fund Inflation Proofing and Dividends                                                                            
          $2.3 billion (18 percent)                                                                                             
     Federal Funds                                                                                                              
          $3.4 billion (27 percent)                                                                                             
Commissioner   Hoffbeck   looked   at   slide   3,   "Fiscal                                                                    
Challenge." He stressed that the  mid-term challenge was due                                                                    
to the significant  draw from savings. He  remarked that the                                                                    
withdrawal  from  the  constitutional budget  reserve  (CBR)                                                                    
would not bring relief to  the long-term crisis. He stressed                                                                    
that, without a  change to the fiscal system,  the CBR would                                                                    
be greatly  depleted after two  years. He stated  that there                                                                    
would  be   small  tax  increases  and   earnings  from  the                                                                    
permanent fund that would cover the issue.                                                                                      
Commissioner   Hoffbeck    discussed   slide    4,   "Fiscal                                                                    
Challenge."  He stressed  that there  was  only one  funding                                                                    
source: petroleum, which was the  main source of revenue for                                                                    
the state. He  stated that state budget was  very much based                                                                    
on the oil  price volatility. He stressed  that there should                                                                    
be more long-term stability in government spending.                                                                             
10:29:55 AM                                                                                                                   
Commissioner   Hoffbeck   highlighted  slide   5,   "Message                                                                    
     Take action now, not later:                                                                                                
          -Government must be cut further                                                                                       
          -Protect essential services                                                                                           
     Use of Permanent Fund earnings is acceptable if:                                                                           
          -Protect the Permanent Fund Corpus                                                                                    
          -Preserve a Dividend Program                                                                                          
     New Revenues are acceptable if:                                                                                            
          -They are not supporting a "bloated" government                                                                       
          -The burden is shared equitably                                                                                       
Commissioner Hoffbeck shared that the  list on the slide was                                                                    
developed  based on  recommendations  from  citizens of  the                                                                    
Senator   Dunleavy   wondered    if   the   administration's                                                                    
reductions  were aligned  with  the  recommendations of  the                                                                    
people of the state.  Commissioner Hoffbeck replied that the                                                                    
reductions were directly aligned  with the desire to protect                                                                    
the  essential  services.  He   furthered  that  the  public                                                                    
expected more than a $100 million reduction.                                                                                    
10:34:10 AM                                                                                                                   
Co-Chair MacKinnon  noted that the governor's  budget was an                                                                    
increase from the previous year.  She asked how the governor                                                                    
expected  the legislature  to justify  an increased  budget.                                                                    
She  shared   that  her  district  wanted   a  "right  sized                                                                    
government."  Commissioner   Hoffbeck  responded   that  the                                                                    
administration  wanted  to  protect   as  many  services  as                                                                    
possible, which  resulted in using  as many  revenue sources                                                                    
as possible.  He stressed that  the goal was only  to reduce                                                                    
GF expenditures.                                                                                                                
Co-Chair  MacKinnon shared  that  she had  recently read  an                                                                    
article that  highlighted the use  of nonrecurring  money in                                                                    
the  short-term  budget,  which would  result  in  long-term                                                                    
spending   issues.   She    queried   the   administration's                                                                    
perspective on the difference  between the words "equitable"                                                                    
and "fair." She  felt that her district  wanted an equitable                                                                    
solution,   rather  than   a  fair   solution.  Commissioner                                                                    
Hoffbeck  replied  that  there  was a  benefit  to  cyclical                                                                    
spending  in difficult  economic times.  He felt  that there                                                                    
was  an   advantage  to  one-time   spending.  He   had  not                                                                    
considered the  nuance of the  difference between  the words                                                                    
"equitable" and "fair." He stated  that industry had desired                                                                    
an "equitable" solution.                                                                                                        
10:40:47 AM                                                                                                                   
Senator Dunleavy  shared a story about  some districts using                                                                    
or not using  the federal "bailout" money,  but then desired                                                                    
more money related to inflation.                                                                                                
Vice-Chair Micciche  looked at  slide 3,  and felt  that the                                                                    
real revenue  picture would look different  in the forecast.                                                                    
Commissioner Hoffbeck shared that  the numbers were based on                                                                    
the Department of Revenue (DOR) Revenue Forecast.                                                                               
Vice-Chair Micciche  felt that there  should not be  a focus                                                                    
on filling  the budget gap,  because that would  probably be                                                                    
filled by  the energy revenue.  He stressed that  there were                                                                    
not  enough  Alaskans or  alternate  resources  to fill  the                                                                    
budget gap. He  shared that his district  showed support for                                                                    
the use  of the  earnings reserves, but  demanded additional                                                                    
efficiencies.  He pointed  out that  Alaskans should  not be                                                                    
intimidated into believing  that there should be  an "all or                                                                    
nothing  solution."  Commissioner Hoffbeck  understood  that                                                                    
the  chart  was the  "worst  case  scenario." He  wanted  to                                                                    
attempt to find an overall solution.                                                                                            
10:45:48 AM                                                                                                                   
Vice-Chair  Micciche wondered  if  the administration  would                                                                    
consider a  change in the  plan, with the possibility  of an                                                                    
increase in  oil price.  Commissioner Hoffbeck  replied that                                                                    
there could be a modification in the plan.                                                                                      
Co-Chair Kelly  commented that the committee  had dealt with                                                                    
many revenue  issues. He remarked  that using  federal funds                                                                    
was a  common solution, but he  did not want to  use federal                                                                    
funds.  He stressed  that he  wanted to  reduce the  size of                                                                    
Commissioner   Hoffbeck   addressed   slide  6,   "The   New                                                                    
Sustainable Alaska Plan":                                                                                                       
     •Alaska Permanent Fund Protection Act                                                                                      
     •FY17 Budget and Future Spending Reductions                                                                                
     •Revenue Increases                                                                                                         
Commissioner Hoffbeck  discussed slide 7,  "Alaska Permanent                                                                    
Fund Protection Act":                                                                                                           
     A fiscal framework for using our wealth to:                                                                                
         Help resolve this year's fiscal challenge                                                                              
          Sustainably fund government operations into the                                                                       
          Provide the maximum benefit to the broader                                                                            
     Main components of the framework:                                                                                          
          Royalties and production taxes into the Permanent                                                                     
          Endowment draw                                                                                                        
          Royalty dividend                                                                                                      
          Periodic review                                                                                                       
Commissioner Hoffbeck  addressed slide 8,  "Alaska Permanent                                                                    
Fund  Protection Act."  He  shared that  30  percent of  the                                                                    
royalties flowed  through the  corpus. The  earnings reserve                                                                    
must  be built  to four  times the  annual draw.  After that                                                                    
draw,  100  percent  of  the royalties  would  flow  to  the                                                                    
10:52:18 AM                                                                                                                   
AT EASE                                                                                                                         
10:52:52 AM                                                                                                                   
10:53:15 AM                                                                                                                   
Commissioner  Hoffbeck  continued  to discuss  slide  8.  He                                                                    
explained  that the  funds would  flow to  the corpus,  when                                                                    
there was  four times  the draw. He  stated that  there were                                                                    
two  outflows  from the  earnings  reserve:  a $3.3  billion                                                                    
annual   appropriation  to   the   general   fund;  and   an                                                                    
appropriation to the PFD that  would equal 50 percent of the                                                                    
prior   year's  royalty   revenues.  He   stated  that   the                                                                    
combination of  the $3.3 billion  and the other  revenues to                                                                    
the general  fund would provide  the totality of  the amount                                                                    
of  revenue  available  for government  spending  under  the                                                                    
current program.                                                                                                                
Commissioner   Hoffbeck   discussed   slide  9,   "The   New                                                                    
Sustainable Alaska Plan":                                                                                                       
     Alaska Permanent Fund Protection Act (annual draw):                                                                        
     Revenue from existing taxes and fees: $850                                                                                 
     Earnings on Savings: $135                                                                                                  
     TOTAL: $4,285                                                                                                              
          Spending Reductions (estimated amounts)                                                                               
               FY17-FY19 Cuts:($240)                                                                                            
               Reform OandG Tax Credits: ($400)                                                                                 
              FY17 Priority Investments: $40                                                                                    
               TOTAL: ($ 600)                                                                                                   
     New Revenue Components (estimated amounts)                                                                                 
          Mining: $6                                                                                                            
          Fishing: $18                                                                                                          
          Tourism: $15                                                                                                          
          Motor Fuel: $49                                                                                                       
          Alcohol: $40                                                                                                          
          Tobacco: $29                                                                                                          
          Oil and Gas: $100                                                                                                     
          Individual Alaskans (Income Tax): $200                                                                                
          TOTAL: $457                                                                                                           
Senator Bishop  looked at slide  7 and slide 5.  He wondered                                                                    
if  the   periodic  review  was  intended   to  protect  the                                                                    
permanent  fund corpus.  Commissioner Hoffbeck  replied that                                                                    
the  review was  intended to  ensure that  there was  enough                                                                    
reserves to allow for a draw.                                                                                                   
Senator Bishop  wondered if the  permanent fund  board would                                                                    
continue  to  function  in  the  same  manner.  Commissioner                                                                    
Hoffbeck replied that the corpus  would not change the fund.                                                                    
The mechanism  from moving the  corpus to the  reserve would                                                                    
still align with  statute. He explained that  there would be                                                                    
a change to manage the draw, because of the dividend.                                                                           
10:59:04 AM                                                                                                                   
Senator Hoffman asked if the  protection act was intended to                                                                    
protect  the  dividend,  and  the   number  of  the  payout.                                                                    
Commissioner Hoffbeck  replied that the act  was intended to                                                                    
protect  the  dividend,  corpus, and  earnings  reserve.  He                                                                    
stressed  that  the  act  would   allow  for  a  sustainable                                                                    
dividend in perpetuity.                                                                                                         
Senator  Hoffman   wondered  how   the  dividend   would  be                                                                    
protected  under  the  plan. Commissioner  Hoffbeck  replied                                                                    
that the bill  did not offer a  constitutional amendment. He                                                                    
hoped that  the plan  would be  a robust  and stable  way to                                                                    
finance government. He stressed  that there was no intention                                                                    
to take away the PFD.                                                                                                           
Senator  Hoffman   stressed  that   the  dividend   was  not                                                                    
protected. Commissioner Hoffbeck agreed.                                                                                        
Vice-Chair  Micciche  remarked  that   the  ISER  study  was                                                                    
fundamentally flawed,  because approximately $60  billion in                                                                    
revenue was  not included. The  lowest price  assumption was                                                                    
$70 in  FY 17. He  stressed that  the study did  not portray                                                                    
the  current gap.  He remarked  that  people were  concerned                                                                    
about supporting  the plan, when  there was  possibility for                                                                    
turnaround.  He  stated  that  there could  be  a  level  of                                                                    
revenue from the production tax,  and he asserted that there                                                                    
could possibly be  $3 billion from that tax.  He also stated                                                                    
that there  could be  an opportunity  to adjust  the revenue                                                                    
for tax relief, whether income  tax, fuel tax, or sales tax.                                                                    
He also noted  that there could be revenue  from the corpus,                                                                    
which  would increase  the dividend  at a  certain level  of                                                                    
return. He offered  that there could possibly be a  12 to 15                                                                    
percent  level of  return. He  stressed that  a system  that                                                                    
promised a  return to more  normalcy, if revenues  or corpus                                                                    
returns  were  larger  than expected,  people  may  be  more                                                                    
susceptible  to a  new  revenue plan.  He  stressed that  an                                                                    
increase  in  production tax  revenue  would  result in  tax                                                                    
Co-Chair  MacKinnon   wondered  if  the   proposal  affected                                                                    
inflation proofing  statutes. Commissioner  Hoffbeck replied                                                                    
that with no payment for  inflation proofing, the plan would                                                                    
change the statute.  The modeling was done, so  the value of                                                                    
the  corpus of  the  fund  would be  the  FY  16 value  plus                                                                    
inflation. The modeling allowed for  the fund to grow at the                                                                    
rate  of  inflation, but  there  was  no specific  inflation                                                                    
proofing deposit. The $3.3 billion  draw was calculated at a                                                                    
level that allowed the fund to grow with inflation.                                                                             
Co-Chair MacKinnon  wondered if  the language  for inflation                                                                    
proofing was removed from statute in the bill.                                                                                  
11:07:06 AM                                                                                                                   
PAT  PITNEY,  DIRECTOR,  OFFICE OF  MANAGEMENT  AND  BUDGET,                                                                    
OFFICE OF THE GOVERNOR, replied  that the component would be                                                                    
repealed in the legislation.                                                                                                    
Co-Chair Kelly  felt that the assumptions  were failing, and                                                                    
queried some suggestions.                                                                                                       
Commissioner  Hoffbeck   highlighted  slide  10,   "The  New                                                                    
Sustainable Alaska  Plan." He stated  that the  slide showed                                                                    
the per capita  broad based tax burden on the  people of the                                                                    
state. He  shared that  the state  currently had  the lowest                                                                    
personal tax  burden for broad  based taxes. He  stated that                                                                    
the  slide was  a reflection  of the  ISER study.  He shared                                                                    
that the  tax burden  for the  state was  approximately $500                                                                    
per  person,  and  the national  average  was  approximately                                                                    
$2300. He  stated that,  even with  the personal  income tax                                                                    
and  other taxes,  there would  only be  approximately $1000                                                                    
per person tax  burden. He stressed that there  would not be                                                                    
a  situation   where  a  person   was  taxed   beyond  their                                                                    
capabilities. He remarked  that the state may  begin to look                                                                    
like some of the other states.                                                                                                  
Commissioner   Hoffbeck  displayed   slide   11,  "The   New                                                                    
Sustainable Alaska Plan":                                                                                                       
     •Lowest taxes in the nation.                                                                                               
     •Receive a dividend.                                                                                                       
     •Grow our savings.                                                                                                         
     •Continue to provide essential services.                                                                                   
     •Invest in future                                                                                                          
Co-Chair  MacKinnon announced  that the  state owed  the CBR                                                                    
the amount  of the previous year's  withdrawal. Commissioner                                                                    
Hoffbeck  deferred  to  DOL. He  stated  that  the  earnings                                                                    
reserve could not be "sweepable" into the CBR.                                                                                  
11:12:08 AM                                                                                                                   
Co-Chair  MacKinnon  surmised  that  there was  no  plan  to                                                                    
"recharge" the  savings. Commissioner Hoffbeck  replied that                                                                    
there was no additional money for the CBR.                                                                                      
Co-Chair  MacKinnon would  like  to know  about the  pension                                                                    
payments.  She stressed  that the  state owed  a significant                                                                    
amount of money  for the pension liability.  She queried the                                                                    
administration's   efforts  in   paying  down   the  pension                                                                    
obligation.  Commissioner Hoffbeck  replied  that the  state                                                                    
could  still  borrow at  a  low  rate;  and the  market  was                                                                    
beginning to  correct, therefore the  risk may be  lower. He                                                                    
stated that  there was  also an  examination of  whether the                                                                    
pension obligation  would take  more of  the fixed  draw. He                                                                    
stressed that  there would  be no  additional debt  with the                                                                    
use  of   pension  obligation  bonds.   He  felt   that  the                                                                    
obligation  would be  replaced with  another obligation.  He                                                                    
proposed that the obligation for  the debt would stay in the                                                                    
general fund.                                                                                                                   
Co-Chair Kelly surmised that the  plan comingled the GF with                                                                    
the earnings reserve. Commissioner Hoffbeck agreed.                                                                             
Co-Chair Kelly stressed that approval  of the plan should be                                                                    
done with caution.                                                                                                              
Senator Dunleavy  stressed that someone  had to pay  for the                                                                    
state government  and state services.  He remarked  that the                                                                    
plan  was meant  to pay  for state,  not the  pension group.                                                                    
Commissioner  Hoffbeck agreed,  and  stated  that the  bonds                                                                    
would pay for the state.                                                                                                        
Senator Dunleavy wondered  if there was a  model that showed                                                                    
an increase of the value of  the dollar, and how it impacted                                                                    
the  state of  Alaska.  Commissioner  Hoffbeck replied  that                                                                    
inflation put  pressure on anyone with  outstanding debt. He                                                                    
preferred a deeper discussion on that issue.                                                                                    
11:20:07 AM                                                                                                                   
Senator Bishop noted  the recent $3 billion  deposit for the                                                                    
pension obligation. He stressed  that the current obligation                                                                    
was $225  million, and the fund  was at 80 percent.  He felt                                                                    
that  many  states  in  the  country  would  be  envious  of                                                                    
Alaska's pension obligation percentage.                                                                                         
Commissioner Hoffbeck  shared that the modeling  at the $3.3                                                                    
billion  projected that  the earnings  reserve  would go  to                                                                    
zero 30  percent of  the time.  He stressed  that a  move to                                                                    
zero at any time in its life was considered a failure.                                                                          
Co-Chair Kelly asked for a restatement.                                                                                         
Commissioner Hoffbeck  stated that the modeling  showed that                                                                    
there would be an extended period  of low oil prices and low                                                                    
draw  on the  earnings reserve  30 percent  of the  time. He                                                                    
stressed  that  the  periodic review  would  allow  for  the                                                                    
opportunity  to  correct  a possible  systemic  problem.  He                                                                    
stressed  that  the draw  could  always  be reduced,  but  a                                                                    
statutory  change was  required  for an  increased draw.  He                                                                    
shared that the  move to zero would be in  the out years. He                                                                    
felt that the plan was  fairly robust, in order to eliminate                                                                    
the possibility of failure.                                                                                                     
Co-Chair  Kelly asked  if  there had  been  analyses of  the                                                                    
sustaining  the  corpus   at  current  levels.  Commissioner                                                                    
Hoffbeck replied in the affirmative.                                                                                            
Vice-Chair Micciche  queried the reasoning behind  an income                                                                    
tax versus sales tax. He looked  at slide 10, and noted that                                                                    
New Hampshire and Delaware did  not have a significant sales                                                                    
tax. He felt that there  were polls conducted that preferred                                                                    
sales tax. Commissioner Hoffbeck agreed to that discussion.                                                                     
Senator  Dunleavy shared  that there  would be  a lunch  and                                                                    
learn that was related to health care costs.                                                                                    
SB  138  was  HEARD  and   HELD  in  committee  for  further                                                                    
SB  139  was  HEARD  and   HELD  in  committee  for  further                                                                    
SB  140  was  HEARD  and   HELD  in  committee  for  further                                                                    

Document Name Date/Time Subjects
SB 139 020216 OMB FY2017 10-year plan.pdf SFIN 2/2/2016 9:00:00 AM
SB 139
SB 139 020216 Senate Finance - NSAP DOR-OMB.pdf SFIN 2/2/2016 9:00:00 AM
SB 139