Legislature(2015 - 2016)SENATE FINANCE 532
04/12/2016 01:30 PM Senate FINANCE
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SENATE BILL NO. 128 "An Act relating to the Alaska permanent fund; relating to appropriations to the dividend fund; relating to income of the Alaska permanent fund; relating to the earnings reserve account; relating to the Alaska permanent fund dividend; making conforming amendments; and providing for an effective date." 1:37:58 PM Co-Chair MacKinnon explained the intent of the committee substitute for SB 128 was to address the state's fiscal crisis. 1:38:44 PM Vice-Chair Micciche MOVED to ADOPT the committee substitute for SB 128, Work Draft 29-GS2859\N (Wallace/Martin, 4/12/16). Co-Chair MacKinnon OBJECTED for DISCUSSION. 1:39:00 PM AT EASE 1:40:42 PM RECONVENED 1:41:09 PM Co-Chair MacKinnon announced that the documents discussed at the table were available online under the bill. 1:41:24 PM LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, explained the committee substitute. She read from the Sectional Analysis (copy on file): Section 1: Legislative intent that the legislature reevaluate the use of the earnings of the Permanent Fund in three years Section 2: Amerada Hess income no longer flows to the Capital Income Fund. Segregation of these funds is no longer legally required Section 3: Dedicated deposits of royalties to the Permanent Fund are reduced from the current 25/50 split on old/new leases to the constitutional minimum of 25 percent Section 4: (a) Requires the Alaska Permanent Fund Corporation to determine the net income of the earnings reserve account as the income is realized and received (b) Defines the Percent of Market Value (POMV) payout as 5.25 percent of the average year-end market value of the Permanent Fund and Earnings Reserve Account for the first five of the most recently completed six fiscal years. The payout may not exceed the year-end balance of the earnings reserve account for the fiscal year just ended Section 5: AS 37.13.145 is the Disposition of Income of the Permanent Fund statute (a) Unchanged - Establishes the ERA and identifies the ERA as holding earnings of the Permanent Fund and ERA (b) Repealed in this bill - dividends based on statutory net income (c) Repealed in this bill - inflation proofing (d) Repealed in this bill - segregation of Amerada Hess (e) Added in this section - each year the legislature may appropriate to the General Fund the amount available for distribution from the Earnings Reserve Account under the POMV in Sec. 4 (b) Section 6: Dividends are comprised of 20 percent of the 5.25 percent POMV outlined in Sec. 4(b), and 20 percent of prior year royalties, excludes those dedicated to the Permanent Fund or School Fund (25.5 percent are dedicated) Section 7: Mental Health Trust Fund may not be included in the computation of income available for distribution under the POMV Section 8: Makes computation of Mental Health Trust Fund income consistent with computation of other Permanent Fund Income Section 9: Transfer of money to the Dividend Fund requires an appropriation Section 10: The amount of each Permanent Fund Dividend for fiscal years 2017, 2018, and 2019 shall be $1,000 Section 11: Conforms to Sec. 9, which moves money to the Dividend Fund by appropriation Section 12: Once the money is in the Dividend Fund, the Department of Revenue shall annually pay dividends without further appropriation Section 13: Repeals language relating to the former dividend calculation, inflation proofing calculation, and Amerada Hess language Section 14: Repeals Sec. 10 - $1,000 dividend for three years Section 15: The Commissioner of Revenue and the Alaska Permanent Fund Corporation may adopt regulations, policies and procedures to implement this Act Section 16: Retroactivity clause Section 17: Effective Date for sections 15 and 16, immediate Section 18: Effective Date, July 1, 2016 1:45:56 PM Senator Olson wondered how the dividend amount would fluctuate under Section 6, what the expected dividend payout would be after 2019. 1:46:34 PM Co-Chair MacKinnon relayed that David Teal, Director, Legislative Finance Division would be available to answer questions. 1:46:39 PM Ms. Cramer agreed that Mr. Teal would walk through the output from the model. 1:46:55 PM Co-Chair MacKinnon WITHDREW the OBJECTION. There being NO OBJECTION, the proposed committee substitute was adopted. She relayed that Mr. Teal would walk through how the bill would address the budget shortfall and how it would affect the Permanent Fund. 1:47:47 PM DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, looked at the "LFD Fiscal Model" (copy on file). 1:48:00 PM AT EASE 1:48:33 PM RECONVENED 1:48:35 PM Co-Chair MacKinnon remarked that the Permanent Fund Corporation had requested a model using a 6.9 percent Permanent Fund investment return; the governor's original model had used 7.45 percent. She noted that the model before the committee used the 6.9 percent investment return. 1:49:16 PM Mr. Teal looked to the price scenario at the center of the document. The scenario used the spring 2016 revenue forecast. He noted that the yellow highlighted fields reflected no growth in the operating budget, and in fact had a targeted cut of $247 million, which was subject to change. 1:50:07 PM Co-Chair MacKinnon understood that the estimated capital spend projected in the model was $185 million. Mr. Teal replied in the affirmative. 1:50:16 PM Mr. Teal noted the factors of Community Assistance and Debt Service, as projected, and highlighted that the model contained no revenue variables: sales tax, income tax, motor fuel tax, indirect expenditure adjustments, the Governor's tax bills package, except for the Tax Credit Reform bill - the modeling output of which were the House Finance Committee numbers. He directed committee attention to the blue bars under "Custom Plan Specifications" which reflected a POMV payout of 5.25 percent, with 20 percent of the payout going to dividends, and an additional 20 percent going to dividends from royalties. He pointed to the upper right line graph on the slide, which showed that dividends would be steady at $1000. He said that without the cap, dividends would drop to $900 for 3 years and then would go back to $1000 through 2025. He said that the model assumed that the CBR would earn more than the current 1 to 2 percent. He said that it was not in the bill, but there had been discussion of more aggressively investing the CBR so that the returns on it would be higher. He elaborated that there were a number of ways to do that, but it would not make a significant difference to the model. He noted that the lower left graph on the slide reflected that the CBR balance under the model would drop to $2 billion. He furthered that those earnings did not make or break the model. He indicated the graph in the upper left corner, which showed the UGF revenue/budget, in millions. He stated that the expenditure line was the dark line on top, the bars represented oil revenue [blue], CBR/SBR draws [orange], and the POMV draw from the earnings reserve [green]. The graph indicated that the deficit would narrow, but that it would still exist through 2025. He said that the lower left graph showed that reserve balances were expected to stabilize at approximately $12 billion. He noted that the table at the bottom of the graph showed reserves of approximately $12 billion in 2025. The deficit would still exist, but because it would be lower than it was currently, the reserves would be exhausted after 28 years. He said that it was worth noting that although reserves in 2017 were approximately $14 billion, the state was spending reserves at a more rapid rate, which would exhaust them in 8 years or less. 1:54:39 PM Mr. Teal remarked that the reserve balance would be slightly lower, and the deficit would be so much lower that the glide path would be better under the legislation than under the status quo. He noted the table in the lower right of the slide that reflected in turquoise the real value of the Permanent Fund would fall slightly overtime and would not keep pace with inflation at the projected earnings rates. He noted that although there would be a nominal payout of 5.25 percent, there was a 6 year lag in the projection because the payout was based on the first 5 of the most recently completed 6 years. Because of the long look back, the effective payout as shown in the lower right hand corner of the slide was at roughly 4.9 percent. 1:55:59 PM Co-Chair MacKinnon surmised that the slide reflected a spending increased from FY16 to FY17. Mr. Teal replied that there was actually a reduction in FY 17, but remarked that in FY16 the dividends were not shown as general fund expenditures. The graph was showing only UGF expenditures. He clarified that if FY 17 dividends were shown, the line would increase from $5 billion to $6.4 billion. 1:56:47 PM Co-Chair MacKinnon surmised that the way that the dividend was calculated and paid out would change under the legislation and the dividend payments would be reflected in the Operating Budget. Mr. Teal responded that currently the dividends did not show as general fund expenditures. They were reflected in the fiscal summary, but in a different section; under the legislation dividends would appear as general fund expenditures. 1:57:23 PM Co-Chair MacKinnon assured Alaskans that there would be zero growth in the operating budget. 1:58:04 PM Co-Chair MacKinnon asked whether the green bars on the graph in the upper left of the slide reflected a $2.4 billion draw in FY17. Mr. Teal responded that $2.4 billion was an accurate approximation. 1:58:26 PM Co-Chair MacKinnon referred to FY 25 on the same chart, and surmised that the draw would increase to $3 billion. Mr. Teal replied that the draw would increase as the Permanent Fund and the Earnings Reserve increased. 1:58:55 PM Co-Chair MacKinnon noted that the dividend check would remain steady at about $1000, in perpetuity. She said that the Governor's original plan, SB 114, as well as offerings in the house had all been incorporated into the cs in an effort to stabilize the dividend, while using the bulk of the assets in the form of earnings to diversify Alaska's revenue stream. She indicated the lower left hand corner of the slide which showed the stabilizing of the draw on reserves. She said that currently the legislature was looking at removing $7 billion, over two years, to pay for expenses. She furthered that more work needed to be done to ensure that the state did not lose any stability in growing the corpus of the fund. 2:00:19 PM Senator Dunleavy surmised that if spending could be driven down from $5.2 billion, to $4 billion, reserves could be extended and less of a draw would be necessary. Mr. Teal replied in the affirmative. 2:00:52 PM Senator Dunleavy remarked that people should understand that as spending was pushed down, the life of the savings and the Permanent Fund would be extended. 2:01:37 PM Co-Chair MacKinnon agreed. She understood that for the first time in Alaska's history, $700 million for dividend payouts was listed as new money spending in the Operating Budget. She furthered that there was no increase to the Operating Budget, but dividends going out to the people of Alaska were reflected. Mr. Teal responded yes. He added that the $5.3 billion in spending included the payout of dividends, which meant that the graph reflected a $4.5 billion budget, in conventional terms. 2:02:26 PM Co-Chair MacKinnon asserted that the downward pressure on the budget would continue; the bill would not solve all of the state's fiscal problems, but would go a long way toward future fiscal stabilization. 2:02:45 PM Senator Hoffman looked at the bottom left graph, which showed budget reserves without growth, out to 2053. [He added the Years to Exhaust, 28, to the last date on the graph 2025: 2053] Mr. Teal replied that the Years to Exhaust used simple math. He explained that in FY 25, reserves would be lower at $11.9 billion, but the deficit would also be lower at minus $432 million. He said that although there would be lower reserves, they would last much longer. 2:04:09 PM Senator Hoffman understood that with no growth, the reserves would be exhausted by 2053. Mr. Teal warned that it was risky to get too accurate with projections of this kind. 2:04:30 PM Vice-Chair Micciche queried the factors that made the corpus of the fund grow faster under the scenario on the slide, versus the status quo. Mr. Teal replied that the balance included both the Earnings Reserve and the Corpus. He said that they continued to increase because 25 percent of royalties, leases, etc., were being deposited into the Corpus every year. He stated that 6.9 percent was being earned, but 5.25 percent was being paid out, any earnings above the payout remained in the fund. He furthered that although the inflation proofing provision had been repealed, inflation proofing would still exist. 2:05:49 PM Vice-Chair Micciche noted that the cuts in state government that were reflected on the slide were less than what the committee hoped to accomplish. He pointed out that the model also did not include changes to oil and gas credits. 2:06:18 PM Co-Chair MacKinnon interjected that the model did take oil and gas tax credit changes into account, she referred to the Tax Credit Reform line in yellow at the center of the page. 2:06:21 PM Vice-Chair Micciche asserted that it would be more favorable to the fiscal outlook if the actual reductions were higher. Mr. Teal agreed. He said that the Governor's oil and gas credit reform bill would have the most impact, the House Resource Committee version would have had the least impact, and the House Finance Committee version would split the difference. 2:06:45 PM AT EASE 2:06:59 PM RECONVENED 2:07:01 PM Vice-Chair Micciche thought that it would be helpful to include a separate box on the slide that reflected the expected $700 million payout for the dividend, with a spend line below it. 2:07:28 PM Co-Chair MacKinnon wondered whether there could be an asterisk on the FY 17 line to reflect the addition of the $700 million payout for the dividend. Something to highlight that the Operating Budget was not growing. Mr. Teal replied that he could include the dividend payments in the FY 16 line. Senator Dunleavy reiterated that highlighting the figure for the public as a "different spend" could be helpful. 2:08:15 PM Co-Chair MacKinnon repeated that clearly highlighting that the $700 million was for dividends, and not government spending, would be helpful. Mr. Teal agreed to highlight the difference on a future slide. 2:08:56 PM Co-Chair MacKinnon mentioned the document titled "Status Quo" (copy on file) and related that the public could find it online under the bill. 2:09:15 PM Senator Olson understood that the bill did not eliminate the need for a three-quarter vote to access the CBR. Mr. Teal replied that as long as the legislature had a CBR draw and a large earnings reserve balance it faced supermajority votes. 2:09:48 PM Co-Chair MacKinnon hoped that the other body would do the three-quarter draw because the money currently in the CBR had a rate of return for interest of 2 percent, the borrowing interest would be higher if the legislature was forced to go into the earnings reserve account. 2:11:05 PM Vice-Chair Micciche remarked that the governor preferred a fixed draw, and supported the intent for stability. He asked how the budget could be kept small, even as earnings increased and the POMV draw grew. Mr. Teal replied that there were things that could be done that would limit spending, but that if money was available it could be spent; future spending was up to the legislature. He thought that the governor assumed that extra revenue would always be spent, which was the primary difference between the DOR analysis of the model and the LFD analysis. He believed that the truth fell somewhere in- between always spending or always saving, but it would be up to each legislature to decide. He said that rules could be established to limit spending when the price of oil rebounded, and could be easily added to legislation of this nature. Vice-Chair Micciche understood that the stability of the POMV was similar to a fixed draw because it was based on earnings that would not fluctuate dramatically. What would create the change would be a fluctuation in oil related revenue, which was where rules should be applied. Mr. Teal responded that the combination of oil revenue and the POMV payout would be the issue. He agreed that the POMV payout was fairly stable, but the other oil revenue was not. He said that exercising spending restraint when surpluses were available would eliminate volatility. He said that the hypothetical could not be modeled because spending would always be at the per-view of the legislature. 2:15:05 PM Senator Dunleavy believed that there should be less government spending. 2:16:19 PM Co-Chair MacKinnon recalled a conversation with Mr. Teal about the consideration of a draw that could not exceed the $3.3 billion as suggested by the governor. She relayed that in her duration at the legislature, money had been returned to the CBR over the top of what had been borrowed by past legislatures, and spending had been done in the Capital Budget. She recognized that dividend reductions and taxes made the public uncomfortable unless there was also conversation about controlled government spending. 2:17:52 PM Senator Dunleavy remarked that there should be less government spending. He added that deferred maintenance in the state needed to be addressed. 2:18:47 PM Co-Chair MacKinnon remarked that there was also an unfunded pension liability issue that needed to be considered. She asserted that there needed to be less spending, but that the state needed to pay the debts that it owed - one of which was deferred maintenance. 2:20:08 PM Vice-Chair Micciche pointed out the Alaska State Constitution specified that one legislature could not "tie the hands" of future legislatures, which he believed was a blessing and a curse. 2:21:20 PM Co-Chair MacKinnon explained that the senate had proposed $1 billion in cuts to the Operating Budget and was hopeful that the two bodies to craft a plan that would work for Alaska. She noted that the committee was tackling the issue from all angles. 2:22:46 PM Senator Bishop asked how the real value effective payout could be kept at 100 percent in the out years. Mr. Teal responded that one way would be to earn more money, and the other would be to reduce the payout rate from 5.25, which some considered aggressive. He said that those were the two levers that would help maintain the real value of the Permanent Fund. 2:23:51 PM Co-Chair MacKinnon interpreted that to mean to cut the budget and draw less from reserves - or increase revenue through other sources. Mr. Teal agreed. SB 128 was HEARD and HELD in committee for further consideration. 2:24:38 PM AT EASE 2:31:57 PM RECONVENED