Legislature(2015 - 2016)SENATE FINANCE 532

03/23/2016 09:00 AM Senate FINANCE

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Audio Topic
09:04:04 AM Start
09:04:47 AM SB114 || SB128
01:36:49 PM Public Testimony: Juneau
02:19:39 PM Public Testimony: Bethel, Nome, Kotzebue, Unalaska
03:06:44 PM Public Testimony: Barrow, Tok, Delta Junction
03:36:24 PM Public Testimony: Ketchikan, Wrangell, Petersburg
03:43:01 PM Public Testimony: Sitka, Cordova, Valdez
04:19:58 PM Public Testimony: Statewide Teleconference - Offnet Sites
05:19:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ David Teal, Director, Legislative Finance TELECONFERENCED
Heard & Held
Heard & Held
-- Public Testimony <Limited to 2 Minutes> --
1:30 - 2:15 Juneau
2:15 - 2:45 Bethel, Nome, Kotzebue, Unalaska
2:45 - 3:15 Barrow, Tok, Delta Junction
3:15 - 3:45 Ketchikan, Wrangell, Petersburg
3:45 - 4:15 Sitka, Cordova, Valdez
4:15 - 5:15 Statewide Teleconference - Offnet
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 114                                                                                                           
     "An Act relating to deposits into the dividend fund;                                                                       
     and relating to the Alaska permanent fund."                                                                                
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."                                                                          
9:04:47 AM                                                                                                                    
Co-Chair MacKinnon discussed the forthcoming presentation.                                                                      
DAVID TEAL,  DIRECTOR, LEGISLATIVE  FINANCE DIVISION,  stated                                                                   
that SB  114 and  SB 128  both pertained  to re-plumbing  the                                                                   
state's cash flow.  He thought that models were  the best way                                                                   
to  compare   the  fiscal  impact   of  the  two   bills.  He                                                                   
considered  that   the  models   provided  a  comparison   of                                                                   
projected  deficits,  as well  as  the dividend  and  reserve                                                                   
balances  under  the  bills  and   any  other  options  being                                                                   
considered.   He  emphasized   that  it   was  important   to                                                                   
understand  how the  plans differed  in  order to  understand                                                                   
the models.                                                                                                                     
Mr. Teal  discussed the presentation  "A Comparison  of Plans                                                                   
to  Re-Plumb  Alaska's   Cash  Flow,"  (copy  on   file).  He                                                                   
explained   that   cash   flow   diagrams   were   simplistic                                                                   
representations  of various  options  that  showed where  the                                                                   
money  flowed. The  diagrams could  not  illustrate how  much                                                                   
money  was   moving  in  different   areas,  and   could  not                                                                   
communicate  if a  plan was fiscally  sound  or how it  would                                                                   
respond  to  changes  in  revenues   or  interest  rates.  He                                                                   
thought  the  diagrams  also   depicted  where  the  decision                                                                   
points  were,  which  would elucidate  which  decisions  were                                                                   
important and what the trade-offs were for each scenario.                                                                       
Co-Chair  MacKinnon  referred  to the  new  spring  forecast,                                                                   
which had come  out the previous week. She asked  Mr. Teal to                                                                   
frame  his  presentation  in   relation  to  the  new  spring                                                                   
Mr. Teal  noted that the spring  forecast did not  affect the                                                                   
diagrams  being presented.  He reiterated  that the  diagrams                                                                   
simply showed  where cash flowed,  but not how  much; whereas                                                                   
each  model   would  inform  the   amounts  of   funding.  He                                                                   
commented  on the downward  change in  the new forecast,  and                                                                   
discussed the one  percent decrease in anticipated  long term                                                                   
interest earnings  recently published  by the Permanent  Fund                                                                   
Corporation  (PFC). He  had  not been  able  to evaluate  the                                                                   
reason  for  the  significant   change,  and  hoped  to  gain                                                                   
further insight  later in  the day  after meeting with  state                                                                   
9:08:44 AM                                                                                                                    
Co-Chair  MacKinnon  related   that  she  had  met  with  the                                                                   
executive  director of  the Permanent  Fund Board, who  would                                                                   
be reaching  out to  the commissioners  of the Department  of                                                                   
Revenue and  the Department  of Law.  She continued  that she                                                                   
had discussed the one percent differential.                                                                                     
Co-Chair  MacKinnon asked  if  the presentation  model  would                                                                   
reflect  the  lower  interest  rate  and  if  it  dealt  with                                                                   
numbers from the fall forecast.                                                                                                 
Mr.  Teal explained  that  the model  was  flexible, and  the                                                                   
intent  was  to  allow  the  committee   to  demonstrate  and                                                                   
observe what would happen in various scenarios.                                                                                 
Senator Dunleavy  was under the  impression that  the amounts                                                                   
being  discussed did  not  matter, the  model  was to  depict                                                                   
mechanics. He  wanted to  ensure that the  plan take  care of                                                                   
the deficit  problem if the  mechanics of the  permanent fund                                                                   
were being considered.                                                                                                          
Mr.  Teal  concurred, particularly  considering  the  revised                                                                   
earnings  forecast;  and  did  not  think  that  any  of  the                                                                   
sponsors  of  the  bills  considered  that  the  plans  would                                                                   
completely  solve the problem.  He suggested  that using  the                                                                   
earnings  of  the  permanent fund  was  perhaps  the  biggest                                                                   
lever that the  legislature had, but even using  the earnings                                                                   
was  insufficient  to  solve the  issue.  He  continued  that                                                                   
legislature   still   faced    decisions   between   reducing                                                                   
expenditures and increasing revenue.                                                                                            
Co-Chair  MacKinnon stated  that  she had  misunderstood  the                                                                   
function  of  the  models when  she  previously  asked  about                                                                   
updating the presentation to reflect the new forecast.                                                                          
Mr.  Teal  detailed  that  he  would  be  showing  slides  to                                                                   
represent  current cash flow  and the  changes to cash  flow;                                                                   
first  under the  governor's  Permanent  Fund Protection  Act                                                                   
(PFPA) in SB 128, and then under SB 114.                                                                                        
9:12:22 AM                                                                                                                    
Mr.  Teal  addressed  slide 2,  "Current  Cash  Flow,"  which                                                                   
depicted  a flow  chart of  revenues  and revenue  locations.                                                                   
He  thought  the  first  important item  to  notice  was  the                                                                   
separation  of the  permanent  fund  into the  principal  and                                                                   
Earnings  Reserve Account  (ERA). He pointed  out that  there                                                                   
was no  arrow on  the chart  between the  permanent fund  and                                                                   
the  general  fund  (GF),  because  (with  minor  exceptions)                                                                   
permanent  fund   accounts  were  not  used   for  government                                                                   
expenditures.  He  continued   that  the  earnings  from  the                                                                   
permanent fund would  accumulate in the ERA and  was shown on                                                                   
the chart  by an arrow labelled  "Statutory Net  Income," and                                                                   
included  earnings from  the ERA itself.  He emphasized  that                                                                   
the  permanent fund  dividend  (PFD) was  the first  priority                                                                   
under the  law, and was calculated  at 50 percent of  a five-                                                                   
year moving average  of earnings. He emphasized  that the PFD                                                                   
was  dependent upon  investment  earnings  alone  and had  no                                                                   
firm  connection  to the  fiscal  health  of the  state,  but                                                                   
rather was  a reflection  of the  fiscal health of  financial                                                                   
markets. There  were strong rules  for paying  out dividends,                                                                   
which were  calculated using a  formula put forth in  law. He                                                                   
pointed out a  loop between the permanent fund  principal and                                                                   
the ERA  on the chart, depicted  by the statutory  net income                                                                   
arrow as well  as an arrow entitled "Inflation  proofing." He                                                                   
explained  that  inflation  proofing  was  simply  sending  a                                                                   
portion of the  earnings back into the corpus of  the fund to                                                                   
protect against  inflation and  retain real market  value. He                                                                   
indicated  another connection  to  the permanent  fund was  a                                                                   
portion  of royalties that  flowed into  the fund,  indicated                                                                   
on the chart by an arrow.                                                                                                       
Mr. Teal  highlighted the  GF on the  chart, to which  income                                                                   
was  shown  coming   from  royalties  (from  gas   and  oil),                                                                   
production  tax; as well  as a  "Less Volatile Revenue"  box,                                                                   
which was  the taxes, fees,  corporate income tax,  and other                                                                   
things.  He remarked that  the royalties  and production  tax                                                                   
were considered  volatile revenue  sources. When  oil revenue                                                                   
was high,  there was  a surplus  to spend  or save;  and when                                                                   
there  was a  deficit,  money was  pulled  from reserves.  He                                                                   
pointed  out that  the  diagram was  simplified  and did  not                                                                   
include  surplus revenue  such  as the  state budget  reserve                                                                   
Mr. Teal  continued on slide 2,  and stated that  the current                                                                   
model did  not function well  in a low-production,  low-price                                                                   
environment like  the state was currently in.  He thought the                                                                   
only  way  for   the  current  model  to  work   was  to  cut                                                                   
expenditures   by  about   two-thirds,   or  increase   other                                                                   
revenues  substantially.  He  discussed  the  eventuality  of                                                                   
running out  of reserves, and  referred to the  fall forecast                                                                   
prediction  that  the  Constitutional  Budget  Reserve  (CBR)                                                                   
would be  exhausted in FY 19.  He added that the  short time-                                                                   
frame for  the exhaustion of  state reserves was  the primary                                                                   
reason for  the downgrade  in the  state's credit rating,  as                                                                   
well as  the primary  reason for  examining alternative  cash                                                                   
9:16:39 AM                                                                                                                    
Co-Chair Kelly  pointed out  that the  state did not  deficit                                                                   
spend,  and the  state  was not  incurring  debt by  spending                                                                   
Vice-Chair  Micciche referred  to the committee's  discomfort                                                                   
with   unrealistic  optimism   with  the   fall  and   spring                                                                   
forecasts.  He thought  the recent forecast  was a  healthier                                                                   
way  to  conservatively   analyze  what  revenues   could  be                                                                   
expected.  He  did  not  have   a  pessimistic  view  of  the                                                                   
forecast, and thought it was a more realistic viewpoint.                                                                        
Co-Chair MacKinnon  concurred, and  commented that  the issue                                                                   
was changing.  She was interested  in seeing the  probability                                                                   
of  failure of  plans that  were implemented.  She hoped  for                                                                   
steady  interest income  if  the state  was  receiving a  low                                                                   
price per barrel  of oil. She thought the two  bill proposals                                                                   
were not  going to fare  as well since  the two variables  in                                                                   
question were not performing as well.                                                                                           
9:20:12 AM                                                                                                                    
Mr.  Teal thought  it  was important  for  people to  realize                                                                   
when he  used the word "deficit"  he was referring to  a cash                                                                   
flow  deficit rather  than  deficit spending.  He  reiterated                                                                   
Co-Chair  Kelly's  comments  that   the  state  was  spending                                                                   
reserves  rather than incurring  a deficit.  He thought  cash                                                                   
flow was  an important  concept, and  reminded the  committee                                                                   
that   the  forecast   was  a   projection   rather  than   a                                                                   
prediction. He  continued that  in modelling, there  had been                                                                   
a  smooth  path predicted  for  oil  prices, and  a  constant                                                                   
interest   rate;  even   though   both   were  volatile.   He                                                                   
acknowledged  that  the model  could  not reflect  the  ever-                                                                   
changing   rates,  and   therefore   it  was   good  to   use                                                                   
conservative assumptions.                                                                                                       
Mr. Teal  discussed slide  3, "1.  Change Royalty  Percentage                                                                   
(PFPA)," and indicated  that the next five slides  would show                                                                   
how the  Permanent Fund  Protection Act  (PFPA) would  change                                                                   
the  plumbing of  state finances.  He stated  that the  first                                                                   
change  would  be  from  savings mode  to  harvest  mode.  He                                                                   
thought some  would ask why  the state would  contribute more                                                                   
than  the   constitutional  minimum   of  royalties   to  the                                                                   
permanent fund principal.  By reducing from 30  percent to 25                                                                   
percent of royalties  to the principal (where  they could not                                                                   
be spent), there would be 5 percent available to be spent.                                                                      
9:23:14 AM                                                                                                                    
Mr. Teal  continued on slide  3, stating that  both royalties                                                                   
and  production  tax had  been  reallocated by  the  governor                                                                   
from the  GF to the  ERA, which equated  to a shift  of about                                                                   
$1  billion. He  explained that  as the  funds were  diverted                                                                   
from the  GF, it was  replaced with  a sustainable  draw. The                                                                   
draw was  planned for approximately  $3.3 billion,  and could                                                                   
be adjusted  downward by the  commissioner of  the Department                                                                   
of   Revenue  if   conditions   were  less   favorable   than                                                                   
predicted.  Conversely,  the draw  could  be adjusted  upward                                                                   
with inflation.  He noted  that inflation  would change  from                                                                   
an annual,  mechanical, statutory  rule to retain  the market                                                                   
value  of  the permanent  fund  to  an overflow  concept.  He                                                                   
thought that  it was  arguable that  there was no  inflation-                                                                   
proofing unless  money was in  the corpus and  protected from                                                                   
spending.  He  posited  that the  aforementioned  25  percent                                                                   
savings  did not  count  as  inflation-proofing,  but was  in                                                                   
fact  additional savings  that should  be inflation  proofed.                                                                   
The other  extreme  was arguable  in that it  did not  matter                                                                   
which account  the money was in.  The value of  the permanent                                                                   
fund  was  the  sum  of  the  two  accounts,  and  inflation-                                                                   
proofing  (by putting  money  in  the corpus)  increased  the                                                                   
risk  of   running  down   the  ERA,   which  supported   the                                                                   
sustainable  draw. He  thought  it was  important to  realize                                                                   
that the  sustainable draw  came from  the ERA, and  anything                                                                   
in the permanent fund principal could not be spent.                                                                             
9:26:10 AM                                                                                                                    
Vice-Chair  Micciche  asked  to  clarify that  Mr.  Teal  was                                                                   
reviewing  the  governor's  plan,  and wondered  about  a  $3                                                                   
billion deposit  from the  CBR to  the permanent fund  corpus                                                                   
to increase the draw.                                                                                                           
Mr. Teal  answered in  the affirmative,  and elucidated  that                                                                   
the diagram  was meant  to illustrate  a long-term  flow, and                                                                   
did not  reflect the  one-time deposit.  He referred  to long                                                                   
arguments  on the subject  made in  the Senate State  Affairs                                                                   
Committee,  and stated  that he  would touch  on some of  the                                                                   
legal arguments and solutions later in the presentation.                                                                        
Mr.  Teal  discussed  inflation-proofing,   and  thought  the                                                                   
consideration  of  how  it  should  be done  was  more  of  a                                                                   
personal preference  than right  or wrong. He  suggested that                                                                   
the  committee  refrain  from  debating  the  topic  for  the                                                                   
Co-Chair MacKinnon  asked if  it was fair  to say  that under                                                                   
both models  inflation-proofing and capping in  the permanent                                                                   
fund was  the source of all  the funds being  considered. Mr.                                                                   
Teal answered in the affirmative.                                                                                               
Co-Chair   MacKinnon  discussed   the  permanent  fund.   She                                                                   
thought there  were to two  choices; not to  inflation-proof,                                                                   
or to reduce  the PFD to create additional  revenue for state                                                                   
Mr. Teal concurred.                                                                                                             
Vice-Chair  Micciche  considered   the  proposed  $3  billion                                                                   
deposit, and thought  that in order to get to  a $3.3 billion                                                                   
draw,  there  would  need to  be  a  6 percent  draw  in  the                                                                   
current year.                                                                                                                   
Mr.  Teal stated  that the  draw  was higher  in early  years                                                                   
(about  6 percent).  He  pointed  out that  there  was a  new                                                                   
forecast  out  and  new  interest rates.  He  stated  he  had                                                                   
examined  the  numbers   earlier  in  the  morning   and  had                                                                   
observed  that  under  the new  forecast,  including  a  full                                                                   
percent   lowering   of   long-term   interest   rates,   the                                                                   
sustainable draw  dropped from $3.3 billion  to approximately                                                                   
$2.5 billion.  He confirmed  that a  sustainable draw  needed                                                                   
to be carefully examined.                                                                                                       
Co-Chair  MacKinnon commented  that  there had  been a  model                                                                   
examined  by the  legislature  for a  couple  of months,  but                                                                   
with new  market numbers there  was a more conservative  view                                                                   
and  the draw  substantially dropped.  She acknowledged  that                                                                   
the  Commissioner   and  the   Deputy  Commissioner   of  the                                                                   
Department of Revenue (DOR) were in the audience.                                                                               
She  asked for  DOR Commissioner  Randall Hoffbeck  to get  a                                                                   
new  report from  Callan  Associates  to reflect  the  spring                                                                   
forecast. She thought  the report would aid  the committee in                                                                   
making   a  decision.   She  clarified   that  she  was   not                                                                   
criticizing  the  model  being  used,  but  rather  that  the                                                                   
current outcomes  looked different than  at the start  of the                                                                   
9:30:58 AM                                                                                                                    
Mr.  Teal highlighted  slide 7,  "5.  Change Dividend  Source                                                                   
and  Calculation  (PFPA)"  which   illustrated  changing  the                                                                   
amount and  source of the  permanent fund dividend,  based on                                                                   
50 percent of  the previous year's royalties.  He highlighted                                                                   
the practical consideration  of paying a dividend  in October                                                                   
with royalties  that  would be  coming in up  to nine  months                                                                   
later.  He  clarified  that  dividends   would  be  based  on                                                                   
royalties from  the prior year.  He drew attention  to arrows                                                                   
on the slide  that showed 74.5 percent of royalties  going to                                                                   
the ERA, and 50 percent of royalties going to dividends.                                                                        
Mr.  Teal  thought   the  cash  flow  diagram   was  no  more                                                                   
complicated than  the current cash  flow, and the  whole plan                                                                   
was  to  reduce  revenue volatility.  He  explained  that  by                                                                   
moving  the  two  volatile  revenue  sources  (royalties  and                                                                   
production tax), to  point to the ERA rather than  the GF, it                                                                   
would provide  a more  stable draw from  the ERA.  He thought                                                                   
that  conceptually the  governor's  plan [SB  128] worked  to                                                                   
stabilize  GF   earnings.  He  echoed  Co-Chair   MacKinnon's                                                                   
comments that there  was no new money included in  any of the                                                                   
plans being  presented,  and essentially  the plans were  re-                                                                   
plumbing only. He  commented that if one were to  look at the                                                                   
governor's  plan  as  a whole,  there  was  also  expenditure                                                                   
reductions  and revenue  enhancements.  He  pointed out  that                                                                   
the committee was  currently only looking at  the re-plumbing                                                                   
portion of the bill.                                                                                                            
9:33:22 AM                                                                                                                    
Mr. Teal  thought the plan explicated  in SB 128  raised some                                                                   
concerns,  and  specified  that   redirecting  royalties  and                                                                   
production  taxes  to  the  ERA  raised  some  legal  issues.                                                                   
Additionally, the  governor's plan put  a portion of  the CBR                                                                   
in to  the ERA, which  problematically changed  the character                                                                   
of the account.   Currently the ERA only held  permanent fund                                                                   
earnings,  was considered  part  of the  permanent fund,  and                                                                   
could not be swept  into the CBR at the end  of each year. He                                                                   
pondered  the  idea  of  three  different  fund  sources  and                                                                   
categories  going  into  the   ERA,  and  spending  from  the                                                                   
account  without  knowing  from  whence the  funds  came.  He                                                                   
recognized  that the ERA  was able  to be  spent at  any time                                                                   
for any  purpose. He did  not consider  the scenario to  be a                                                                   
real  problem, and  thought the  motivation  for putting  the                                                                   
taxes  in  was  very  clear  -   it  gave  the  governor  the                                                                   
sustainable draw  that he had  prioritized. He  discussed the                                                                   
motivation for drawing  from the CBR, and the  differences in                                                                   
interest between  the CBR (2 percent)  and the ERA  (close to                                                                   
7  percent).  In  addition to  5  percent  greater  interest,                                                                   
earnings of  the CBR remained  in the CBR, while  earnings of                                                                   
the  ERA could  be  spent with  a  simple majority  vote.  He                                                                   
thought the  easy way to do  what the governor wanted  was to                                                                   
create  another account  that held  royalties and  production                                                                   
tax, and iterate  that the sustainable draw was  based on the                                                                   
sum of  the two  with the corpus,  the ERA,  and the  CBR. He                                                                   
informed  that it  was not  necessary  to physically  combine                                                                   
the balances to  combine them on a spreadsheet  and determine                                                                   
the draw.  He emphasized  that he did  not want to  spend any                                                                   
more time discussing  the legal issues, unless  the committee                                                                   
wanted to delve further.                                                                                                        
9:36:53 AM                                                                                                                    
AT EASE                                                                                                                         
9:41:10 AM                                                                                                                    
Mr.  Teal  referenced  slide   8,  "Current  Cash  Flow"  and                                                                   
discussed another  concern with SB  128. He pointed  out that                                                                   
under the  PFPA, any  potential extra  funds from  production                                                                   
tax  (with  higher  oil  prices)  would go  in  to  the  ERA;                                                                   
therefore  the sustainable  draw would  not increase and  the                                                                   
windfall could  not be spent as  it currently could  with the                                                                   
funds flowing in  to the GF. He referred to  testimony by DOR                                                                   
earlier  in the  week  that pertained  to  allowing an  upper                                                                   
adjustment; however  the current bill did not  allow an upper                                                                   
adjustment  of the spending  limit except  for inflation.  He                                                                   
was concerned that  if the amount was adjusted  with windfall                                                                   
revenue, the  state could  spend approximately one  twentieth                                                                   
of the  revenue in each  year. If the  revenue was  unable to                                                                   
be  spent, the  bill  would provide  incentive  to break  the                                                                   
rules in order to access the funds.                                                                                             
Vice-Chair  Micciche   wondered  where   the  CBR   could  be                                                                   
deposited  without  a  three-quarter vote.  Mr.  Teal  stated                                                                   
that removing  any money  from the  CBR currently required  a                                                                   
supermajority vote.                                                                                                             
Vice-Chair  Micciche disagreed  that the  funds could  not be                                                                   
deposited in the corpus.                                                                                                        
Mr. Teal  stated that  it was  possible to  deposit from  the                                                                   
ERA into  the corpus at any  time, but an appropriation  from                                                                   
the CBR required  a supermajority vote, except  under certain                                                                   
conditions  outlined in  Article IX,  Section 17  (b) of  the                                                                   
Co-Chair  MacKinnon asked  if the  entire ERA  was put  in to                                                                   
the corpus  of the  permanent fund, it  would be  possible to                                                                   
access the CBR under the current scenario.                                                                                      
Mr. Teal  answered in  the affirmative,  and stated  that the                                                                   
reason for not  being able to access the CBR  was a provision                                                                   
that stated the  money available to spend must  exceed to the                                                                   
amount appropriated  in the prior  year. If the state  was to                                                                   
drain the  ERA by  putting it  in the corpus  of the  PF, the                                                                   
legislature could  avoid a supermajority vote on  the CBR. It                                                                   
was also  possible  to deposit  the ERA funds  into the  CBR,                                                                   
and it  would be possible to  have simple majority  access to                                                                   
the CBR. He thought  it did not make sense to  take ERA funds                                                                   
to run through  the CBR, when it was possible  to go directly                                                                   
from the ERA to the GF with a simple majority vote.                                                                             
9:46:07 AM                                                                                                                    
Senator Hoffman  thought the simplest  way to access  the CBR                                                                   
through   a  simple   majority   vote  was   to  change   the                                                                   
Mr. Teal concurred.                                                                                                             
Mr. Teal  addressed the  third issue  with the PFPA,  stating                                                                   
that  the act  relied heavily  on  long-term projections  and                                                                   
was sensitive to  changes in interest rates  and oil revenue.                                                                   
He  reiterated that  there was  a substantial  effect on  the                                                                   
sustainable  draw,  due  to  the   lower  interest  rate  and                                                                   
relying very  heavily in the  long-term on the  high interest                                                                   
Senator Bishop theorized  that for the governor's  plan to be                                                                   
more   complete  and   less  volatile   (by  protecting   the                                                                   
permanent  fund   and  the  sustainable  draw,   etc.),  more                                                                   
revenue  was  needed   that  was  less  volatile.   Mr.  Teal                                                                   
responded  in  the  affirmative,   and  clarified  that  less                                                                   
volatile  revenue would  include many  of the governor's  tax                                                                   
proposal plans including  the motor fuels tax  and the income                                                                   
Mr. Teal outlined  that the fourth issue with  the governor's                                                                   
plan  was a  semantic issue  or technicality,  and asked  the                                                                   
committee to  keep in  mind that a  sustainable draw  was not                                                                   
synonymous  with  a sustainable  budget.  He  furthered  that                                                                   
even if  it was possible to  project the draw  accurately, it                                                                   
would not necessarily  fill the deficit. He  posited that the                                                                   
re-plumbing alone  did not fill the anticipated  deficits. He                                                                   
furthered  that  the governor  was  aware  of the  fact,  and                                                                   
therefore  had included  expenditure  reductions and  revenue                                                                   
measures  in his  plan to  fill  the deficits  after the  re-                                                                   
plumbing was accomplished.                                                                                                      
Senator Hoffman  wondered if the deficit increased  from $3.8                                                                   
billion to $4.1  billion as a result of the  spring forecast.                                                                   
Mr.  Teal  recounted that  there  were  a number  of  factors                                                                   
affecting the  deficit; the revenue  itself was  reduced, and                                                                   
as a result  tax credits went  up. He reminded  the committee                                                                   
that when  oil prices were  low, profits were  low; therefore                                                                   
there was  a better chance of  having credits to turn  in for                                                                   
cash rather than the credits deducted from tax liability.                                                                       
9:50:43 AM                                                                                                                    
AT EASE                                                                                                                         
9:50:53 AM                                                                                                                    
Mr. Teal  stated that  LFD was  not finished  looking at  the                                                                   
full impact of the new revenue forecast.                                                                                        
Co-Chair MacKinnon  stated that the committee  was interested                                                                   
to know  the impact of the  forecast on FY 16.  She clarified                                                                   
the span  of fiscal  years. She  thought the spring  forecast                                                                   
was impacting  the legislature  during a  span between  FY 16                                                                   
and FY  17, and  considered that  the legislature would  have                                                                   
the  fiscal  year  reconciled   the  following  January.  She                                                                   
discussed the importance  of how much was drawn  from savings                                                                   
in FY  16, and how much  was proposed to  be drawn in  FY 17.                                                                   
She   noted  that   there  was   already   a  provision   for                                                                   
withdrawing  up to  $500 million  from the  CBR in  FY 16,  a                                                                   
portion of  which was expended  when the state  had purchased                                                                   
information from  TransCanada as it exited the  Alaska Liquid                                                                   
Natural Gas (AKLNG) project.                                                                                                    
Mr. Teal  discussed the  alternate fiscal  plan as  presented                                                                   
in SB  114, and informed  that he would  be showing  the same                                                                   
set  of diagrams,  starting with  the  diagram "Current  Cash                                                                   
Flow" on slide 8.                                                                                                               
Mr. Teal  looked at  slide 9,  "1. Change Royalty  Percentage                                                                   
(SB114/HB303)"   and  noted   that  the   first  change   was                                                                   
identical to  slide 3, and  signified reduction of  the share                                                                   
of royalties going to the permanent fund.                                                                                       
Mr. Teal  turned to slide  10, "2. Add  POMV Payout  (SB114 /                                                                   
HB303)" and noted  another facet of the bill  was the Percent                                                                   
of Market Value (POMV) draw. He  noted that under SB 114, the                                                                   
royalties  and  production taxes  still  pointed  to the  GF,                                                                   
whereas  under the  governor's plan  they were  moved to  the                                                                   
ERA. He  estimated  that the original  bill  had put forth  5                                                                   
percent, and if the permanent  fund value was $50 billion, it                                                                   
would signify  a 2.5  percent payout.  He thought the  payout                                                                   
would be  somewhere in the 2.3  percent to 2.5  percent range                                                                   
as time went on.                                                                                                                
Co-Chair MacKinnon  clarified that under SB 114,  there would                                                                   
be a combination  of permanent fund principal and  the ERA to                                                                   
do the draw. Mr. Teal concurred.                                                                                                
9:54:05 AM                                                                                                                    
Mr.  Teal thought  that it  was critical  to understand  that                                                                   
the 5 percent draw  was not an essential part  of SB 114; the                                                                   
draw was whatever the legislature determined it to be.                                                                          
Mr. Teal  discussed slide 11,  "3. Remove Inflation  Proofing                                                                   
(SB114  / HB303)."  He  relayed that  the  original bill  (SB
114) made  no mention of inflation  proofing, but it  did not                                                                   
signify that there  would not be inflation proofing.  He gave                                                                   
an example  of expected  earnings  at 6.9 percent,  with  a 5                                                                   
percent  payout. Under  the  scenario excess  earnings  would                                                                   
accumulate in the  ERA and eventually be appropriated  to the                                                                   
permanent  fund principal  and  inflation-proof  the fund  if                                                                   
they   were  deemed   sufficient  by   the  legislature.   He                                                                   
discussed  considering whether  the sum  of the two  accounts                                                                   
kept pace with  inflation. He summarized that  the governor's                                                                   
concept  of  "overflow" inflation-proofing  could  easily  be                                                                   
incorporated into SB 114.                                                                                                       
9:55:29 AM                                                                                                                    
Mr.  Teal showed  slide 12,  "4. Change  Dividend Source  and                                                                   
Calculation (SB114/HB303)."  He noted  that PFDs  were higher                                                                   
under SB 114  than under the PFPA  in SB 128. He  stated that                                                                   
the  governor's   bill  took  50  percent  of   prior  years'                                                                   
royalties,  whereas  SB 114  similarly  had 74.5  percent  of                                                                   
previous year's royalties going to dividends.                                                                                   
Senator  Hoffman asked  about the  provision of  SB 114  that                                                                   
yielded  a   higher,  fixed  dividend;  and   wondered  about                                                                   
dividends under SB 128 in the long term.                                                                                        
Mr. Teal  revealed that the  governor's plan took  50 percent                                                                   
of the  previous years' royalties  for dividends,  whereas SB
114  took 74.5  percent  of  the previous  year's  royalties,                                                                   
ergo SB 114  would always pay higher dividends.  He clarified                                                                   
that SB 114 might  have a dividend floor of  $1000. Under the                                                                   
governor's plan,  dividends would be in the  $700 range under                                                                   
the fall  forecast and decrease  to the $500 range  under the                                                                   
spring  forecast. In  SB  114, dividends  would  be fixed  at                                                                   
$1000  regardless of  market  conditions.  He concluded  that                                                                   
depending on  the version of  SB 114, dividends  would always                                                                   
be higher, and perhaps substantially higher.                                                                                    
Co-Chair  MacKinnon asked  if a  dividend floor  was set  and                                                                   
attached  to  royalties,   and  what  would  happen   if  the                                                                   
royalties could not  pay out the sufficient  amount. Mr. Teal                                                                   
stated  that   dividends  did   not  necessarily   come  from                                                                   
royalties;  rather  it  was an  amount  equivalent  to  prior                                                                   
year's  royalties. Royalties  went  to the  GF,  and if  they                                                                   
were less than  the dividend payment, additional  GF would be                                                                   
used to pay the dividends.                                                                                                      
Co-Chair MacKinnon  wondered if the subject was  something to                                                                   
review.  She thought the  spring forecast  indicated  that in                                                                   
five to  ten years there  would be oil  volume in the  200 to                                                                   
300 barrel range.                                                                                                               
Mr.  Teal confirmed  that total  royalties  were expected  to                                                                   
decline  over  time,  even  as   prices  went  up,  therefore                                                                   
dividends would decline over time.                                                                                              
Co-Chair MacKinnon  thought that the spring forecast  did not                                                                   
take in  to account  new promising  finds in  the oil  fields                                                                   
and stayed  with a  conservative approach.  Mr. Teal  was not                                                                   
aware of  new finds,  and stated that  the fall forecast  was                                                                   
treated similarly.                                                                                                              
9:59:36 AM                                                                                                                    
Mr. Teal  displayed slide  13, "PFPA  vs. SB114/HB303"  which                                                                   
was a  comparison of  SB 128 and  SB 114.  He noted  that the                                                                   
black  arrows on  the slide  signified  cash flow  conditions                                                                   
that remained  the same;  while the PFPA  was shown  in blue,                                                                   
and  SB 114  was  shown  in red.  He  noted that  both  bills                                                                   
treated  the dedicated  portion of royalties  the same,  with                                                                   
.5 percent  going  to the Public  School Trust  Fund, and  25                                                                   
percent to  the permanent  fund principal.  He pointed  out a                                                                   
difference  in  where  royalties   and  production  tax  were                                                                   
directed: to  the GF under SB  114, and to the ERA  under the                                                                   
PFPA. He  highlighted the difference  in the bills  comparing                                                                   
a fixed  draw to a POMV  draw. He elucidated that  at $85/bbl                                                                   
oil,  production  taxes  would  be about  $800  million.  The                                                                   
fixed draw, under  the original plans, was $3.3  billion. The                                                                   
POMV draw  would pay about  $2.5 billion, but  the production                                                                   
tax continued  to go in to  the GF. He summarized  that under                                                                   
SB 114;  if the price  of oil was  less than $85/bbl,  the GF                                                                   
would get less  money, and if oil was more than  $85/bbl, the                                                                   
GF would get more.                                                                                                              
Mr.  Teal continued  to discuss  slide 13,  and thought  that                                                                   
the committee would  need to debate the method  and amount of                                                                   
the  draw  from the  ERA.  He  thought  that the  concept  of                                                                   
inflation  proofing was  not a huge  consideration, as  there                                                                   
was no great  conceptual difference between the  two methods.                                                                   
He  did   not  think   the  difference   in  the  bills   was                                                                   
substantive,  nor  was  the dividend  amount.  He  considered                                                                   
that  the  bills  were  conceptually  close,  with  the  only                                                                   
significant  difference  being the  degree  of stability.  He                                                                   
opined that  the PFPA  offered a  more stable revenue  stream                                                                   
than  did SB  114, which  was governor's  intent. He  thought                                                                   
the  obvious  question  was  if the  PFPA  a  clearly  better                                                                   
approach if stability was good.                                                                                                 
Vice-Chair Micciche  pointed out  that the plans  only worked                                                                   
as long as  there was balance  in the ERA to cover  the draw.                                                                   
He clarified  for the  public that even  though the  POMV was                                                                   
based  on the  balance  of the  permanent  fund,  it was  not                                                                   
possible to draw from the corpus.                                                                                               
Mr. Teal  concurred,  and stated  that none  of the plans  he                                                                   
had  seen   raided  the  permanent   fund,  because   it  was                                                                   
constitutionally  protected.  The plans  drew  only from  the                                                                   
earnings  of the  permanent fund,  which was  intended to  be                                                                   
appropriated when it was set up.                                                                                                
10:05:00 AM                                                                                                                   
Vice-Chair  Micciche  thought   that  the  term  "sustainable                                                                   
draw"  was  being   used  loosely;  and  rather   than  being                                                                   
sustainable,  it was  merely  a way  to  conserve savings  as                                                                   
long as possible.                                                                                                               
Mr.  Teal  agreed  and  reiterated   that  there  was  a  big                                                                   
difference  between  a  sustainable draw  and  a  sustainable                                                                   
budget.  The  sustainable draw  was  too  small to  render  a                                                                   
sustainable budget.                                                                                                             
Vice-Chair  Micciche  thought  a sustainable  draw  would  be                                                                   
able to  deliver the same quantity  or percentage of  draw in                                                                   
perpetuity, but neither bill provided such.                                                                                     
Co-Chair MacKinnon  commented that a sustainable  draw in the                                                                   
bill   was   predictable   under    the   current   financial                                                                   
circumstances in  the state. She  referred to the  concept of                                                                   
a "glide  path" so there  was not an  immediate crash  in the                                                                   
economy  or sharp decline  in state  services. She  discussed                                                                   
spending scenarios using new data.                                                                                              
Vice-Chair  Micciche referred  to bringing  down the  cost of                                                                   
government  and  thought  that   additional  revenue  sources                                                                   
should be part of the discussion.                                                                                               
Co-Chair MacKinnon  asserted that the committee  had informed                                                                   
the  public it  would examine  the budget,  and consider  the                                                                   
most   impactful   legislation   to   address   the   revenue                                                                   
Senator Bishop  emphasized the need  for a healthy  oil, gas,                                                                   
and mining program.                                                                                                             
Senator Olson discussed  Mr. Teal's comment about  a possible                                                                   
shortfall  in the  ERA and  the eventuality  of the  dividend                                                                   
coming  from  the  GF. He  wondered  if,  considering  future                                                                   
predictions,  the model  was  sustainable.  Mr. Teal  thought                                                                   
that  dividend issues  would be  perceptible  when the  state                                                                   
turned to a model.                                                                                                              
10:09:27 AM                                                                                                                   
Mr.  Teal  turned to  slide  14,  "PFPA  vs. POMV:  Which  is                                                                   
     1.  A  fixed  draw  is  highly   dependent  on  actually                                                                   
     attaining  the projected rates  of return and  projected                                                                   
     oil revenue.                                                                                                               
     2. Those  projections look  forward 20 years--hence  the                                                                   
     need for review of sustainability of the draw.                                                                             
     3. We are  not very good at projecting  rates of return,                                                                   
     and even worse at projecting oil revenue.                                                                                  
     4.  POMV  looks backwards  5  years  and the  payout  is                                                                   
     based on actual events rather than on projections.                                                                         
     5.  Ask  yourself  this   question:  Is  your  hindsight                                                                   
     better than your foresight?                                                                                                
     6.  Lest that  question appears  to  be one-sided,  note                                                                   
     that  POMV fails  the  stability test-if  royalties  and                                                                   
     production  tax revenue  jump $4b  and fill the  deficit                                                                   
     without the  need for a payout, the payout  still occurs                                                                   
     and  there   would  be  a   tendency,  or  at   least  a                                                                   
     possibility, of spending the windfall.                                                                                     
     7.  Is  there  a  hybrid  that  offers  the  comfort  of                                                                   
     hindsight offered by POMV and the stability of PFPA?                                                                       
Mr. Teal  referred to economist  Dr. Scott Goldsmith,  of the                                                                   
Institute  of Social  and  Economic Research,  University  of                                                                   
Alaska Anchorage;  and said many people considered  his model                                                                   
(in which  spending could be  approximately $4.5  billion) as                                                                   
a  sustainable  plan.  He reported  that  Dr.  Goldsmith  had                                                                   
testified  in the  Senate State  Affairs  committee that  the                                                                   
model had  used a year-old oil  forecast, and under  the fall                                                                   
forecast  the same  calculations showed  a sustainable  level                                                                   
of spending closer to $2.7 billion.                                                                                             
Co-Chair MacKinnon  asked about the lowest dividend  that had                                                                   
been  paid  to  residents.  Mr.  Teal  did  not  recall,  and                                                                   
referred  to a  graph  within  the governor's  proposal  that                                                                   
showed   dividends  over   the   years   and  reflected   the                                                                   
volatility  and  low dividends  in  the  early years  of  the                                                                   
Mr. Teal continued  to discuss slide 14, and  stated that the                                                                   
projections were  critical. He compared that the  PFPA looked                                                                   
forward 20  years and  projected rates  of return;  while the                                                                   
POMV looked backwards  5 years, with a  self-adjusting payout                                                                   
based on  actual events  rather than  projects. He  commented                                                                   
that he  would much  prefer to  consider historical  earnings                                                                   
rather than projected  earnings. He did not  want his comment                                                                   
to be  perceived as being entirely  in favor of  the approach                                                                   
of SB 114, and  reminded the committee that  the governor did                                                                   
not  take the  POMV approach  because he  considered that  it                                                                   
failed the  stability test.  He stated that  if the  price of                                                                   
oil spiked  in the  short term, the  state would  continue to                                                                   
get the payout  even if the oil revenues filled  the deficit.                                                                   
He  mused  that  a  payout on  top  of  other  revenue  would                                                                   
possibly be spent  rather than saved. He questioned  if there                                                                   
was  some  way   to  combine  the  two  approaches   to  take                                                                   
advantage  of the  hindsight of  POMV, and  the stability  of                                                                   
the PFPA.                                                                                                                       
10:13:53 AM                                                                                                                   
Co-Chair  MacKinnon  asked  about  when  Alaska's  Clear  and                                                                   
Equitable Share  (ACES) tax and progressivity  were in effect                                                                   
and wondered  if during  that time the  state had  spent more                                                                   
than  it  saved.  Mr. Teal  answered  in  the  negative,  and                                                                   
recounted  that there  had been  a zero balance  in the  SBR,                                                                   
and the  state had owed  over $5 billion  to the CBR.  The $5                                                                   
billion was  repaid and the fund  balance had been  built up,                                                                   
as  well as  a substantial  balance in  the SBR.  He had  not                                                                   
compared how  much was saved with  how much was  spent during                                                                   
the years in question.                                                                                                          
Co-Chair MacKinnon  considered that the state had  saved more                                                                   
than the  growth in  government. She  believed that  in times                                                                   
of   surplus,   past   legislatures  had   saved   more   and                                                                   
contributed  to  the permanent  fund  corpus. She  wanted  to                                                                   
retrospectively  thank the members  that had made  the choice                                                                   
to save while in a time of surplus.                                                                                             
Senator Olson stated  that he had been on the  Senate Finance                                                                   
Committee  during  the  time being  discussed.  He  furthered                                                                   
that 16 years previously  the CBR had been down  to nearly $2                                                                   
billion,  and  the  legislature   had  built  it  up  to  $17                                                                   
billion.  He agreed  with Co-Chair  MacKinnon regarding  past                                                                   
legislatures putting funds in to savings.                                                                                       
Co-Chair  MacKinnon  recognized  that  everyone  was  working                                                                   
together,  and thought  that when  blame was  placed it  took                                                                   
energy away from solving the problem.                                                                                           
Mr. Teal  clarified that he was  not trying to  blame anyone.                                                                   
He made  the point  that the governor  thought stability  was                                                                   
important because  there was a  tendency to spend  money when                                                                   
it  was  available,  and  therefore  favored  a  sustainable,                                                                   
fixed  payout and  tried to avoid  volatility  in the GF.  He                                                                   
asserted  that was  the reason  the governor  did not  choose                                                                   
the POMV option.                                                                                                                
10:17:55 AM                                                                                                                   
Senator  Bishop  recalled  that  Mr. Teal  had  testified  in                                                                   
front  of  the  committee a  year  previously.  He  mentioned                                                                   
spikes in  spending and catching  up on deferred  maintenance                                                                   
with capital projects.  He wanted to see the  legislature and                                                                   
the   administration   come    together   and   implement   a                                                                   
sustainable  plan  to  drive down  deferred  maintenance.  He                                                                   
thought  deferred  maintenance of  state  assets  had been  a                                                                   
major  cost driver  in  state budgets  in  times of  economic                                                                   
Co-Chair MacKinnon  associated herself with  Senator Bishop's                                                                   
comments  and furthered  that  there had  been  a "spike  and                                                                   
spend"  as well  as a  gradual increase  on operating  budget                                                                   
items.  She thought  the largest  volatility  was when  there                                                                   
was more funding available.                                                                                                     
Vice-Chair  Micciche largely  agreed  with  the two  previous                                                                   
speakers, and suggested  that before catching up  on deferred                                                                   
maintenance   it  was  important   to  analyze  which   state                                                                   
services  the  state  could afford  to  continue  delivering.                                                                   
Additionally  he  wondered  which   assets  attached  to  the                                                                   
services should no longer be owned by the state.                                                                                
Senator  Dunleavy commented  that  graphs had  shown that  in                                                                   
times of greater  income, the state had spent  more and saved                                                                   
10:20:06 AM                                                                                                                   
Co-Chair  Kelly commented  on the large  investment into  the                                                                   
unfunded  liability  for  the  Public  Employees'  Retirement                                                                   
System  (PERS)  and the  Teachers  Retirement  System  (TRS),                                                                   
which  had accounted  for a large  portion  of the spikes  in                                                                   
past spending. He  thought that accounting for  inflation and                                                                   
population  growth,  the  previous year's  spending  was  the                                                                   
lowest since  2003. He  thought that  the legislature  was at                                                                   
the  point where  it must  interact  with the  administration                                                                   
differently.   He   discussed  unallocated   reductions   and                                                                   
suggested  that the governor  had been  unwilling to  support                                                                   
them. He  considered that  the legislature  could be  likened                                                                   
to a  board of directors,  and it  was the responsibility  of                                                                   
the executive  to manage  the administration.  He thought  it                                                                   
was time  to make further  reductions in spending,  including                                                                   
unallocated  reductions.  He  emphasized  the  need  for  the                                                                   
administration  to specify  areas  for cuts.  He referred  to                                                                   
the  federal government  blocking  access  to oil  production                                                                   
and development in the state.                                                                                                   
10:24:26 AM                                                                                                                   
Mr.  Teal  referenced  slide  16,  "Decision  Points,"  which                                                                   
depicted a cash  flow diagram with decision  points indicated                                                                   
numerically on cash flow the diagram.                                                                                           
Mr. Teal reviewed slide 17, "Decision Points":                                                                                  
     1. Do you direct volatile revenue to the GF or the                                                                         
     ERA? Trade-off: fixed draw vs. "good enough"                                                                               
     stability. This choice is made once you decide on #4.                                                                      
     2. Reduce dedication to 25%? Do you save while                                                                             
     harvesting? Not a critical decision-it affects 10s of                                                                      
     millions vs. 100s of millions under decision #3.                                                                           
     3. Inflation Proofing--Do you want greater protection                                                                      
     of the permanent fund if it increases the risk of                                                                          
     failing  to have  the  cash needed  for  a payout?  Once                                                                   
     money is in  the PF, it can never be spent,  while money                                                                   
     in the ERA can be spent any time.                                                                                          
     4. The  payout is your  first critical decision.  Trade-                                                                   
     off: do  you favor  a forward-looking, manual  adjusting                                                                   
     fixed  draw  that  promises   greater  stability,  or  a                                                                   
     backward-looking,  self-adjusting draw that  offers less                                                                   
     stability? Spending  restraint under high  oil prices is                                                                   
     a  key element  of  PFPA. But  POMV's  weakness in  that                                                                   
     area  can be overcome  by limiting  the payout  to prior                                                                   
     year  appropriations  (plus  some  room for  growth,  if                                                                   
     desired).  The   POMV  payout  can  be  turned   into  a                                                                   
     spending limit.                                                                                                            
     If  you chose  a variable  draw, what  payout rate  will                                                                   
     you  choose? Trade-off:  a lower  rate means less  money                                                                   
     now,  but  it increases  growth  of  the ERA  and  other                                                                   
     reserves  so could  mean larger payouts  in the  future.                                                                   
     4.5% of $70b is greater than 5% of $60b.                                                                                   
Mr. Teal  noted that the  Senate State Affairs  Committee had                                                                   
incorporated a  spending limit into  SB 114, and  opined that                                                                   
there were  other limits that  were considered that  may have                                                                   
been more effective.                                                                                                            
Co-Chair MacKinnon  referred to  the spending limit  that had                                                                   
been discussed the  previous day, and highlighted  a question                                                                   
by  Senator  Hoffman  regarding   the  combined  capital  and                                                                   
operating   budgets.  She  mentioned   greater  spending   on                                                                   
deferred  maintenance  as  discussed by  Senator  Bishop,  as                                                                   
well  as  investing  with  one-time   funds  for  a  one-time                                                                   
Mr.  Teal stated  that there  were  many considerations,  and                                                                   
many  types   of  limits  to   implement  by   percentage  or                                                                   
Co-Chair   MacKinnon   considered   the  bills   before   the                                                                   
committee,  and  wondered  if  they  would  prevent  a  large                                                                   
project (such as the AKLNG project) from going forward.                                                                         
Mr. Teal thought it was possible.                                                                                               
10:28:30 AM                                                                                                                   
Mr. Teal  continued to discuss  slide 17. He read  from slide                                                                   
18, which was a continuation of slide 17:                                                                                       
     But a  lower payout  rate means  larger deficits  in the                                                                   
     short-term-do  you want to  reduce spending  or increase                                                                   
     taxes  to  fill  the  gap, or  do  you  have  sufficient                                                                   
     reserves to  fill deficits? The longer you  wait to act,                                                                   
     the  lower your  reserves  and the  higher  the risk  of                                                                   
Mr.  Teal explained  that the  choice between  types of  draw                                                                   
would determine inter-generational equity.                                                                                      
Co-Chair  MacKinnon referenced  a conversation  related  to a                                                                   
challenge to the  state's ability to pay out  a dividend. She                                                                   
discussed  the   method  of  calculating  the   amount  of  a                                                                   
dividend,  and referred  to  negative earnings.  She  thought                                                                   
that under the  current dividend formula, there  had been one                                                                   
month in  which the  PFD was  not scheduled  to be  paid. She                                                                   
recalled that  the market has  risen enough during  the month                                                                   
that  it  triggered the  formula  to  be  able to  provide  a                                                                   
Mr.  Teal  affirmed that  in  2009,  the permanent  fund  had                                                                   
suffered large  losses and  had almost been  unable to  pay a                                                                   
dividend.  All of the  losses had  diminished the ERA,  where                                                                   
the earnings  accumulated. He  stated that under  the current                                                                   
formula it was  possible that the state would not  be able to                                                                   
pay  dividends.  He referred  to  statutory net  income,  and                                                                   
stated that  it did not take  market recovery to pay  out the                                                                   
dividend.  The  permanent  fund  could have  sold  stock  and                                                                   
earned positive gains in order to be able to pay dividends.                                                                     
Co-Chair    MacKinnon    commented     that    the    current                                                                   
administration  was  relatively  new,  and  perhaps  had  not                                                                   
observed  the long-term  volatility  of  state finances.  She                                                                   
thought  the fixed  draw  had its  own  set of  circumstances                                                                   
that could cause problems.                                                                                                      
Mr. Teal recalled  that when the state had  difficulty paying                                                                   
dividends  it was during  high oil  prices with high  revenue                                                                   
for  the state.  He pointed  out that  conversely, the  state                                                                   
had  been  paying  record high  dividends  when  the  state's                                                                   
fiscal  health   was  diminished.  He  emphasized   that  the                                                                   
current method of  calculating dividends did not  reflect the                                                                   
fiscal health of the state.                                                                                                     
10:34:13 AM                                                                                                                   
Senator Bishop quipped  that a Fortune 500 company  would not                                                                   
use  the same  method and  expect  to stay  in business.  Mr.                                                                   
Teal termed  the circumstance  "record dividends  with record                                                                   
Mr. Teal continued discussing slide 18:                                                                                         
     5. Second  critical choice is  the amount and  source of                                                                   
     dividends.  This applies  to #5 and  #6. Recall  that IP                                                                   
     can  never   be  spent,  but  it  spins   off  spendable                                                                   
     earnings  in   the  future.  Once  money   is  spent  on                                                                   
     dividends,  it   can  never  be  recovered.   Trade-off:                                                                   
     higher dividends  mean lower  reserves and greater  risk                                                                   
     of  unfillable  deficits  (or higher  taxes  or  reduced                                                                   
     spending  on things other  than dividends).  This trade-                                                                   
     off  exists  regardless  of  the  source  of  dividends.                                                                   
     Another trade-off: dividends and the economy.                                                                              
     6.  The source  of  money  for dividends  may  not be  a                                                                   
     critical   choice  in  terms   of  maintaining   healthy                                                                   
     reserves,  but  it  is  a  decision  you  will  need  to                                                                   
     debate.  Dividends now reflect  the health of  financial                                                                   
     markets  rather than  the  fiscal health  of the  state.                                                                   
     Basing  dividends on  royalties (PFPA  and SB114)  would                                                                   
     bring   in  short-term  fiscal   health,  while   basing                                                                   
     dividends  on reserve  balances (HB224)  would bring  in                                                                   
     long-term  fiscal health.  Why  not do  all three?  That                                                                   
     would  provide  a  stable, guaranteed  dividend  with  a                                                                   
     7. And  8. Deciding what  to do with money  that remains                                                                   
     after the  deficit is filled  and dividends are  paid is                                                                   
     hardly  worth talking  about. You  can set  up rules  or                                                                   
     leave that decision to future legislatures.                                                                                
Mr. Teal  displayed a  model that  depicted four  interactive                                                                   
graphs  (copy not  on file).  [The  graphs represented  model                                                                   
projections  of  PFDs,  budget reserves,  and  the  permanent                                                                   
fund]. He  addressed the  first graph in  the upper  left. He                                                                   
discussed  how  different  draw scenarios  would  affect  the                                                                   
graph  being  examined.  He  showed  a  graph  depicting  the                                                                   
current  cash flow  model,  which  showed an  unplanned  draw                                                                   
from the  ERA in red.  He noted that  the model was  based on                                                                   
the assumption  that if revenue  did not reach  expenditures,                                                                   
funds would  be drawn from the  CBR to fill the  deficit. The                                                                   
model  showed  the  CBR  completely expended  in  FY  18.  He                                                                   
continued that  when the CBR was  gone, the state  would turn                                                                   
to the  ERA to draw  funds. If the  state continued  to spend                                                                   
in the same fashion,  it would expend the ERA.  He noted that                                                                   
there was a large  corpus in the ERA, which  would still spin                                                                   
off  earnings  available to  spend  after  inflation-proofing                                                                   
and dividends.                                                                                                                  
10:39:00 AM                                                                                                                   
Mr.  Teal  postulated   that  thought  the  easiest   way  to                                                                   
evaluate a plan was to examine reserves.                                                                                        
Co-Chair Kelly  asked about  values on  the models.  Mr. Teal                                                                   
explained  that the  point of  the model was  the ability  to                                                                   
change  variables.   He  explained  that  if   reserves  were                                                                   
declining,  it meant  the  state  had a  structural  deficit,                                                                   
which would  eventually lead to  a broken plan.  He discussed                                                                   
the  second graph,  "Budget Reserves"  and  referred back  to                                                                   
the first graph,  outlining a scenario under  which the state                                                                   
would  have  no choice  but  to  increase revenue  or  reduce                                                                   
expenditures.  He discussed  the timeline  of the status  quo                                                                   
scenario, and stated that reserves would be gone in FY 22.                                                                      
Mr.  Teal  clarified   that  the  numbers   represented  were                                                                   
gleaned from  the fall forecast.  He updated the  interactive                                                                   
graph on  budget reserves to  reflect the recently  published                                                                   
spring forecast,  which  showed the diminishment  of  the CBR                                                                   
by FY 17, as well as the diminishment of the ERA by FY 20.                                                                      
Co-Chair  MacKinnon asked  if  the model  projected a  status                                                                   
quo budget reduced by approximately $500 million.                                                                               
Mr.  Teal  adjusted   the  model  and  stated   that  if  the                                                                   
committee  passed an  operating  budget similar  to one  that                                                                   
the House  and Senate had adopted  and cut $500  million, the                                                                   
reserves did not increase for very long.                                                                                        
Co-Chair  MacKinnon asked  if the  projections reflected  the                                                                   
one percent drop  in interest rate. Mr. Teal  answered in the                                                                   
negative,  and adjusted  the  graph to  reflect  the drop  in                                                                   
interest rate.  The graph showed  exhaustion of  reserves and                                                                   
expenditures  substantially higher with  no reserves  to fill                                                                   
the deficit.  He reiterated  that  the choice  was to cut  to                                                                   
the  level of  revenue,  or raise  revenue  to  the level  of                                                                   
10:44:30 AM                                                                                                                   
Vice-Chair  Micciche  asked  if   the  hypothetical  scenario                                                                   
included  a $500  million  cut. Mr.  Teal  verified that  the                                                                   
current  variables  included  the proposed  $500  million  in                                                                   
cuts and the spring revenue forecast.                                                                                           
Co-Chair  MacKinnon  drew attention  to  the idea  of  moving                                                                   
management  of the  CBR  to the  permanent  fund. She  stated                                                                   
that  there was  a rate  of return  for the  CBR required  by                                                                   
statutes. She wondered  if co-locating management  of the CBR                                                                   
with  the  permanent  fund would  increase  efficiencies  and                                                                   
garner  a higher  rate of  return.  She noted  that the  move                                                                   
would take a structural change in statute.                                                                                      
Senator  Hoffman  asked  for   a  demonstration  of  how  the                                                                   
state's   finances   would   appear   if   $2   billion   was                                                                   
hypothetically cut from the budget.                                                                                             
Mr.  Teal adjusted  the  interactive graph  to  reflect a  $1                                                                   
billion cut from  the FY 17 governor's amended  budget, which                                                                   
showed budget reserves extending further.                                                                                       
Co-Chair MacKinnon  asked Mr.  Teal to  adjust the  graphs to                                                                   
view  the  governor's  proposal  [SB 128]  under  the  spring                                                                   
Mr. Teal  stated that  the governor's  plan  and SB 114  both                                                                   
accomplished  the  goal  of  providing   a  "glide  path"  by                                                                   
eliminating  inflation-proofing  and reducing  dividends.  He                                                                   
stated  that   if  the   state  stopped   inflation-proofing,                                                                   
reserves  were   extended  but  did  not  solve   the  fiscal                                                                   
problem.  If the  state were  to stop  dividends, then  there                                                                   
would be a sustainable  budget. He viewed the  model with the                                                                   
spring  forecast.   He  stated   that  re-plumbing   was  not                                                                   
necessary   to   accomplish  what   was   demonstrated.   The                                                                   
legislature    could   eliminate    inflation-proofing    and                                                                   
eliminate dividends, which he acknowledged was complex.                                                                         
10:50:10 AM                                                                                                                   
Mr.  Teal  continued   to  examine  the   interactive  models                                                                   
reflecting  the  governor's plan,  which  included  dividends                                                                   
based on  50 percent of  royalties and  a fixed draw  of $3.3                                                                   
billion.  He observed  that  revenue  had declined  below  $2                                                                   
billion.  Even under  the  much  lower spring  forecast,  the                                                                   
$3.3  draw   gave  the  state   a  glide  path,   much  lower                                                                   
dividends,  continued  CBR draws,  and unplanned  draws  from                                                                   
the  ERA. Mr.  Teal  continued  inserting variables  such  as                                                                   
reduction of long-term interest rates.                                                                                          
Mr. Teal  examined the models  reflecting SB 114.  He offered                                                                   
to return  to the committee  or meet with individual  members                                                                   
to review the model.                                                                                                            
Co-Chair MacKinnon  stated that the committee  would be happy                                                                   
to invite  Mr. Teal back  for further testimony,  and members                                                                   
could   meet   with   him  individually   to   gain   further                                                                   
understanding  of the models.  She referred  to the  decision                                                                   
points he had discussed earlier.                                                                                                
Co-Chair  MacKinnon  discussed   the  public  testimony  that                                                                   
would  happen later  in  the day.  She  handed  the gavel  to                                                                   
Senator Micciche.                                                                                                               
10:54:02 AM                                                                                                                   
1:35:21 PM                                                                                                                    
Vice-Chair  Micciche  discussed  the afternoon  schedule.  He                                                                   
recognized  former Senator  John  Binkley, former  Lieutenant                                                                   
Governor  Fran Ulmer,  former Representative  Tom Brice,  and                                                                   
Senator Dennis Egan in the gallery.                                                                                             
^PUBLIC TESTIMONY: JUNEAU                                                                                                     
1:36:49 PM                                                                                                                    
FRAN  ULMER, SELF,  JUNEAU, testified  about  the fiscal  gap                                                                   
facing the  state. She  was testifying  as a long-time  state                                                                   
resident,  and recounted  that her  first job  in Alaska  was                                                                   
working  as an attorney  for the  legislature. She  continued                                                                   
that  she had  worked for  former Governor  Jay Hammond,  and                                                                   
was present during  the time the permanent fund  was created.                                                                   
She reminded the  committee that when the permanent  fund was                                                                   
being  formed  there had  been  a  great deal  of  discussion                                                                   
concerning  the eventuality  of oil  revenues declining,  and                                                                   
thought it  was important  for the  legislature to  provide a                                                                   
long-term   fiscal  regime   that  would   give  comfort   to                                                                   
businesses  and  families  in  Alaska. She  shared  that  the                                                                   
previous  day the Rasmuson  Foundation  had called a  meeting                                                                   
of  all former  governors  and  lieutenant governors  of  the                                                                   
state to  discuss the fiscal gap  and see if the  group could                                                                   
make  a  recommendation  for action  during  the  legislative                                                                   
session.  She  recounted  that  seven  bi-partisan  attendees                                                                   
were present  and able  to reach consensus.  She read  from a                                                                   
consensus statement  that was a  result of the  meeting (copy                                                                   
on file):                                                                                                                       
     The current state deficit is the most significant in                                                                       
     state history.                                                                                                             
     1. We do not have enough revenue to pay for the                                                                            
        government we currently have. We have to do some                                                                        
        significant changing in how we do business.                                                                             
     2. We need a combination of cuts and new revenues.                                                                         
     3. The Permanent Fund was created to help pay for                                                                          
        essential state services when oil declined.                                                                             
     4. Everybody benefits from state services and everybody                                                                    
        should help pay for them. It is important for people                                                                    
        to help pay for governments so they are connected to                                                                    
        how government funds are spent.                                                                                         
     5. We can protect the Permanent Fund dividend for the                                                                      
        long term if we commit to use a share of Permanent                                                                      
        Fund earnings to make a significant reduction in the                                                                    
     6. Making decisions today to adopt a sustainable,                                                                          
        balanced budget is essential. The longer we wait,                                                                       
        the fewer options we have.                                                                                              
Ms. Ulmer  relayed that  the statement  was signed  by former                                                                   
Governor  Tony  Knowles,  former   Governor  Bill  Sheffield,                                                                   
former  Governor Frank  Murkowski, former  Lt. Governor  Mead                                                                   
Treadwell,  former  Lt.  Governor  Loren  Leman,  former  Lt.                                                                   
Governor  Stephen McAlpine,  and  herself.  She relayed  that                                                                   
former  Lieutenant Governor  Mead Treadwell  had intended  to                                                                   
join  her in  testifying but  had  been unable  to attend  in                                                                   
person and  would call  in. She  asserted that the  consensus                                                                   
statement  was  a  bipartisan  action.  She  thought  it  was                                                                   
incredibly important  for action to  be taken in  the current                                                                   
1:42:09 PM                                                                                                                    
FRANK  BERGSTROM,   SELF,  JUNEAU,  recounted   that  he  had                                                                   
received his  PFD all the  years he had  lived in  Alaska. He                                                                   
expressed  that   the  growth  of  the  permanent   fund  was                                                                   
wonderful and  considered that it  should be used to  pay for                                                                   
1:43:42 PM                                                                                                                    
MARY BECKER,  MAYOR, CITY  AND BOROUGH  OF JUNEAU,  indicated                                                                   
that the  City of  Juneau had  passed a  resolution (copy  on                                                                   
file) that  supported using  the permanent  fund earnings  to                                                                   
help create a sustainable balanced budget.                                                                                      
Vice-Chair  Micciche  thanked   Ms.  Becker  for  serving  as                                                                   
Acting Mayor for the City of Juneau.                                                                                            
1:44:51 PM                                                                                                                    
ERIN WALKER  TOLLES, EXECUTIVE  DIRECTOR, CATHOLIC  COMMUNITY                                                                   
SERVICES,  JUNEAU, testified  in support  of using  permanent                                                                   
fund earnings  to fund  state government.  She discussed  the                                                                   
function  of Catholic  Community  Services  (CCS), and  noted                                                                   
that its  funding was a  combination of federal,  tribal, and                                                                   
city funds.  She recounted  that the  agency was feeling  the                                                                   
effects of  the recent budget  cuts and preparing  to receive                                                                   
less money  from communities.  She stated  that the  board of                                                                   
directors  of CCS  had  passed a  resolution  (copy on  file)                                                                   
urging  the committee  to  use  earnings from  the  permanent                                                                   
fund to fund the  budget. She noted that CCS  had already had                                                                   
to  cut days  of  some of  its  senior centers  in  Southeast                                                                   
Alaska.  She discussed  the  impact of  the  cuts on  elders,                                                                   
families, and children.                                                                                                         
1:47:09 PM                                                                                                                    
BILL  CORBUS, SELF,  JUNEAU, testified  in  support of  using                                                                   
the ERA to help  bridge the state's deficit.  He relayed that                                                                   
he  had  been  following  SB  114  and  SB  128  through  the                                                                   
committee process  and thought he was  up to date on  all the                                                                   
changes  to  the  bills.  He was  in  support  of  using  the                                                                   
permanent  fund earnings  reserve to bridge  the fiscal  gap.                                                                   
He thought the  funds were the most important  component that                                                                   
the  state had  at its  disposal  to make  up the  difference                                                                   
between state  spending and state  revenue. He  was concerned                                                                   
that the  cash flow  that came  from the  statutory plan  for                                                                   
using the  ERA plus  the new dividend  plan were  adequate so                                                                   
that  remaining   funds  (spending   cuts  and  taxes)   were                                                                   
realistically able  to bridge  the fiscal gap.  He emphasized                                                                   
his  support for  using the  ERA, and  particularly that  the                                                                   
change be accomplished within the current year.                                                                                 
1:49:31 PM                                                                                                                    
TOM BRICE,  SELF, JUNEAU,  testified in favor  of SB  114 and                                                                   
SB 128.  He referred to October  2, 2014; which was  the last                                                                   
day  the price  of  oil was  above  $90/bbl.  He referred  to                                                                   
having experienced  a similar budget situation  in the 1990s,                                                                   
and thought  the decisions  the legislature  were faced  with                                                                   
were  difficult. He  pointed out  the substantial  difference                                                                   
in oil  production between the  two time periods.  He thought                                                                   
the governor's  approach was  a cornerstone  of how  to solve                                                                   
state  fiscal   issues  without  massive  taxes   or  massive                                                                   
further  cuts.   He  supported   using  renewable   resources                                                                   
(finances) to cover  the cost of what oil  previously funded,                                                                   
and thought the bills would accomplish the task.                                                                                
1:51:59 PM                                                                                                                    
JOHN BINKLEY, SELF,  JUNEAU, testified in favor  of utilizing                                                                   
a  portion  of  permanent  fund earnings  to  pay  for  state                                                                   
government.  He  professed  that  his  grandparents  came  to                                                                   
Alaska in  the late 1800s, and  had participated in  the gold                                                                   
rush.  His parents  had worked  through  the depression  era,                                                                   
and worked  in Alaska during World  War II. He  discussed the                                                                   
pre-oil  economies and  the opportunities  in the 1970s,  and                                                                   
his families  business. He asserted  that his  generation had                                                                   
greatly  benefitted from  the oil development  in the  state.                                                                   
He emphasized  the importance for  the state to set  a course                                                                   
that  would   benefit  future   generations,  to   include  a                                                                   
sustainable  level of  government that  provided an  adequate                                                                   
level  of services  to  the people  of  Alaska. He  supported                                                                   
using  a   portion  of  the   permanent  fund   earnings.  He                                                                   
expressed  support and  praise  for the  way the  legislature                                                                   
had conducted  itself while  approaching the fiscal  problems                                                                   
facing the state recently.                                                                                                      
1:56:36 PM                                                                                                                    
Senator  Bishop  asked  Mr.  Binkley   if  he  still  had  an                                                                   
airplane. Mr. Binkley answered in the negative.                                                                                 
1:57:22 PM                                                                                                                    
DON ETHERIDGE,  ALASKA AFL-CIO, JUNEAU, testified  in support                                                                   
of utilizing  the permanent  fund earnings  to pay  for state                                                                   
government.   He  recounted  that   the  leadership   of  his                                                                   
organization had  voted to fully support using  the permanent                                                                   
fund earnings to fund state government.                                                                                         
1:58:43 PM                                                                                                                    
AT EASE                                                                                                                         
1:59:25 PM                                                                                                                    
Vice-Chair Micciche  informed the  committee that  there were                                                                   
no additional testifiers  signed up, and the  committee would                                                                   
take an at-ease.                                                                                                                
1:59:57 PM                                                                                                                    
AT EASE                                                                                                                         
2:17:08 PM                                                                                                                    
JAKE  TODD,  SELF,  JUNEAU,  discussed   the  possibility  of                                                                   
paying taxes  and the  possibility of  a decreased  permanent                                                                   
fund.  He  relayed that  he  was  a teacher  of  high  school                                                                   
history. He had  reviewed fiscal information and  thought the                                                                   
problem   seemed   almost   insurmountable.   He   encouraged                                                                   
bipartisan   work  on   the  budget.   He   thought  that   a                                                                   
combination  of  cuts,  taxes,  diminished  PFDs,  and  fewer                                                                   
infrastructure projects could help solve the budget gap.                                                                        
^PUBLIC TESTIMONY: BETHEL, NOME, KOTZEBUE, UNALASKA                                                                           
2:19:39 PM                                                                                                                    
BEVERLY   HOFFMAN,   SELF,   BETHEL   (via   teleconference),                                                                   
testified  in  support  of  capping  the  permanent  fund  at                                                                   
$1000, creating  an PFD opt-out  option for residents,  and a                                                                   
state  income tax.  She expressed  concern  about the  budget                                                                   
situation. She  discussed state  employee wages and  reported                                                                   
that non-resident  wages had  increased. She supported  using                                                                   
a  portion of  the  permanent  fund earnings.  She  supported                                                                   
cuts  to government,  with  the  exception of  education  and                                                                   
health programs.                                                                                                                
2:22:48 PM                                                                                                                    
REYNE ATHANS,  SELF, BETHEL  (via teleconference),  testified                                                                   
in support  of capping the  permanent fund. She  relayed that                                                                   
she had  originally  moved to  Bethel as a  teacher, and  had                                                                   
worked in the  cultural center at the University.  She echoed                                                                   
the  comments of  the  previous  speaker and  encouraged  the                                                                   
committee to work  for compromise. She supported  a cap and a                                                                   
floor on  the PFD. She thought  funds above a  certain amount                                                                   
should be  dedicated to  education and  public services.  She                                                                   
supported  taxation  in  the   form  of  a  straight  fee  by                                                                   
2:24:59 PM                                                                                                                    
MIKE  MARTZ,  SELF, BETHEL  (via  teleconference),  spoke  in                                                                   
favor of  using permanent  fund earnings.  He stated  that he                                                                   
supported  a reasonable  method of using  the permanent  fund                                                                   
earnings,  and supported a  PFD floor  of $1000 as  contained                                                                   
in  SB  114.  He  thought  citizens   should  pay  for  state                                                                   
programs, and supported  reducing the PFD or  the institution                                                                   
of an  income tax.  He considered  that repealing the  income                                                                   
tax  had  been  a  mistake,  and  thought  that  non-resident                                                                   
workers should be taxed along with residents of the state.                                                                      
2:27:34 PM                                                                                                                    
SUE STEINACHER,  SELF, NOME  (via teleconference),  testified                                                                   
in  support of  structuring the  permanent fund  in order  to                                                                   
provide  greater  dividends.  She  spoke  in  support  of  an                                                                   
income   tax.    She   thought   that   changing    the   PFD                                                                   
disproportionately affected  the poor, particularly  in rural                                                                   
areas of the  state. She thought that lowering  or abolishing                                                                   
the  PFD  was   unconscionable  unless  an  income   tax  was                                                                   
instituted  first.  She discussed  taxation  of  non-resident                                                                   
workers.  She  did  not  support   a  state  sales  tax.  She                                                                   
discussed  the   cost  disparity  between  rural   and  urban                                                                   
Vice-Chair Micciche  observed that  there were no  additional                                                                   
people signed up for public testimony at this time.                                                                             
2:30:53 PM                                                                                                                    
AT EASE                                                                                                                         
3:06:44 PM                                                                                                                    
^PUBLIC TESTIMONY: BARROW, TOK, DELTA JUNCTION                                                                                
3:06:44 PM                                                                                                                    
Vice-Chair  Micciche   reconvened  public   testimony.  Since                                                                   
there were  no callers  online he invited  a person  from the                                                                   
audience to testify.                                                                                                            
3:07:00 PM                                                                                                                    
LAURA STATS,  SELF, JUNEAU, indicated  she had  been watching                                                                   
committee  proceedings online.  She  remembered that  Senator                                                                   
Murkowski  had  advised Alaskans  to  be  aware of  what  was                                                                   
happening with  the budget. Ms.  Stats encouraged  members of                                                                   
the committee  to be bold and  brave with their  choices. She                                                                   
believed that permanent  fund earnings should be  used to pay                                                                   
for government  rather  than the corpus.  She also  supported                                                                   
an income  tax of 1.5 percent  to 2 percent. She  opined that                                                                   
the  public  looked   to  government  to  provide   a  strong                                                                   
education  system and  health  and welfare  services for  the                                                                   
vulnerable.  She  wanted to see people remain  in Alaska. She                                                                   
believed  people had  been fortunate  to  receive a  dividend                                                                   
and discouraged  bringing  a vote before  the public  because                                                                   
of  the  complexity  of  the  issue.  She  thanked  committee                                                                   
members for their time.                                                                                                         
Vice-Chair  Micciche  indicated   that  the  committee  would                                                                   
resume public testimony at 3:30 pm.                                                                                             
3:11:26 PM                                                                                                                    
AT EASE                                                                                                                         
3:36:03 PM                                                                                                                    
^PUBLIC TESTIMONY: KETCHIKAN, WRANGELL, PETERSBURG                                                                            
3:36:24 PM                                                                                                                    
JULIE   DECKER,   SELF,   WRANGELL    (via   teleconference),                                                                   
testified  in support of  some type  of restructuring  of the                                                                   
permanent  fund earnings,  for  a smaller  dividend  payment,                                                                   
and  using the  earnings to  fund state  government. She  had                                                                   
been a resident  of Wrangell for over 20 years.  Given all of                                                                   
the  information  she  had  been   listening  to,  which  was                                                                   
provided by  the administration and the  Rasmuson Foundation,                                                                   
she  supported four  actions. She  supported additional  cuts                                                                   
in  the range  of about  10 percent  across the  board. As  a                                                                   
business owner,  she thought 10  percent was manageable.  She                                                                   
also  supported  something  like   SB  114  or  SB  128.  She                                                                   
encouraged  the  implementation   of  an  income  tax  and  a                                                                   
revision of  oil tax credits.  She urged legislators  to take                                                                   
action. She thanked the committee.                                                                                              
Vice-Chair   Micciche  complimented   Ms.   Decker  for   her                                                                   
detailed testimony.                                                                                                             
3:39:39 PM                                                                                                                    
DAVID OTNESS,  SELF, CORDOVA (via teleconference),  mentioned                                                                   
seeing  a pattern  in wanting  to use the  permanent fund  at                                                                   
times where  oil prices were  low. He believed  the permanent                                                                   
fund was  sacred and  should be  kept intact  as a trust  for                                                                   
future Alaskans.  He discouraged  a cap  on the dividend  and                                                                   
encouraged  an   income  tax  rather  than   subsidizing  the                                                                   
economy  at an unsustainable  level. He  also encouraged  the                                                                   
revision of oil  tax credits. He hoped the  legislature would                                                                   
hold off  getting into the  permanent fund. He  thought there                                                                   
was room for further discussion. He thanked the committee.                                                                      
3:43:01 PM                                                                                                                    
^PUBLIC TESTIMONY: SITKA, CORDOVA, VALDEZ                                                                                     
3:43:01 PM                                                                                                                    
Vice-Chair  Micciche  indicated   there  were  no  testifiers                                                                   
online. The  committee would  check in to  see if  anyone was                                                                   
online  at 4:00  pm and  if not  would remain  at ease  until                                                                   
4:15 pm.                                                                                                                        
3:43:40 PM                                                                                                                    
AT EASE                                                                                                                         
4:19:25 PM                                                                                                                    
^PUBLIC TESTIMONY: STATEWIDE TELECONFERENCE - OFFNET SITES                                                                    
4:19:58 PM                                                                                                                    
LYNETTE CLARK,  SELF, FAIRBANKS  (via teleconference),  spoke                                                                   
against both pieces  of education. She remarked  that Senator                                                                   
Coghill had  declared that the  current economy was  in flux.                                                                   
She  urged  the  committee  to   table  the  bill  until  the                                                                   
following  session.   She  felt   that  the  three   previous                                                                   
legislatures were  the reason for the current  fiscal crisis.                                                                   
She remarked  that the permanent  fund should not be  used to                                                                   
pay for the spending enacted by previous legislatures.                                                                          
4:22:29 PM                                                                                                                    
GLEN  MARUNDE, SELF,  NORTHWAY  (via teleconference),  shared                                                                   
that he  had received  every PFD check.  He spoke  in support                                                                   
of both  pieces of  legislation. He felt  that the  state was                                                                   
able to pay for the state services.                                                                                             
4:23:23 PM                                                                                                                    
DAN APTED,  SELF, ANCHORAGE  (via teleconference),  testified                                                                   
against both  pieces of  legislation. He  felt that  that the                                                                   
proposal  was a  regressive tax.  He urged  the committee  to                                                                   
offer an income  tax. He felt that eliminating  the PFD would                                                                   
be  detrimental  to  the most  vulnerable  residents  of  the                                                                   
state. He offered  the idea of an increased  property tax. He                                                                   
also  stated  that  the  out of  state  fishermen  should  be                                                                   
4:25:32 PM                                                                                                                    
JANET MCCULLOUGH,  SELF, PALMER  (via teleconference),  spoke                                                                   
against both pieces  of legislation. She felt  that the bills                                                                   
would  do  harm to  Alaska's  economy.  She shared  that  her                                                                   
family used  the PFD to pay  for medical costs  and increased                                                                   
heating costs.  She felt  that the  state spending  should be                                                                   
cut  further before  there was  a  consideration for  cutting                                                                   
the PFD to instituting an income tax.                                                                                           
4:26:57 PM                                                                                                                    
BERNIE   HOFFMAN,  SELF,   FAIRBANKS  (via   teleconference),                                                                   
testified against  SB 114  and SB 128.  She mentioned  a town                                                                   
hall   meeting  she   had  attended.   She   felt  that   the                                                                   
legislators  were not listening  to Alaskans,  and felt  that                                                                   
Alaskans wanted a  state income tax. She listed  her ideas to                                                                   
balance the budget:  institute a 5 percent state  income tax;                                                                   
repeal  SB  21;  make  20  percent  cuts  across  the  board;                                                                   
institute  sales tax  with  exemptions on  food,  healthcare,                                                                   
prescriptions,  and water;  double  taxes  on cigarettes  and                                                                   
alcohol;  triple taxes  on gasoline; freeze  the Susitna  Dam                                                                   
project  and the  Knik road  project; and  tap the  permanent                                                                   
fund  earnings  only  for education.  She  suggested  putting                                                                   
triggers  in  place  for  reductions  of  the  aforementioned                                                                   
measures in  the event that the  price of oil went  up again.                                                                   
She reminded the committee to listen to Alaskans.                                                                               
4:28:42 PM                                                                                                                    
JAMES  SQUYRES,  SELF, RURAL  DELTANA  (via  teleconference),                                                                   
testified  against  SB 114  and  SB  128.  He felt  that  the                                                                   
budget should be  reduced further. He felt there  was already                                                                   
substantial  state  income.  He  did  not  believe  that  the                                                                   
earnings  reserve would  be depleted  by  2020. He  discussed                                                                   
inflation proofing.                                                                                                             
4:31:00 PM                                                                                                                    
MIKE SWAIN,  SELF, ANCHORAGE (via teleconference),  testified                                                                   
against  both pieces  of legislation.  He  stressed that  the                                                                   
PFD had contributed  to a significant portion  of his income.                                                                   
He mentioned the  concept of sovereign wealth,  and discussed                                                                   
the configuration  of the  permanent fund  and its  earnings.                                                                   
He  thought  there  needed  to   be  separation  between  the                                                                   
legislature  and the activities  of the  PFC. He thought  the                                                                   
legislature could  utilize the POMV model, and  did not think                                                                   
using portions  of the fund  would solve the  budget problem.                                                                   
He did not  want the PFC to  appear as an arm of  the state's                                                                   
4:33:58 PM                                                                                                                    
ED MARTIN, SELF,  HAWAII (via teleconference),  felt that the                                                                   
government  had  failed  to  utilize   revenue  from  natural                                                                   
resources.  He opined  that taxation  was  nothing more  than                                                                   
the redistribution  of wealth, and did not  think the concept                                                                   
of taxation was  a value of the Republican Party.  He did not                                                                   
support  changing the  PFD.  He proposed  a  plan to  include                                                                   
land vouchers for  all Alaskans. He mentioned  current recall                                                                   
efforts.  He  discussed  the   Alaska  constitution  and  the                                                                   
original  description of  the PFD.  He was  opposed to  using                                                                   
the permanent fund to fund government.                                                                                          
4:38:22 PM                                                                                                                    
ROSS MULLINS,  SELF, CORDOVA (via teleconference),  felt that                                                                   
the  bills   were  a   good  compromise   to  sustain   state                                                                   
government. He  stated that he was  80 years old, and  he had                                                                   
lived in  Cordova since 1963. He  felt that cutting  a way to                                                                   
fiscal balance would  have significant impacts on  all of the                                                                   
services that  Alaskans had come  to rely on. He  thought the                                                                   
bills  offered  a  good  compromise  to  help  support  state                                                                   
government.  He  felt  that  continuing  the  growth  of  the                                                                   
permanent fund corpus  would allow prosperity in  the future.                                                                   
He  felt that  continued  cuts  were imprudent.  He  stressed                                                                   
that  the  people that  came  to  Alaska  to work  should  be                                                                   
subject to  an income  tax. He did  not support the  creation                                                                   
of a  state sales tax.  He thought a  state income  tax would                                                                   
be  more  progressive   than  a  sales  tax.   He  thought  a                                                                   
compromise  could be reached  between the  plans laid  out in                                                                   
the two bills.                                                                                                                  
4:43:08 PM                                                                                                                    
GEORGE  PIERCE,  SELF, KASILOF  (via  teleconference),  spoke                                                                   
against  both pieces  of legislation,  but felt  that SB  128                                                                   
was  the  better   of  the  two.  He  remarked   that  former                                                                   
testifiers had  spoken to  some empty seats  in the  room. He                                                                   
stressed that  the PFD  was the only  money that  he received                                                                   
from the  sale of  the state's resources.  He felt  that many                                                                   
of the large  state projects should  be cut such as  the Knik                                                                   
Arm Bridge and  the Juneau Access Road. He felt  that the oil                                                                   
tax credits should  be eliminated. He urged  the committee to                                                                   
cut credits  to corporations. He  felt that the  state should                                                                   
not fund  nonprofits. He opposed  the state government's  use                                                                   
of  savings to  fund  state government.  He  felt that  there                                                                   
should be a reorganization of oil taxes and credits.                                                                            
Vice-Chair   Micciche  asked   Mr.  Pierce   to  finish   his                                                                   
testimony.  Mr.  Pierce  urged  the committee  to  leave  the                                                                   
permanent fund alone.                                                                                                           
4:47:02 PM                                                                                                                    
TOM LAKOSH,  SELF, ANCHORAGE (via teleconference),  testified                                                                   
against the  bills. He  echoed the  comments of the  previous                                                                   
testifier.  He  thought  there   would  be  a  constitutional                                                                   
challenge to the  proposed use of the PF. He  felt that there                                                                   
should be  a corporate income  tax, a carbon tax,  a personal                                                                   
income tax, and  a seasonal income tax. He felt  that the PFD                                                                   
should remain  intact or be  increased. He stressed  that the                                                                   
state should  diversify its  economy, and  felt that  the PFD                                                                   
diversified  the state's economy.  He suggested  distribution                                                                   
of the PFD on a debit card.                                                                                                     
4:50:16 PM                                                                                                                    
MEAD   TREADWELL,  SELF,   ANCHORAGE  (via   teleconference),                                                                   
testified  in support  of the  bills. He shared  that he  had                                                                   
recently attended  a meeting of  former governors  and former                                                                   
lieutenant governors  with the  Rasmuson Foundation,  who had                                                                   
developed   a  six-point   statement  (copy   on  file).   He                                                                   
highlighted  that the group  was bipartisan  and had  varying                                                                   
viewpoints.   He   supported   maintaining  the   PFD   while                                                                   
utilizing  permanent fund  earnings.   He  testified  against                                                                   
new  taxes for  the state.  He  stressed that  there was  not                                                                   
enough revenue to fund the current government.                                                                                  
Former Lt.  Governor Treadwell  continued, and felt  that the                                                                   
permanent  fund was  created to  pay for  state services  and                                                                   
help to  pay for government.  He believed that  the permanent                                                                   
fund needed  to be protected for  the long term.  He remarked                                                                   
that the  legislature must  adopt a  reasonable and  balanced                                                                   
budget. He  highlighted that  everyone benefitted  from state                                                                   
services,  therefore everyone  should help  pay for them.  He                                                                   
thought  it was  important for  individuals to  help pay  for                                                                   
government  so that  they were  connected  to how  government                                                                   
funds were  spent. He thought the  approach of SB 114  was an                                                                   
important step. He  listed the attendees of  the meeting, and                                                                   
thought  that  there   had  been  a  general   consensus.  He                                                                   
referred  to   a  graph  shown   by  former  Governor   Frank                                                                   
Murkowski, depicting  the growth of  the state GF  budget. He                                                                   
thought  new  taxes  could  have a  damaging  effect  on  the                                                                   
economy  that  was  not fully  understood.  He  thought  that                                                                   
using the permanent  fund earnings for inflation  proofing, a                                                                   
PFD, and supporting  the state budget was a  fair approach to                                                                   
4:56:03 PM                                                                                                                    
AT EASE                                                                                                                         
5:18:02 PM                                                                                                                    
Vice-Chair Micciche discussed the following day's agenda.                                                                       
Senator  Bishop thanked  the  individuals  who testified.  He                                                                   
remarked  that public  comments had  an effect  on the  state                                                                   
SB  114  was   HEARD  and  HELD  in  committee   for  further                                                                   
SB  128  was   HEARD  and  HELD  in  committee   for  further                                                                   

Document Name Date/Time Subjects
SB 128 - 114 Public Testimony Support 1.PDF SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128
SB 128 - 117 Public Testimony Opposition 1.PDF SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128
SB 128 PFD Letter Packet 3.pdf SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128
SB 128 Letter Packet 1.pdf SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128
SB 128 Letter Packet 2.pdf SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128
032316 SB 128 - 114 3 23 16 SFC Comparison of Re-Plumbing Plans.pdf SFIN 3/23/2016 9:00:00 AM
SB 128
SB 128 Dividend comparison - response to HFIN (2 18 16).pdf SFIN 3/23/2016 9:00:00 AM
SB 128
SB 128 Cost of Delay Updated.pdf SFIN 3/23/2016 9:00:00 AM
SB 128
SB 128 Public Testimony - Opposition.pdf SFIN 3/23/2016 9:00:00 AM
SB 128
SB 128 Public Testimony - Support.pdf SFIN 3/23/2016 9:00:00 AM
SB 128
SB 114 Public Testimony Lynn Willis.pdf SFIN 3/23/2016 9:00:00 AM
SB 114
SB 128 - 114 Public Testimony Opposition 2.PDF SFIN 3/23/2016 9:00:00 AM
SB 128
SB 128 - 114 Public Testimony Support 2.PDF SFIN 3/23/2016 9:00:00 AM
SB 128