Legislature(2015 - 2016)SENATE FINANCE 532

03/21/2016 09:00 AM Senate FINANCE

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SENATE BILL NO. 128                                                                                                           
     "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."                                                                          
9:08:44 AM                                                                                                                    
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
introduced  himself  and  his support  staff.  He  expressed                                                                    
appreciation for the opportunity to  present the bill to the                                                                    
9:09:57 AM                                                                                                                    
Commissioner Hoffbeck began the presentation, "Alaska                                                                           
Permanent Fund Protection Act," (copy on file). He                                                                              
presented Slide 2, "Overview":                                                                                                  
        · Defining the Problem                                                                                                  
        · Fiscal Policy for Oil Economies                                                                                       
        · Analysis of Options APFPA Summary                                                                                     
             o Defining "Sustainable"                                                                                           
             o How to Handle the Draw                                                                                           
             o How to Handle the Volatility                                                                                     
             o How to Handle the Dividend                                                                                       
        · APFPA Sectional Analysis                                                                                              
Commissioner Hoffbeck believed that the bill attempted to                                                                       
solve the subtleties of the state's fiscal problems.                                                                            
9:10:36 AM                                                                                                                    
Commissioner  Hoffbeck  presented  Slide  4,  "Defining  the                                                                    
     · Short-Term:                                                                                                              
          o Drop in oil prices has resulted in large budget                                                                     
     · Medium-Term:                                                                                                             
          o State savings will be spent in about 4 years                                                                        
          o Uncorrected, state budget hole will damage                                                                          
             Alaska's economy                                                                                                   
          o Dividend payments are unsustainable under the                                                                       
             status quo                                                                                                         
     · Long-Term:                                                                                                               
          o State's    undiversified   budget    is   highly                                                                    
             dependent on petroleum revenues                                                                                    
          o There has been a declining trend in North Slope                                                                     
             petroleum production                                                                                               
          o Cyclicality in petroleum prices creates an                                                                          
             unstable state budget and economy                                                                                  
9:11:04 AM                                                                                                                    
Commissioner   Hoffbeck  discussed   Slide  5,   "Short-Term                                                                    
Problem,"  which depicted  a  bar  graph entitled  "Alaska's                                                                    
Unrestricted  General Fund  Revenue." He  remarked that  the                                                                    
slide depicted  the petroleum and non-petroleum  revenues of                                                                    
the unrestricted general fund (UGF).                                                                                            
9:12:04 AM                                                                                                                    
Commissioner Hoffbeck  remarked that  the UGF  revenues were                                                                    
primarily  driven  by  petroleum revenue,  which  made  them                                                                    
volatile.  He  pointed out  the  variance  between 2012  and                                                                    
2016. In 2012,  the state had approximately  $9.5 billion in                                                                    
UGF to  use for  funding government services;  conversely in                                                                    
2016, the projected revenue was  $1.3 billion: an $8 billion                                                                    
decline  in a  4-year  period  of time.  He  noted that  the                                                                    
decline  had  created  a  budget  shortfall,  regardless  of                                                                    
mitigating  factors  such as  savings  and  budget cuts.  He                                                                    
lamented  that   the  state  faced  a   substantial  revenue                                                                    
shortfall of approximately $4 billion.                                                                                          
9:13:46 AM                                                                                                                    
Commissioner  Hoffbeck  turned   to  Slide  6,  "Medium-Term                                                                    
Problem,"  which  plotted  the   state  budget,  in  nominal                                                                    
billions;   by   existing    revenue;   short-term   savings                                                                    
(CBR&SBR);  and withdrawals  from permanent  funds earnings.                                                                    
He said that  although during times of  smaller deficits the                                                                    
state  had been  able to  bridge the  shortfall by  spending                                                                    
savings,  state  savings would  not  last  to cover  the  $4                                                                    
billion  deficit. He  relayed that  if  no adjustments  were                                                                    
made under the current scenario,  the state would spend down                                                                    
the CBR by  2018; the earnings reserve would  be depleted by                                                                    
2021. He discussed  the benefits of not  spending down state                                                                    
savings during the current time  of fiscal crisis; the first                                                                    
benefit being  the fiscal  certainty that  savings provided,                                                                    
and secondly, that the savings  could be a primary driver in                                                                    
the  state's  long-term  sustainable income.  He  summarized                                                                    
that the goal  was to balance the budget and  create a long-                                                                    
term sustainable plan, while preserving savings.                                                                                
9:15:19 AM                                                                                                                    
Commissioner   Hoffbeck  moved   to   Slide  7,   "Long-Term                                                                    
Problem,"  which  showed  a   line  graph  illustrating  the                                                                    
volatility of  a government funded primarily  by a commodity                                                                    
based  asset.   He  pointed  out   to  the   committee  that                                                                    
government  spending had  tracked with  the amount  of money                                                                    
available for expenditure.  He relayed that the  bill was an                                                                    
attempt  to  take  the  volatility   out  of  the  budgeting                                                                    
process,  which  he  believed   would  benefit  the  state's                                                                    
economy in the long-term.                                                                                                       
9:16:26 AM                                                                                                                    
Senator Dunleavy believed that  the discussion was about the                                                                    
state's operating budget having  grown with revenue, but not                                                                    
dropped  correspondingly,  he  queried  whether  the  budget                                                                    
could be reduced from current  levels in order to align with                                                                    
current revenues.                                                                                                               
Commissioner  Hoffbeck thought  there were  several dynamics                                                                    
at work; the  budget had been relatively flat  for 20 years,                                                                    
which   had   put   stress  on   government   services   and                                                                    
infrastructure,  and had  deferred other  expenses. He  said                                                                    
that the  administration had worked  to trim the  budget, as                                                                    
well  as  the  House   and  Senate  Finance  Committees.  He                                                                    
lamented that  inflation, raising medical costs,  and higher                                                                    
employee costs had  kept the state from  reducing the budget                                                                    
to lower levels.                                                                                                                
9:18:54 AM                                                                                                                    
Senator  Dunleavy  asked  whether  the  possibility  of  new                                                                    
revenues would keep legislators  and the administration from                                                                    
significantly cutting the current budget.                                                                                       
Commissioner Hoffbeck  did not believe that  the possibility                                                                    
of  new revenues  would psychologically  trick lawmakers  or                                                                    
the executive  branch from  seeking meaningful  budget cuts.                                                                    
He felt  that it would be  hard work to get  to a long-term,                                                                    
balanced, sustainable budget even  using the permanent funds                                                                    
9:20:03 AM                                                                                                                    
Senator  Dunleavy  shared  that  Alaska  enjoyed  a  smaller                                                                    
population and an economic boom in the mid-1980s.                                                                               
9:20:22 AM                                                                                                                    
Senator  Bishop  stressed  the  importance  of  reigning  in                                                                    
deferred  maintenance   in  order  to  cut   capital  budget                                                                    
spending. He  expressed distain for deferred  maintenance as                                                                    
a liability.                                                                                                                    
9:21:37 AM                                                                                                                    
Vice-Chair  Micciche  referred  to  a  research  paper  from                                                                    
Institute of Social and  Economic Research (ISER), published                                                                    
in 1992,  which was written  at the  time of a  $2.5 million                                                                    
operating budget. He noted that  the legislature had cut the                                                                    
operating budget  by 35  percent over the  past 3  years. He                                                                    
believed that the price of  oil would recover in the future.                                                                    
He thought that  it was important to  remain fiscally frugal                                                                    
when crafting future budgets.                                                                                                   
Commissioner  Hoffbeck responded  that the  state needed  to                                                                    
adopt a rules based system for use of earnings.                                                                                 
9:23:39 AM                                                                                                                    
Vice-Chair Micciche referred  to Page 2 of  the ISER report,                                                                    
which listed  five checklist items for  fiscal strategy: cut                                                                    
spending,  use permanent  fund earnings,  encourage economic                                                                    
development, levy taxes, and conserve and invest windfalls.                                                                     
9:24:12 AM                                                                                                                    
Senator Olson referred  to Slide 7. He  wondered whether the                                                                    
unfunded  liability from  the early  2000s was  reflected in                                                                    
the current numbers.                                                                                                            
Commissioner  Hoffbeck responded  that  any  money that  had                                                                    
been spent to cover deficits would appear as spending.                                                                          
Senator Olson  understood that  the predicted  liability was                                                                    
not reflected in the presentation.                                                                                              
Commissioner  Hoffbeck  replied  that the  spending  on  the                                                                    
liability was reflected in the  presentation, and that long-                                                                    
term liability  payments had been modeled  in the governor's                                                                    
9:25:03 AM                                                                                                                    
Co-Chair MacKinnon noted that  the state continued to retain                                                                    
long-term  pension   liability  of  upwards  of   a  billion                                                                    
dollars,   which  contributed   to   the  state's   economic                                                                    
volatility. She  said that the governor's  original proposal                                                                    
included the use  of pension obligation bonds  to manage the                                                                    
liability, and  the Senate  had been  working to  lower that                                                                    
reoccurring operating cost.                                                                                                     
Co-Chair MacKinnon welcomed Co-Chair Kelly to the table.                                                                        
9:25:52 AM                                                                                                                    
Commissioner Hoffbeck presented Slide  8, "Why the Permanent                                                                    
     · Other pieces of the plan provide millions, the Fund                                                                      
        can sustainably contribute billions                                                                                     
     · Placing petroleum revenues in the Permanent Fund is                                                                      
        the cleanest way to address oil price volatility                                                                        
     · There is no solution without Permanent Fund earnings                                                                     
        and adjusting the dividend                                                                                              
Commissioner  Hoffbeck opined  the  challenge of  impressing                                                                    
upon  the  public  the  magnitude   of  a  billion  physical                                                                    
dollars, and how difficult it  was to achieve savings in the                                                                    
9:26:58 AM                                                                                                                    
Commissioner Hoffbeck discussed Slide  9, "Why the Permanent                                                                    
     "Of all the fiscal options for closing the deficit,                                                                        
     only saving less of Permanent Fund earnings . . .                                                                          
     would have no short-run economic impacts."                                                                                 
     Economic Impacts of Alaska Fiscal Options: Draft                                                                           
    Gunnar Knapp, Mouhcine Guettabi, and Matthew Berman                                                                         
     Institute of Social and Economic Research (March                                                                           
Commissioner Hoffbeck added that  because of the sustainable                                                                    
draw that  anticipated high  and low  years of  revenue; the                                                                    
Permanent  Fund Protection  Act was  the only  solution that                                                                    
could  deal  with  current   low  price  volatility  without                                                                    
breaking the rules based structure set up for spending.                                                                         
9:27:58 AM                                                                                                                    
Commissioner Hoffbeck turned to Slide 10:                                                                                       
     DELAY WILL . . .                                                                                                           
        · Reduce the sustainable draw                                                                                           
       · Risks a downgrade of Alaska's credit rating                                                                            
        · Damage the economy                                                                                                    
Commissioner Hoffbeck  relayed that  the uncertainty  of how                                                                    
the state  would resolve the  fiscal crisis was  a component                                                                    
considered by the private sector in investment strategies.                                                                      
9:29:15 AM                                                                                                                    
Senator  Dunleavy  whether  the  state's  economy  would  be                                                                    
damages by the current fiscal climate.                                                                                          
Commissioner Hoffbeck did  not think that there  was any way                                                                    
to  avoid  some  damage  to  the  economy,  considering  the                                                                    
current level of  oil prices and the impact of  that on both                                                                    
the private and public sectors.                                                                                                 
9:29:39 AM                                                                                                                    
Commissioner  Hoffbeck showed  Slide 11,  "Lower Sustainable                                                                    
Commissioner Hoffbeck  hypothesized that if $1  billion were                                                                    
left unresolved in FY16, the  sustainable draw going forward                                                                    
would  be   $100  million  less.   The  $100   million  went                                                                    
throughout  the life  of the  state's  finance, which  would                                                                    
mean more cuts, or more revenues, in order to balance.                                                                          
9:30:21 AM                                                                                                                    
Co-Chair  MacKinnon requested  an analysis  on how  the $100                                                                    
million  figure  had  been  determined,  the  interest  rate                                                                    
assumed on the  $1 billion and where it was  located, was it                                                                    
staying  in   the  constitutional  budget  reserve   or  the                                                                    
earnings reserve account. She felt  that the figure was high                                                                    
for an opportunity loss cost.                                                                                                   
Commissioner Hoffbeck agreed to provide the information.                                                                        
9:30:43 AM                                                                                                                    
Commissioner  Hoffbeck  moved  to   Slide  12,  "Cost  of  a                                                                    
     "The  state sold  $135  million  of general  obligation                                                                    
     bonds yesterday [03/09/16], its  first sale in almost a                                                                    
     year. Tax-exempt securities maturing  in August of 2035                                                                    
     sold  at  a  top  yield  of  2.9  percent,  about  0.35                                                                    
     percentage point  higher than the  benchmark securities                                                                    
     due  in 20  years. That  gap is  four times  wider than                                                                    
     what the state paid when it  last sold debt in March of                                                                    
     -Bloomberg News                                                                                                            
Commissioner  Hoffbeck opined  that  the  state had  already                                                                    
seen the costs of a downgrade.                                                                                                  
9:31:20 AM                                                                                                                    
Commissioner Hoffbeck  showed Slide 13, "Damage  to Alaska's                                                                    
     ·  Lower  sustainable   draw   from  financial   assets                                                                    
        o More taxes                                                                                                            
        o Less government spending (services and jobs)                                                                          
     ·  Degraded  confidence   and   less   private   sector                                                                    
     · Direct impacts on Alaskans                                                                                               
        o Job Market                                                                                                            
        o Home Values                                                                                                           
Commissioner Hoffbeck  stressed that any decisions  that the                                                                    
legislature made would have long-term  effects on the people                                                                    
of Alaska.                                                                                                                      
9:32:09 AM                                                                                                                    
Co-Chair  MacKinnon   queried  whether  the   committee  was                                                                    
interested  having the  Department  of  Labor and  Workforce                                                                    
Development (DOL)  speak to the  governor's veto of  oil tax                                                                    
credits  in   the  FY   16  budget   and  how   it  affected                                                                    
unemployment in  the state. She  expressed concern  with the                                                                    
information  on  the  slide.   She  revealed  that  she  had                                                                    
suffered from  real estate economic instability  in the late                                                                    
Members nodded in the affirmative.                                                                                              
9:32:58 AM                                                                                                                    
Senator  Bishop  requested  that Neal  Fried,  research  and                                                                    
analysis staff for DOL, represent  the department before the                                                                    
9:33:07 AM                                                                                                                    
Vice-Chair Micciche lamented the  huge home value impacts on                                                                    
municipalities  that resulted  from  economic downturns.  He                                                                    
felt that municipalities were  bearing increasing weight due                                                                    
to the fiscal climate of the state.                                                                                             
Co-Chair  MacKinnon  wondered  whether   DOL  had  any  data                                                                    
detailing   how   Alaskans   spent  their   permanent   fund                                                                    
9:34:20 AM                                                                                                                    
Co-Chair  MacKinnon  wondered   whether  the  committee  was                                                                    
interested in  hearing from the Alaska  Realtors Association                                                                    
on the home value issue.                                                                                                        
Co-Chair Kelly  suggested the Chair  of the Alaska  Board of                                                                    
Co-Chair  MacKinnon  believed  that a  conversation  with  a                                                                    
state assessor could shed some light on the issue.                                                                              
9:35:34 AM                                                                                                                    
Senator Dunleavy thought that  a similar conversation should                                                                    
occur concerning the depressed  energy costs for the average                                                                    
Co-Chair MacKinnon  thought that an economist  could provide                                                                    
insight   on  disposable   income  increasing   for  average                                                                    
Alaskans as  energy costs went  down at a greater  degree in                                                                    
rural Alaska  than urban areas.  She said that  rural Alaska                                                                    
bought in bulk tanks and could be sustaining higher costs.                                                                      
Senator Dunleavy referred to an  older ISER study that could                                                                    
be referenced on the matter.                                                                                                    
9:36:33 AM                                                                                                                    
Senator  Bishop  thought  the  University  of  Alaska  could                                                                    
provide further economic research at no cost to the state.                                                                      
Co-Chair MacKinnon clarified that  she was not proposing any                                                                    
studies,  and  was  interested   only  in  reaching  out  to                                                                    
Alaskans who had information to  share that might shed light                                                                    
on Alaska's economic future.                                                                                                    
9:37:04 AM                                                                                                                    
CRAIG  RICHARDS,   ATTORNEY  GENERAL,  DEPARTMENT   OF  LAW,                                                                    
referred  to   Slide  15,   "Government  Spending   and  the                                                                    
        · The Commodities Roller Coaster -                                                                                      
          the International Monetary Fund studied                                                                               
          85 economies over 3 decades                                                                                           
        · Government spending in commodity-based economies                                                                      
          tends to move up and down with commodity revenue                                                                      
        · Pro-cyclical government spending stunts economic                                                                      
        · Stabilizing fiscal policy has the inverse effect,                                                                     
          increasing GDP growth by 0.3% annually                                                                                
Mr.  Richards explained  that the  state was  not unique  to                                                                    
other   states;   Alaska   suffers  the   problems   of   an                                                                    
undiversified, commodity based economy.                                                                                         
9:39:08 AM                                                                                                                    
Mr. Richards turned to Slide 16, "Break-Even Oil Price":                                                                        
        · A widely used rule-of-thumb measure of the oil                                                                        
          price required to balance the government budget                                                                       
          in any given year                                                                                                     
             o Options for petroleum states to bring down                                                                       
               break-even    oil   prices    are   generally                                                                    
               Diversify revenues through other types of                                                                        
             o Use sovereign wealth assets                                                                                      
        · Alaska: $109                                                                                                          
Mr. Richards  noted that  the break-even  oil price  for the                                                                    
nine other  petroleum states were  listed on the  right hand                                                                    
side of  the slide; Alaska  rested between Russia  and Saudi                                                                    
Arabia in terms of the need  to have about $110 p/bbl oil in                                                                    
order to balance the budget.                                                                                                    
9:40:19 AM                                                                                                                    
Mr. Richards discussed Slide 17,  "Oil: Break-Even Price and                                                                    
Share of Revenue,"  which graphed the oil  price required to                                                                    
balance the budget  on one axis, and  oil's percentage share                                                                    
of total government  revenue on the other. He  said that the                                                                    
blue and  yellow bubble  son the  slide depicted  classes of                                                                    
oil  economies  that   had  successfully  diversified  their                                                                    
governmental  revenues   away  from  high   commodity  price                                                                    
independence. He noted  that the numbers were  from 2013 and                                                                    
represented a  high commodity  price environment.  He stated                                                                    
that currently  the state had  a high break-even  oil price,                                                                    
and  the total  share  of governmental  revenue relative  to                                                                    
other sources  of revenue was  highly dependent on  oil. The                                                                    
chart  put Alaska  up  with Saudi  Arabia  and other  Middle                                                                    
Eastern   oil   economies    that   had   not   successfully                                                                    
diversified. He noted that the  blue bubble, which contained                                                                    
Wyoming, Alberta, and Norway,  had successfully been able to                                                                    
become independent  of commodity  revenue by  adopting broad                                                                    
based taxation  so that they  were not totally  dependent on                                                                    
oil. He  related that those  economies had the  advantage of                                                                    
taxation options,  which Alaska did  not. He noted  that the                                                                    
yellow circle  had economies more comparable  to Alaska, and                                                                    
those economies used sovereign wealth  fund assets to create                                                                    
a fiscal plan that allowed  for the diversification of total                                                                    
governmental revenues  by using savings  in a way  that made                                                                    
them less dependent year-to-year on financial assets.                                                                           
9:42:40 AM                                                                                                                    
Vice-Chair Micciche queried why  the economies in the yellow                                                                    
bubble did  not move to  the blue bubble once  revenues were                                                                    
realized by the state.                                                                                                          
Mr. Richards replied  that the red arrow on  the chart could                                                                    
indicate a state  moving to the bubble on the  left. He said                                                                    
that he did not know why  the red arrow did not slope toward                                                                    
the lower oil price required  to balance the budget. He felt                                                                    
that the slide was illustrative  of the point that the state                                                                    
could  diversify  its  income   stream  by  using  financial                                                                    
savings in  a way that  took some  of the volatility  out of                                                                    
the year-to-year dependence on oil prices.                                                                                      
9:43:54 AM                                                                                                                    
Co-Chair  MacKinnon  referred to  Slide  16.  She felt  that                                                                    
presenters  before  the  committee always  chose  best  case                                                                    
scenarios to represent their agenda.                                                                                            
Mr.  Richards   believed  that  the  information   that  the                                                                    
administration was putting forward  was the best information                                                                    
to offer in order to get to a solution.                                                                                         
Co-Chair MacKinnon referred to  Slide 17. She contended that                                                                    
the taxation  in Norway  was between 50  to 75  percent, and                                                                    
their  sovereign  wealth  fund  did not  contribute  to  the                                                                    
people of  Norway. She noted  that Alberta and  Wyoming also                                                                    
taxed their  residents. She wondered  whether the  states in                                                                    
the yellow  bubble taxed their people,  or employed complete                                                                    
sovereign wealth.                                                                                                               
Mr.  Richards responded  that he  was not  in possession  of                                                                    
exact  numbers, but  thought that  those represented  in the                                                                    
yellow  bubble relied  primarily on  petroleum revenues  and                                                                    
sovereign  wealth funds,  and blue  bubble indicated  states                                                                    
that  had broad  based  taxation that  differed from  solely                                                                    
financial savings. He noted that  all three of the economies                                                                    
in the blue  bubble had permanent funds.  He understood that                                                                    
Norway did  not spend its petroleum  revenues, but deposited                                                                    
them in an account approximated at  1 trillion, and used a 4                                                                    
percent of market value approach.                                                                                               
Co-Chair   MacKinnon   recalled   a  conversation   with   a                                                                    
consultant that  had asserted  that Alaska  was in  a better                                                                    
wealth position than Norway.                                                                                                    
Mr.  Richards clarified  that Alaska  was  displayed in  the                                                                    
graphic with a  break-even oil price of $110  p/bbl, and was                                                                    
not in an enviable position  from the income statement side.                                                                    
He  said  that  Alaska  had   a  high  level  of  oil  price                                                                    
dependence and needed high oil prices  in order to be in the                                                                    
black.  He  relayed  that  the state  was  in  the  opposite                                                                    
situation  in term  of total  financial savings.  Alaska had                                                                    
$55 or  $60 billion in  unencumbered financial assets  and a                                                                    
$5  billion dollar  budget; meaning  that the  state had  12                                                                    
times financial savings than annual  spending, which put the                                                                    
state at the  highest level of sovereign  wealth savings, to                                                                    
total  governmental expenditure  in the  world. He  stressed                                                                    
that used  intelligently, the state  had the  opportunity to                                                                    
take an  immense financial base and  use it to bring  down a                                                                    
bad income statement.                                                                                                           
9:47:52 AM                                                                                                                    
Co-Chair Kelly  agreed with Mr. Richards  regarding the goal                                                                    
of getting off the  "commodities rollercoaster". He spoke to                                                                    
Keynesian  economics and  how they  applied  to the  state's                                                                    
budget.  He shared  that  following  those various  theories                                                                    
made him  uncomfortable. He felt  that taxation was  not the                                                                    
only  way  to  diversify  an  economy,  but  was  a  way  to                                                                    
diversify government revenue. He  believed that changes that                                                                    
were  more   favorable  to  the  private   sector,  and  not                                                                    
Keynesian  economics,  would be  better  for  the state.  He                                                                    
contended  that once  the  administration  decided that  the                                                                    
goal  was to  take care  of government,  government spending                                                                    
would increase.  He felt that the  administration's goal was                                                                    
to continue to feed government spending.                                                                                        
9:50:59 AM                                                                                                                    
Mr.   Richards  observed   that   by  discussing   Keynesian                                                                    
economics he  had not intended  to broaden  economic policy.                                                                    
He  suggested  that  in  times of  down  economies,  if  the                                                                    
government  had extra  money to  spend  on capital  budgets,                                                                    
perhaps  it  would be  better  to  spend  more in  order  to                                                                    
flatten  out  the  economy.  He  agreed  that  there  was  a                                                                    
distinction   between  growing   the  economy   and  growing                                                                    
governmental  revenue;  however,  the  wat to  get  off  the                                                                    
commodity price  roller coaster  was to  go for  broad based                                                                    
taxation, to  use sovereign wealth assets,  or a combination                                                                    
of  the  two.  He  asserted that  Alaska's  ability  to  use                                                                    
financial  savings  was  greater  than the  ability  to  tax                                                                    
9:52:01 AM                                                                                                                    
Co-Chair  Kelly  encouraged  Mr. Richards  and  Commissioner                                                                    
Hoffbeck to separate what  the administration was attempting                                                                    
to do using sovereign wealth,  from the discussion on taxing                                                                    
Mr. Richards replied that he appreciated the advice.                                                                            
9:52:19 AM                                                                                                                    
Senator Dunleavy  spoke to Slide  17. He noted  that without                                                                    
government spending there would be  no economy in Alaska. He                                                                    
felt  that  a  government   that  provided  basic  services,                                                                    
separate from the economy, should be explored.                                                                                  
9:54:04 AM                                                                                                                    
Co-Chair  MacKinnon  considered  a  discussion  on  economic                                                                    
structures in differing political regimes.                                                                                      
Senator Dunleavy pondered government  support of the economy                                                                    
and social dislocation.                                                                                                         
9:54:45 AM                                                                                                                    
Mr. Richards observed that moving  from the yellow bubble to                                                                    
the  blue bubble  would require  getting  off the  commodity                                                                    
rollercoaster by diversifying the  economy. He asserted that                                                                    
in order to  grow an economy that was  not petroleum revenue                                                                    
or governmental spending based,  the state needed to provide                                                                    
stability for economic growth in other sectors.                                                                                 
9:55:36 AM                                                                                                                    
Senator  Dunleavy  noted  that  the  bill  could  solve  the                                                                    
state's  revenue issue,  but would  not solve  the issue  of                                                                    
economic diversification.                                                                                                       
9:56:22 AM                                                                                                                    
Mr.  Richards referred  to the  International Monetary  Fund                                                                    
paper on Slide  15. He explained that until  the state could                                                                    
control the fluctuation in the  economy, caused by oil price                                                                    
dependence, it was hard to  diversify into other sectors. He                                                                    
stated  that the  state could  not  diversify without  first                                                                    
stabilizing the economy.                                                                                                        
9:57:00 AM                                                                                                                    
Vice-Chair Micciche  thought that the current  fiscal crisis                                                                    
left  Alaska  exposed; oil  constituted  90  percent of  the                                                                    
state's  revenue.  He  said  that the  states  in  the  blue                                                                    
bubbles had additional revenue streams  after oil monies. He                                                                    
felt  that  of the  governments  in  the country  that  were                                                                    
responsibly operated, Alaska  was the international outlier.                                                                    
He said  that he, "did not  want to be Norway"  but admitted                                                                    
that  something needed  to be  done to  address the  current                                                                    
fiscal situation.                                                                                                               
9:58:40 AM                                                                                                                    
Senator Bishop  pointed out that  the cost for  Saudi Arabia                                                                    
to increase the  flow of crude oil was $12  to $14 p/bbl. He                                                                    
thought that, due  to commodity prices, Norway  would make a                                                                    
draw for the first time on their sovereign wealth fund.                                                                         
Mr. Richards informed the committee  that an expert would be                                                                    
brought before the  committee to discuss the  nuances of the                                                                    
different countries on the slide.                                                                                               
9:59:46 AM                                                                                                                    
Mr. Richards looked at Slide  19, "Rule-Based Framework." He                                                                    
stated  that there  was a  correlation between  unrestricted                                                                    
general fund  spending and prior year  petroleum collations.                                                                    
He  added that  the state  had  a habit  of making  spending                                                                    
projections  based   on  prior   year  total   revenues.  He                                                                    
furthered that  the permanent fund  operated within  a rules                                                                    
based framework which  allowed for dividends to  be paid out                                                                    
of  the earnings  reserve, inflation  proofing  back to  the                                                                    
corpus, and saving  the remainder. He shared  that the rules                                                                    
based framework  had never been  violated. He  admitted that                                                                    
the state  did not have  incredible discipline when  it came                                                                    
to   saving   money   from  year-to-year   in   unrestricted                                                                    
budgeting,   but   that   the  legislature   had   displayed                                                                    
unrelenting discipline regarding the  fund. He observed that                                                                    
the reason  was not  solely because  the permanent  fund was                                                                    
Constitutionalized; the rules-based frame  work was based in                                                                    
statute  and could  have  been  violated by  a  vote of  the                                                                    
majority, yet  the custom in  Alaska had  been not to  do so                                                                    
for a  variety of reasons.  He said that  the administration                                                                    
hoped  to  duplicate  the  way   in  which  the  rules-based                                                                    
framework worked  in a  manner that  met the  current fiscal                                                                    
reality in a logical way.                                                                                                       
10:02:22 AM                                                                                                                   
Co-Chair MacKinnon  queried whether  the double  dividend of                                                                    
2008 had been inside the rules-based framework.                                                                                 
Mr.  Richards understood  that the  second dividend  of 2008                                                                    
had come out of the general fund.                                                                                               
Co-Chair MacKinnon pointed out  that a substantial amount of                                                                    
money had been sent out to Alaskans.                                                                                            
Mr. Richards  replied yes, and  without altering  the rules-                                                                    
based framework of the permanent fund.                                                                                          
Co-Chair  MacKinnon whether  the legislature  had saved  and                                                                    
paid back all CBR withdrawals since 2007.                                                                                       
Mr. Richards replied in the affirmative.                                                                                        
Co-Chair  MacKinnon  reiterated  that  the  legislature  had                                                                    
repaid all funds that had  been previously borrowed from the                                                                    
Mr. Richards replied, again, in the affirmative.                                                                                
10:03:33 AM                                                                                                                   
Senator  Olson  asked  whether  or  states  with  a  similar                                                                    
sovereign  wealth   fund  gave  out  a   dividend  to  their                                                                    
Mr.  Richards believed  that Wyoming  used its  earnings for                                                                    
their  broad  based  education system,  Alabama  used  their                                                                    
earnings  for   its  road  system,  and   Texas  used  their                                                                    
permanent fund earnings for their road system.                                                                                  
10:04:30 AM                                                                                                                   
Senator Olson asserted  that much of the  public had advised                                                                    
legislators to leave the permanent  fund alone while seeking                                                                    
solutions to the fiscal problems of the state.                                                                                  
Commissioner Hoffbeck  believed that there had  been a shift                                                                    
in  the  public's perception  of  using  the permanent  fund                                                                    
earnings.  He said  that the  administration  had worked  to                                                                    
education the public on what would  be the proper way to use                                                                    
the funds earnings.                                                                                                             
10:05:58 AM                                                                                                                   
Senator  Dunleavy reported  that  Finland was  contemplating                                                                    
giving each  of its citizens  $10,000, in an effort  to spur                                                                    
private sector activity.                                                                                                        
10:06:37 AM                                                                                                                   
Senator Olson said that there had  been talks in the past of                                                                    
giving every Alaskan resident a $25,000 one-time dividend.                                                                      
Mr. Richards  looked at Slide  20, "APFPA," which  offered a                                                                    
breakdown of how the act would work:                                                                                            
        · Volatile petroleum revenues to the Permanent Fund                                                                   
        · $3.3 billion draw to the General Fund                                                                               
        · Dividends                                                                                                           
          50% royalties                                                                                                         
Mr. Richards said  that the bill would  place oil production                                                                    
taxes and royalties  in the permanent fund, draw  out of the                                                                    
permanent  fund  the fixed  amount  of  $3.3 billion  to  be                                                                    
deposited into the general fund  yearly, and it would change                                                                    
the  dividend pay-out  calculation  to equal  50 percent  of                                                                    
Co-Chair  MacKinnon  asked  whether the  dividend  would  be                                                                    
drawn  out  of the  corpus  of  the  fund, or  the  earnings                                                                    
reserve account (ERA).                                                                                                          
Mr. Richards  stated that,  constitutionally, 25  percent of                                                                    
royalties went to the corpus  of the fund, all statutory net                                                                    
income  traveled  from  the corpus  and  into  the  earnings                                                                    
reserve.  The corpus  of the  fund was  not constitutionally                                                                    
available  for expenditure,  but  the  earnings reserve  was                                                                    
available by a  majority vote. He concluded  that, barring a                                                                    
constitutional amendment,  all plans  to use  permanent fund                                                                    
earnings,  or  other  permanent   fund  assets,  had  to  be                                                                    
expenditures  out of  the  ERA -  including  the payment  of                                                                    
10:09:05 AM                                                                                                                   
Co-Chair   MacKinnon   clarified   that   the   25   percent                                                                    
constitutionally  required went  into  the  corpus, and  the                                                                    
remaining  74.5 percent  went  into the  ERA  to be  managed                                                                    
Mr. Richards replied in the affirmative.                                                                                        
Co-Chair MacKinnon  noted that the remaining  .5 percent was                                                                    
placed in the Mental Health Trust fund.                                                                                         
Mr. Richards answered in the affirmative.                                                                                       
Co-Chair  MacKinnon added  that  the deposit  was a  federal                                                                    
Mr.  Richards understood  that putting  the .5  percent into                                                                    
the  Mental  Health   Trust  fund  had  been   a  result  of                                                                    
litigation. He could not recall if  it had been on the state                                                                    
or federal level.                                                                                                               
Co-Chair MacKinnon asked Ms. Mills,  in the gallery, whether                                                                    
the case had been on the federal level.                                                                                         
Ms. Mills replied yes.                                                                                                          
10:10:11 AM                                                                                                                   
Senator Bishop  asked whether  the plan  changed in  any way                                                                    
the investment strategy of the permanent fund board.                                                                            
Mr. Richards answered in the  negative. He added that if the                                                                    
state drew from the ERA on  an annual basis under any of the                                                                    
proposed  plans,   the  board  would  need   to  manage  for                                                                    
additional liquidity.                                                                                                           
10:11:12 AM                                                                                                                   
Senator Bishop  theorized that the  $3.3 billion  draw might                                                                    
not be available in certain  future years. He suggested that                                                                    
the budget could  be short funded in  the future, regardless                                                                    
of which plan is implemented.                                                                                                   
Mr.  Richards  explained  that   the  plan  would  take  the                                                                    
constitutionally required  25 percent  of the  royalties and                                                                    
placed them into the corpus.  Then, approximately 75 percent                                                                    
of the  royalties would be  deposited into the ERA,  as well                                                                    
as all  production taxes.  The other  cash flowing  into the                                                                    
ERA would be considered  statutory net income, which creates                                                                    
an income stream into the  ERA. Three things would come from                                                                    
the ERA: 50 percent of  royalties to pay dividends, the $3.3                                                                    
billion draw  for the  General Fund,  and when  the earnings                                                                    
reserve reached  a balance of  4 times the annual  payout of                                                                    
$3.3 billion any  extra would be placed into  the corpus and                                                                    
would be constitutionally protected.                                                                                            
Mr. Richards  addressed the  assertion that  the plan  ran a                                                                    
substantial risk  of failure. He  said that the  issue would                                                                    
be  whether  the ERA  had  a  sufficient enough  balance  to                                                                    
instill confidence even during  bad market years. He relayed                                                                    
that the  small chance that  the ERA would not  be available                                                                    
for the  $3.3 billion draw  would exist under any  plan; the                                                                    
current  plan had  been  designed to  reduce  the chance  of                                                                    
shortfall to a very high  degree. He thought that the Callen                                                                    
and Associates  estimations were  high, and shared  that the                                                                    
administration had  adjusted for chance by  establishing the                                                                    
target of  amassing 4 times  the balance of the  annual draw                                                                    
into  the ERA,  and  by creating  the  periodic review.  The                                                                    
review entailed  that every  four years  the balance  of the                                                                    
ERA would be assessed in  order to decide whether the system                                                                    
needed  adjustment.  He relayed  that  four  years had  been                                                                    
chosen because  every four years  there would be  four times                                                                    
the amount of payment in the  ERA. He said that the plan was                                                                    
made more robust by the proposal  of $3 billion from the CBR                                                                    
into the  ERA. He pointed out  to the committee that  the $3                                                                    
billion  would not  be required  in  order for  the plan  to                                                                    
work, but offered a higher  level of confidence that the ERA                                                                    
would be large enough to accommodate bad market years.                                                                          
10:16:16 AM                                                                                                                   
Co-Chair  MacKinnon stated  that she  would be  meeting with                                                                    
the  Executive Director  of the  permanent  fund board.  She                                                                    
summarized that  the asset allocation would  remain the same                                                                    
with the board managing the fund.                                                                                               
Mr.  Richards  could  not  speak  to  the  accuracy  of  the                                                                    
summarization.  He said  that he  had requested  that Angela                                                                    
Rodell,   Executive   Director,    Alaska   Permanent   Fund                                                                    
Corporation  brief the  trustees on  the issue.  He was  not                                                                    
aware of  whether or not  there was an expectation  that the                                                                    
asset  allocation  would   change  if  additional  petroleum                                                                    
revues were placed in the fund.                                                                                                 
10:16:58 AM                                                                                                                   
Co-Chair  Kelly understood  that the  25-30 percent  failure                                                                    
rate had  been calculated using  the assumption of  a higher                                                                    
level return from the permanent  fund and an old oil revenue                                                                    
Mr. Richards replied  in the affirmative. He  added that the                                                                    
new spring  2016 forecast put  out by the department  used a                                                                    
new  petroleum projection.  He revealed  that  for the  plan                                                                    
under the bill the  forecasted revenues did not particularly                                                                    
matter.  He related  that the  permanent  fund analysis  may                                                                    
have  down  stated  return assumptions.  He  shared  that  a                                                                    
future  meeting with  the  board would  reveal  more on  the                                                                    
10:17:51 AM                                                                                                                   
Co-Chair Kelly thought that the  failure rate might increase                                                                    
as the to-date numbers changed.                                                                                                 
Mr. Richards replied that if  assumed petroleum revenues and                                                                    
return assumptions were lowered,  the probability of failure                                                                    
would increase.                                                                                                                 
10:18:08 AM                                                                                                                   
Co-Chair  MacKinnon spoke  to the  assumptions  used in  the                                                                    
crafting  of the  plan. She  wondered whether  the actuaries                                                                    
had assumed for lost opportunity  cost due to the changes in                                                                    
the per-year cash draw and  the need for higher liquidity on                                                                    
an annual basis.                                                                                                                
Mr. Richards  relayed that  the administration  had examined                                                                    
the  issue and  had  concluded that  it  was irrelevant.  He                                                                    
shared that  the administration  believed that it  could "go                                                                    
long" with  other financial assets that  were currently held                                                                    
"short".  He  thought  that there  would  be  some  modeling                                                                    
affect,  but  that the  remaining  balance  of the  CBR  was                                                                    
short, and not long, which  suggested that the total amounts                                                                    
would be similar.                                                                                                               
10:18:56 AM                                                                                                                   
Co-Chair MacKinnon  referred to  a previous slide  which had                                                                    
indicated $100  million on $1  billion worth  of opportunity                                                                    
cost lost. She  said that if a $3.3 billion  draw were to be                                                                    
taken annually, there  would be between $0  and $100 million                                                                    
worth of  opportunity cost  lost on  assets sitting  in more                                                                    
fixed reserves.                                                                                                                 
Mr.  Richards responded  that because  of the  way the  cash                                                                    
flow was structured  he could not estimate  the magnitude of                                                                    
opportunity cost lost.                                                                                                          
10:19:44 AM                                                                                                                   
Mr. Richards showed Slide 21, "Defining 'Sustainable'":                                                                         
     · Protect the Corpus                                                                                                       
     · Earnings Reserve Durability                                                                                              
     · Inflation Proofing                                                                                                       
          o Maintain the real value of the Permanent Fund                                                                       
          o Transfers to the Corpus                                                                                             
Mr.  Richards  believed that  it  was  important to  have  a                                                                    
meaningful definition for  "sustainable" when determining at                                                                    
what level to  draw from the fund. He relayed  that from the                                                                    
administration's  point  of  view   in  order  to  equitably                                                                    
preserve the state's financial assets  over time, the amount                                                                    
drawn down  should not reduce  the inflation  adjusted value                                                                    
of  the fund,  and examining  the durability  of the  ERA to                                                                    
assure for sustainability.                                                                                                      
10:20:49 AM                                                                                                                   
Mr. Richards turned to Slide 22, "How to Handle the Draw":                                                                      
     · Status quo framework                                                                                                     
          o Sustainable draw §ELOOLRQ                                                                                    
          o Funds to the general fund = $2.4 billion -                                                                          
             dividend ($1.4 billion in FY16)                                                                                    
     · APFPA framework                                                                                                          
          o Sustainable draw = $3.3 billion or 6% POMV                                                                          
          o Separate cash flow allocated to the dividend                                                                        
     · Draw self-adjusts                                                                                                        
          o Lower chance of depletion                                                                                           
          o Less fund growth potential                                                                                          
     · Year-to-year budget volatility*                                                                                          
     · Draw does not self-adjust                                                                                                
          o Greater chance of depletion                                                                                         
          o Greater fund growth potential                                                                                       
     · Stable Budget                                                                                                            
     *Volatility may be reduced, but not eliminated, with                                                                       
     use of smoothing rule such as 5- year averaging                                                                            
Mr.   Richards  explained   that   the  administration   had                                                                    
determined that  placing petroleum revenues in  the forms of                                                                    
royalty  and production  taxes into  the permanent  fund, as                                                                    
proposed  by SB  128,  the sustainable  draw  would be  $3.3                                                                    
billion;  alternatively; a  6 percent  of market  value draw                                                                    
(POMV). He  relayed that  the stability of  a fixed  draw to                                                                    
the general fund  made more sense than a POMV  draw. He said                                                                    
that a draw  a 6 POMV could be done,  and was mathematically                                                                    
equal  to  the  $3.3  billion  draw,  it  was  a  matter  of                                                                    
determining which  had the higher level  of variability. The                                                                    
administration had determined that  the volatility should be                                                                    
kept  in the  permanent  fund  and not  be  allowed to  flow                                                                    
through  to the  governmental  share of  revenues. He  added                                                                    
that both  POMV and a  fixed draw were plausible  plans with                                                                    
fairly equal risks and benefits.                                                                                                
10:23:14 AM                                                                                                                   
Vice-Chair  Micciche stated  that the  modeling on  the draw                                                                    
suggested an assumption of a  commodity price, and therefore                                                                    
an  eventual  production  tax  improvement.  He  probed  the                                                                    
administration's   modeling   on    the   expectations   for                                                                    
production taxes.                                                                                                               
Mr.  Richards stated  that the  distinction between  the way                                                                    
that  DOR  did oil  price  modeling  in the  Permanent  Fund                                                                    
Protection Act, and the way  it was presented in the Revenue                                                                    
Forecast  was that  DOR used  probabilistic modeling,  which                                                                    
projected a large range of  values and assigned a percentage                                                                    
chance  across  those  values of  possible  oil  prices.  He                                                                    
relayed  that  probabilistic  modeling  was  important  when                                                                    
looking  at petroleum  revenues because  of the  progressive                                                                    
nature of the tax.                                                                                                              
10:25:03 AM                                                                                                                   
Co-Chair MacKinnon queried the  purpose of the restructuring                                                                    
effort. She felt  that the projected draw  would support the                                                                    
current  status quo  funding  for  state government,  rather                                                                    
than putting the draw into the  general fund in order to pay                                                                    
the state's bills.                                                                                                              
Mr.  Richards  replied that  he  would  speak to  the  issue                                                                    
further in the presentation.                                                                                                    
Co-Chair MacKinnon  thought a 6  percent rate of  return was                                                                    
ambitious for a sovereign  wealth model; other POMV's across                                                                    
the  nation,  and globally,  were  set  at  a rate  of  4.25                                                                    
Mr. Richards stated  that the 6 percent was  higher than the                                                                    
more  traditional approach  was  due to  the  fact that  the                                                                    
state  would  place  petroleum revenue  into  the  permanent                                                                    
fund. The  incoming cash  flows would  be greater  than what                                                                    
was  earned solely  on financial  assets, which  would allow                                                                    
for a larger take of the total value.                                                                                           
10:26:52 AM                                                                                                                   
Senator Hoffman wondered whether the  funds could be kept in                                                                    
the ERA until  the success of the plan was  proven, and then                                                                    
make the percentage change, with caution, in the future.                                                                        
Mr. Richards did  not think time would make a  great deal of                                                                    
difference.  He spoke  to the  issue of  growing the  assets                                                                    
before  spending them  in the  earnings  reserve, he  shared                                                                    
that the system had been  designed to meet current needs, at                                                                    
a sustainable level.                                                                                                            
Senator Hoffman expressed concern that  if the state were to                                                                    
be successful  and have additional funds  that were targeted                                                                    
to  go back  into the  corpus,  those funds  could never  be                                                                    
taken out again.  He asked how stable the  dividend would be                                                                    
under the legislation.                                                                                                          
Mr. Richards stated that under  the bill, the dividend would                                                                    
be 50  percent of the  royalties. He said that  the dividend                                                                    
would not be stable in the  sense that it would be subjected                                                                    
to   oil  price   volatility  and   changes  in   production                                                                    
forecasting.  He  clarified  that   the  way  in  which  the                                                                    
dividend  was drawn  was  interchangeable between  different                                                                    
restructuring plans,  the governor's  plan only  changes the                                                                    
sustainable draw  amount. Whatever dividend  formulation the                                                                    
legislature chose, the draw would be adjusted accordingly.                                                                      
10:29:57 AM                                                                                                                   
Vice-Chair Micciche  maintained his request  for information                                                                    
concerning the assumptions and failure rate.                                                                                    
Mr.  Richards stated  that the  information was  all already                                                                    
public.  He  stressed  that,  although  the  department  had                                                                    
changed  its deterministic  price forecast,  did not  change                                                                    
its  probabilistic modeling  or assumption.   He  offered to                                                                    
write a letter that explained the matter to the senator.                                                                        
10:30:40 AM                                                                                                                   
Mr. Richards turned  to Slide 23, "How to  Handle the Draw."                                                                    
The slide  depicted a hypothetical  world in 2002,  when the                                                                    
state  had adopted  POMV, the  yellow  represented what  the                                                                    
permanent fund  would have  contributed after  dividends. He                                                                    
said  that   the  slide  demonstrated   that  moving   to  a                                                                    
traditional  POMV  did  not  address  the  state's  economic                                                                    
volatility;  it   layered  the   earnings  of   the  state's                                                                    
financial assets  onto already volatile  petroleum revenues.                                                                    
He  warned that  in  high years,  that  could compound  pro-                                                                    
cyclical  spending  by  putting   unneeded  money  into  the                                                                    
general fund.                                                                                                                   
10:31:55 AM                                                                                                                   
Mr.   Richards   discussed   Slide  24,   "How   to   Handle                                                                    
     STATUTORY NET INCOME (SNI) VOLATILITY                                                                                      
        · Option 1:                                                                                                             
             o SNI placed in earnings reserve                                                                                   
             o Formulaic draw (e.g., fixed draw or POMV)                                                                        
        · Option 2: constitutional amendment allowing pure                                                                      
     PETROLEUM REVENUE VOLATILITY                                                                                               
        · Option 1:                                                                                                             
             o Royalties and production taxes placed in                                                                         
               earnings reserve                                                                                                 
             o Formulaic draw (e.g., fixed draw or POMV)                                                                        
        · Option 2:                                                                                                             
             o Revenue limit                                                                                                    
             o Reduce POMV draw as petroleum revenues in                                                                        
               general fund go up                                                                                               
        · Option 3:                                                                                                             
             o Spending or appropriation limit not linked                                                                       
               to earnings                                                                                                      
             o Difficult to have a dependable rule                                                                              
10:32:57 AM                                                                                                                   
Co-Chair  MacKinnon   about  the  hope  of   the  CBR  being                                                                    
Mr. Richards  replied that under  the bill repayment  to the                                                                    
CBR would  need to come  from revenues other  than petroleum                                                                    
production  taxes, royalties,  and permanent  fund earnings;                                                                    
those three earnings would not be  used to pay back the CBR.                                                                    
The CBR would be paid  back through other forms of taxation,                                                                    
royalty settlements, and other types of future income.                                                                          
10:34:10 AM                                                                                                                   
Senator Bishop  commented that the legislature  would not be                                                                    
limited in creating a payment plan back to the CBR.                                                                             
Co-Chair  MacKinnon   agreed,  but   was  bothered   by  the                                                                    
statement  that taxes  would be  collected in  order to  pay                                                                    
back the money borrowed from the CBR.                                                                                           
Mr.  Richards alleged  that  the plan  would  treat the  two                                                                    
major  sources of  volatile petroleum  revenue  the same  as                                                                    
earnings   from  the   permanent  fund.   He  directed   the                                                                    
committee's  attention to  Option  1 on  the slide,  stating                                                                    
that the  option treated the  volatility of the  two sources                                                                    
of  petroleum  revenues  the same  way  that  earnings  were                                                                    
treated -  by housing  the income  in the  earnings reserve,                                                                    
and then drawing them down based on POMV or a fixed draw.                                                                       
10:36:40 AM                                                                                                                   
Mr. Richards  turned to  Slide 26,  "Calculating the  Draw -                                                                    
Annuity Payment to the General Fund":                                                                                           
          Starting Balance = $55 billion ($45B in corpus;                                                                       
          $7B in earnings reserve account; $3B from CBR)                                                                        
          + Inflows =                                                                                                           
               Investment income                                                                                                
               100% production taxes                                                                                            
               100% royalties                                                                                                   
          - Outflows =                                                                                                          
               Draw (inflation increase delayed until 2020)                                                                     
          = End-of-Year Balance                                                                                                 
          … $3.3 billion annuity from financial and                                                                             
          petroleum wealth                                                                                                      
         (2040 Balance = 2016 Balance + Inflation)                                                                              
10:39:07 AM                                                                                                                   
Senator Hoffman asked  whether the $3 billion  draw from the                                                                    
CBR would require a three-quarter vote.                                                                                         
Mr.  Richards  understood  that  the  vote  would  still  be                                                                    
required.  He shared  that  the  plan did  not  need the  $3                                                                    
billion draw in  order to work, but that  the draw increased                                                                    
the success of the plan.                                                                                                        
10:39:35 AM                                                                                                                   
Co-Chair Kelly  considered the $3.3  billion as  a mechanism                                                                    
to ensure the permanent fund retained its value.                                                                                
Mr.  Richards concurred.  He furthered  that  a larger  draw                                                                    
could result  in an estimated  value of the fund  that would                                                                    
not grow with inflation.                                                                                                        
Co-Chair  MacKinnon  interjected   that  there  was  greater                                                                    
durability in the  ERA if an addition $3 billion  were to be                                                                    
added, because then there would be 4X the cash call.                                                                            
Mr. Richards replied in the affirmative.                                                                                        
10:40:25 AM                                                                                                                   
Senator  Bishop asked  whether  the  failure rate  increased                                                                    
without the $3 billion deposit into the ERA.                                                                                    
Mr. Richards  replied that he could  provide the information                                                                    
at a later date.                                                                                                                
10:41:09 AM                                                                                                                   
Vice-Chair Micciche  wondered whether  there was a  plan for                                                                    
"smoothing" on the dividend on a five-year running average.                                                                     
10:41:58 AM                                                                                                                   
Commissioner  Hoffbeck presented  Slide 28,  "How to  Handle                                                                    
the  Dividend."   He  emphasized   that  the   dividend  was                                                                    
volatile, and  was a formula  based calculation  that varied                                                                    
from year to year.                                                                                                              
10:42:27 AM                                                                                                                   
Commissioner  Hoffbeck turned  to Slide  29, "How  to Handle                                                                    
the Dividend":                                                                                                                  
        · Earnings  Dividend  (current   formula):  half  of                                                                    
          statutory net income (SNI)                                                                                            
        · Royalties  Dividend:  connects   Alaskans  to  the                                                                    
        · POMV  Dividend: based  on Fund  market value,  not                                                                    
        · CBR  Dividend:  based   on  CBR  balance;  rewards                                                                    
          Alaskans for Legislature maximizing stabilization                                                                     
        · $1,000   Flat:  ~   $650   million,  reduces   the                                                                    
          sustainable draw                                                                                                      
        · Mixed Formula: combination of different ideas                                                                         
10:43:12 AM                                                                                                                   
Commissioner  Hoffbeck discussed  Slide 30,  "How to  Handle                                                                    
the Dividend":                                                                                                                  
        · Dividend  formula should  connect Alaskans  to the                                                                    
          economy and the fund                                                                                                  
        · Certain  draw  and  dividend combinations  do  not                                                                    
          work well                                                                                                             
             o POMV draw & earnings dividend                                                                                    
             o Volatile dividend formula (i.e. royalty                                                                          
               dividend) and floor                                                                                              
        · Dividend formula tied to the balance of                                                                               
          stabilization funds (i.e., CBR) runs risk of                                                                          
          politicizing rule-based dividend payout formula                                                                       
10:43:42 AM                                                                                                                   
BILL MILKS, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW,                                                                      
discussed Slide 32, "Alaska Permanent Fund Protection Act":                                                                     
     Section 1: Revenue to the Corpus                                                                                           
     Section 2: Defines "target balance"                                                                                        
     Section 3: Conforming Amendment                                                                                            
     Section 4: ERA transfer to Dividend Fund                                                                                   
     Section 5: ERA transfer to Corpus                                                                                          
     Section 6: Revenue to the ERA, Draw, and Periodic                                                                          
     Section 7: Conforming Amendment                                                                                            
     Section 8: Conforming Amendment                                                                                            
     Section 9: $1,000/person dividend in 2016                                                                                  
     Section 10: Effective July 1, 2016                                                                                         
Mr. Milks discussed the sectional analysis (copy on file):                                                                      
      Section 1 - Revenues to the Corpus                                                                                      
          Section 1 amends AS 37.13.010(a) to increase the                                                                      
          petroleum revenues directed to the corpus of the                                                                      
         permanent fund, subject to a redirection                                                                               
          mechanism that ensures the earnings reserve                                                                           
          account is not degraded.                                                                                              
             o Production Taxes: 100% of production taxes                                                                       
               are directed to the corpus                                                                                       
                  ƒ Currently, these funds go to the                                                                            
                    general fund                                                                                                
                  ƒ Requires an appropriation                                                                                   
             o Mineral Royalties: 49.5% of all mineral                                                                          
               royalties are directed to the corpus                                                                             
                  ƒ Constitutionally mandated 25% (no                                                                           
                  ƒ An additional 24.5% (an increase from                                                                       
             o Redirection Mechanism: if needed to maintain                                                                     
               the target balance (see Sections 2 and 6),                                                                       
               some petroleum revenue may be redirected to                                                                      
               the earnings reserve account                                                                                     
             o Removes distinction between old and new                                                                          
    Section 2 - Target Balance of the Earnings Reserve                                                                      
          Section  2 adds  subsection (d)  to AS  37.13.010,                                                                    
          which   cross-references   AS  37.13.145(l)   (see                                                                    
          Section 6),  setting the  target balance  at equal                                                                    
          to four times the prior year's sustainable draw.                                                                      
     Section 3 - Conforming Amendment                                                                                         
          Section  3   is  a  conforming  amendment   to  AS                                                                    
          37.13.140 that removes  the calculation of "income                                                                    
          available for  distribution" because (1)  the term                                                                    
          relates  to the  current  dividend formula,  which                                                                    
          would  change  (see  Section  4),  and  (2)  other                                                                    
          revenues,    including   production    taxes   and                                                                    
          royalties, may  also be available in  the earnings                                                                    
          reserve account.                                                                                                      
10:46:38 AM                                                                                                                   
Mr. Milks addressed Section 4:                                                                                                  
     Section 4 - Transfers from the Earnings Reserve                                                                          
     Account to the Dividend Fund                                                                                             
          Section 4 amends AS 37.13.145(b) to change the                                                                        
          calculation of the annual dividend.                                                                                   
             · Changes the amount transferred from earnings                                                                     
               reserve account to the dividend fund to 50%                                                                      
               of the prior year royalties instead of                                                                           
               approximately 50% of realized investment                                                                         
             · Changes timing of the transfer from the end                                                                      
               of the fiscal year to the beginning                                                                              
10:47:17 AM                                                                                                                   
Mr. Milks addressed Section 5:                                                                                                  
     Section 5 - Transfers from the Earnings Reserve                                                                          
     Account to the Corpus                                                                                                    
          Section 5 amends AS 37.13.145(c) to change the                                                                        
          timing and amount of transfers from the earnings                                                                      
          reserve account to the corpus.                                                                                        
             · Changes amount transferred to the corpus                                                                         
               from the amount necessary to inflation proof                                                                     
               the corpus to funds in earnings reserve                                                                          
               account exceeding the "target balance"                                                                           
             · Changes timing of the transfer from every                                                                        
               year to when excess funds are available                                                                          
            · Flexible inflation proofing and a                                                                                 
               presumption of savings                                                                                           
                  o Over time, these transfers inflation                                                                        
                    proof the corpus                                                                                            
                  o Transferred funds may exceed the amount                                                                     
                    needed for inflation proofing                                                                               
                  o The flexibility in timing improves the                                                                      
                    durability of the earnings reserve                                                                          
                    account and protects the corpus                                                                             
10:47:47 AM                                                                                                                   
Mr. Milks discussed Section 6:                                                                                                  
     Section 6 - Revenues to the Earnings Reserve Account                                                                     
     and the Sustainable Draw to the General Fund                                                                             
          Section 6 adds subsections (e) to (l) to AS                                                                           
          37.13.145 to direct some petroleum revenues to                                                                        
          the earnings reserve account and establish the                                                                        
          endowment transfer to the general fund.                                                                               
        · Redirection Mechanism: Subsections (e) and (f)                                                                      
          mirror the redirection provisions in Section 1.                                                                       
          Specifically, if needed to maintain the target                                                                        
          balance, up to 100% of production taxes and 24.5%                                                                     
          of royalties that are otherwise deposited in the                                                                      
          corpus may be redirected to the earnings reserve                                                                      
             o Durability of the earnings reserve account:                                                                      
               making these petroleum revenues available to                                                                     
               the earnings reserve account helps ensure it                                                                     
               is not depleted if there are several                                                                             
               consecutive years of low petroleum revenue                                                                       
               and low investment income                                                                                        
             o Protects the corpus: depleting the earnings                                                                      
               reserve account would put the corpus at risk                                                                     
               as the state searches for additional funds                                                                       
               to pay for government                                                                                            
             o Savings: establishes a presumption of saving                                                                     
               excess revenue in the corpus when possible                                                                       
        · Dividend Royalties: Subsection (g) provides that                                                                    
          funds for the dividend (50% of royalties) gather                                                                      
          in the earnings reserve account until they are                                                                        
          transferred to the dividend fund under Section 4.                                                                     
             o Retains the connection between the dividend                                                                      
               and the permanent fund.                                                                                          
             o Helps with cash flow, particularly in first                                                                      
               few years.                                                                                                       
             o Establishes the cash flow pathways in the                                                                        
               first year and minimizes departures from the                                                                     
               permanent framework.                                                                                             
        · Sustainable Draw: Subsections (h) and (i) provide                                                                   
          for the annual endowment transfer from the                                                                            
          earnings reserve account to the general fund.                                                                         
             o $3.3 billion fixed-draw                                                                                          
             o Maximum amount                                                                                                   
             o Adjusted for inflation beginning in FY 2020                                                                      
             o Flexible transfer timing allows the Treasury                                                                     
               and the Alaska Permanent Fund Corporation to                                                                     
               work out a practical and efficient system                                                                        
               based on cash flow needs and investment                                                                          
        · Appropriation                                                                                                         
             o Framework relies on legislature partnering                                                                       
               with the executive                                                                                               
             o The Alaska legislature has a long history of                                                                     
               following a rule-based policy for the                                                                            
               earnings reserve account                                                                                         
        · Periodic Review: Subsections (j) and (k) provide                                                                    
          for a periodic sufficiency of assets review and                                                                       
          adjustments to the draw amount.                                                                                       
             o The Commissioner of Revenue, in consultation                                                                     
               with the Alaska Permanent Fund Corporation,                                                                      
               conducts a review of the state's financial                                                                       
               assets and forecasts and may recommend                                                                           
               adjusting the draw amount                                                                                        
             o Scheduled: 2017, 2020, then every 4 years                                                                        
             o Formulaic: the periodic review uses the same                                                                     
               approach and variables used to calculate the                                                                     
               initial draw                                                                                                     
             o Protects the permanent fund: the periodic                                                                        
               review ensures that, in light of experience,                                                                     
               Alaska remains on a sustainable fiscal                                                                           
             o Collaborative: the review is provided to the                                                                     
             o Transparent: all supporting material - data,                                                                     
               modeling, etc. - must be made available to                                                                       
               the public in its native file format (except                                                                     
               for confidential taxpayer information which                                                                      
               may be provided in aggregated form)                                                                              
        · Subsection (l) defines "sustainable draw amount"                                                                      
          and "target balance."                                                                                                 
10:50:01 AM                                                                                                                   
Co-Chair MacKinnon queried the reasoning behind choosing 4                                                                      
years, rather than 3.                                                                                                           
Commissioner Hoffbeck replied that the idea had been that                                                                       
the review would fall in the middle of each gubernatorial                                                                       
10:51:43 AM                                                                                                                   
Mr. Milks continued to Sections 7 through 10:                                                                                   
     Section 7 - Conforming Amendment                                                                                         
          Section  7   is  a  conforming  amendment   to  AS                                                                    
          37.13.300(c)  isolating   income  of   the  mental                                                                    
          health trust  fund from  net income  available for                                                                    
          transfer to the general fund.                                                                                         
     Section 8 - Conforming Amendment                                                                                         
          Section 8 is a conforming amendment to AS                                                                             
          43.55.080 directing production taxes to the                                                                           
          permanent fund.                                                                                                       
     Section 9 - $1,000 Dividends in 2016                                                                                     
          Section 9 amends uncodified law to specify that                                                                       
          2016 dividend checks will be $1,000 per person.                                                                       
          This provision eases the transition to the new                                                                        
          dividend formula.                                                                                                     
     Section 10 - July 1, 2016 effective date                                                                                 
10:52:15 AM                                                                                                                   
Mr. Milks summarized that for a very important issue, the                                                                       
bill was relatively straightforward.                                                                                            
10:52:39 AM                                                                                                                   
Mr. Richards encouraged the committee to examine Slide 33,                                                                      
"Rule-Based Fiscal Policy":                                                                                                     
        · Savings Rule                                                                                                          
             o Permanent Fund SNI to earnings reserve                                                                           
             o 25% of mineral royalties to corpus                                                                               
             o 24.5% of royalties and 100% production taxes                                                                     
               to earnings reserve                                                                                              
        · Growth Rule                                                                                                           
             o Assets grow with inflation                                                                                       
             o Opportunities for additional growth assigned                                                                     
               to the corpus and dividend                                                                                       
        · Protection Rule                                                                                                       
             o Constitutional protection of the corpus                                                                          
             o Transfers funds in excess of earnings                                                                            
               reserve target balance to the corpus                                                                             
             o Earnings reserve durability tested                                                                               
        · Spending Rule                                                                                                         
             o Draw: fixed $3.3 billion with periodic                                                                           
             o Dividend: 50% of annual mineral royalties to                                                                     
        · Volatility Rule                                                                                                       
             o Permanent Fund: SNI, 49.5% royalties 100%                                                                        
               production tax volatility in the Permanent                                                                       
             o Dividend: 50% royalty volatility in dividend                                                                     
             o General Fund: No SNI, royalty or production                                                                      
              tax volatility in general fund                                                                                    
Commissioner Hoffbeck  reiterated that modeling of  the plan                                                                    
had been successful.                                                                                                            
SB  128  was  HEARD  and   HELD  in  committee  for  further                                                                    
10:53:47 AM                                                                                                                   
Co-Chair MacKinnon discussed housekeeping.                                                                                      
10:55:30 AM                                                                                                                   
1:05:06 PM                                                                                                                    
Co-Chair MacKinnon discussed housekeeping.                                                                                      

Document Name Date/Time Subjects
Copy of SB128 Supporting Documents - Deterministic Modeling from Gov Alaska Gov 1-22-2016.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Letter Packet 2.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Letter Packet 1.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Sectional Analysis - LAW.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Supporting Documents - SSTA Presentation - Sovereign Wealth Fund - Malan Rietveld 1.26.2016.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Supporting Documents - Comm. Hoffbeck & AG Richards - Powerpoint Presentation to SSTA - 1-28-2016(1).pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB128 Sponsor Statement.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB128 Supporting Documents - Department of Law to SSTA - Attorney General Opinions (Formal & Informal) Regarding the Permanent Fund and the CBR 2-3-2016.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB128 Supporting Documents - AG Letter to House Finance Co-Chairs re CBR Sweep 1-25-16.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB128 Supporting Documents - Comparison Flow Charts vs SB 114 versions and Status Quo 03-15-16.pdf SFIN 3/21/2016 9:00:00 AM
SB 114
SB 128
SB128 Supporting Documents - Comparison Rules Table (by Administration) vs SB 114 03-15-16-1.pdf SFIN 3/21/2016 9:00:00 AM
SB 114
SB 128
SB128 Supporting Documents - New Sustainable Alaska Plan from Governor's Website as posted 2-22-2016.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB128 Supporting Documents - Projected Dividends - Status Quo vs SB 128 & SB 114 - Presentation to SSTA 2-22-16.pdf SFIN 3/21/2016 9:00:00 AM
SB 114
SB 128
SB128 Supporting Documents - Presentation by Departments of Law and Revenue to SSTA 03-15-16.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 1 CSSS SB1(FIN) work draft Version U.pdf SFIN 3/21/2016 9:00:00 AM
SB 1
SB 128 - Alaska Permanent Fund Protection Act 3.21.16.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Cost of Delay Updated.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 128 Supporting Document - Micchiche -Safe Landing A Fiscal Strategy for the 1990s.pdf SFIN 3/21/2016 9:00:00 AM
SB 128
SB 1 Opposition Letters - Vaping Support.pdf SFIN 3/21/2016 9:00:00 AM
SB 1