Legislature(2015 - 2016)

04/18/2016 03:30 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."                                                                          
4:33:25 PM                                                                                                                    
Vice-Chair Micciche MOVED to  ADOPT the committee substitute                                                                    
for   SB  128,   Work  Draft   29-GS2859\S  (Wallace/Martin,                                                                    
4/17/16). Co-Chair MacKinnon OBJECTED for DISCUSSION.                                                                           
LAURA CRAMER,  STAFF, SENATOR ANNA MACKINNON,  explained the                                                                    
committee  substitute. She  discussed the  changes from  the                                                                    
original bill,  outlined in the Sectional  Analysis (copy on                                                                    
     Section 2:     Language requiring the Alaska Permanent                                                                     
     Fund Corporation  to adopt  regulations similar  to the                                                                    
     State's procurement code                                                                                                   
     Section 3:     Adds    the   Alaska    Permanent   Fund                                                                    
     Corporation to  the list of  those state  agencies that                                                                    
     are exempt from the State's procurement code                                                                               
     Section 5:     Transfers the management and investment                                                                     
     of   the  Constitutional   Budget   Reserve  from   the                                                                    
     Department  of Revenue  to  the  Alaska Permanent  Fund                                                                    
     Section 6:     Requires the Alaska Permanent Fund                                                                          
     Corporation to prepare an annual  report on the balance                                                                    
     and returns of the Constitutional Budget Reserve fund                                                                      
     Section 9:     (b) Defines the Percent of Market Value                                                                     
     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                                                                                             
          (c) Reserves 20 percent of the POMV payout for                                                                        
     dividends. The  remaining 80 percent  of the  payout is                                                                    
     subject to  a dollar  for dollar  reduction as  oil and                                                                    
     gas  revenue rises  above  $1.2  billion (adjusted  for                                                                    
             Oil and gas Unrestricted General Fund revenue                                                                      
             excluding the amount to be paid as 20 percent                                                                      
             of the prior year royalties to the dividend                                                                        
             $1,200,000 revenue limit adjusted for inflation                                                                    
     Section 10:    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.                                                                    
             10 (b) and the limit calculation Sec. 10 (c)                                                                       
          (f) Inflation proofing mechanism                                                                                      
Senator Hoffman wondered if Ms. Cramer meant $1.2 billion.                                                                      
Ms. Cramer replied in the affirmative.                                                                                          
     Section 12:    Conforming    language    relating    to                                                                    
     Section 18:    Repeals   language   relating   to   the                                                                    
     subaccount  of the  Constitutional Budget  Reserve, the                                                                    
     former   dividend   calculation,   inflation   proofing                                                                    
     calculation, and Amerada Hess language                                                                                     
Co-Chair MacKinnon WITHDREW the OBJECTION. There being NO                                                                       
further OBJECTION, the proposed committee substitute was                                                                        
4:37:58 PM                                                                                                                    
Mr. Teal looked at the document, "Cash Flow Under SB 128/HB
245" (copy on file):                                                                                                            
     Sec 7                                                                                                                      
          Reduces royalties dedicated  to the permanent fund                                                                    
          from new  oil fields  (post 1980) from  50 percent                                                                    
          to the constitutional minimum  of 25 percent. That                                                                    
          increases  general  fund  revenue  by  about  $50m                                                                    
          annually depending on the price of oil.                                                                               
     Sec 8                                                                                                                      
          Deletes  the definition  of  income available  for                                                                    
          distribution. That  formula was based  on earnings                                                                    
          during the preceding 5 years.                                                                                         
     Sec 9                                                                                                                      
          (b)  Replaces  the earnings-based  "available  for                                                                    
          distribution"  formula in  section 8  with a  POMV                                                                    
          calculation.  The nominal  payout  to the  general                                                                    
          fund  is 5.25  percent, but  the effective  payout                                                                    
          will be  about 4.8  percent (in the  long-term) if                                                                    
          the   permanent  fund   corporation's  projections                                                                    
          regarding   real  earnings   of   5  percent   and                                                                    
          inflation  of  2.25   percent  are  realized.  The                                                                    
          effective payout  is lower  than the  nominal 5.25                                                                    
          percent payout because the payout  is based on the                                                                    
         average balance during the past 6 years.                                                                               
          (c) Ensures that 20 percent  of the payout goes to                                                                    
          dividends.  Under the  Spring forecast,  that will                                                                    
          be  about  $500  to  $600  million  annually.  The                                                                    
          remaining 80  percent of the payout  is subject to                                                                    
          a  dollar  for  dollar reduction  as  oil  revenue                                                                    
          rises   above    $1.2   billion    (adjusted   for                                                                    
          inflation). The impact of the payout limit is:                                                                        
               1.  Zero when  oil  is  below about  $75/bbl.                                                                    
               ($75  oil  generates  about $1.2  billion  in                                                                    
               production   taxes   and   royalties   (after                                                                    
               reserving   20  percent   of  royalties   for                                                                    
               2.  The payout  is  reduced by  a dollar  for                                                                    
               every  dollar of  oil  revenue  (less the  20                                                                    
               percent  portion of  royalties  that goes  to                                                                    
               dividends)  between  $1.2 billion  and  about                                                                    
               $3.1  billion. The  reduction  occurs at  oil                                                                    
               prices between about  $75/bbl and $100/bbl as                                                                    
               shown in the graph below.                                                                                        
               3. When oil prices  are above about $100/bbl,                                                                    
               the  POMV  payout  is  reduced  to  zero  and                                                                    
               additional oil revenue  is spendable. General                                                                    
               fund  revenue  available  to  spend  will  be                                                                    
               lower (relative  to revenue without  a limit)                                                                    
               by about $2 billion.                                                                                             
4:42:10 PM                                                                                                                    
Mr. Teal discussed the charts on page 2 of the document.                                                                        
Senator Dunleavy remarked that the revenue limit focused                                                                        
only on the Permanent Fund, not taxes. Mr. Teal agreed.                                                                         
Senator Dunleavy  noted that there  was nothing in  the bill                                                                    
that would  prevent the  legislature from  increasing taxes.                                                                    
Mr. Teal agreed.                                                                                                                
Vice-Chair  looked at  the Sectional  Analysis, and  queried                                                                    
the changes in Sections 5 and 6.                                                                                                
Co-Chair MacKinnon announced Ms.  Rodell could address those                                                                    
Vice-Chair Micciche remarked  that there was a  value in the                                                                    
difference  in  the  earnings.  Mr.  Teal  deferred  to  Ms.                                                                    
4:48:35 PM                                                                                                                    
Co-Chair MacKinnon looked  at page one of  the analysis, and                                                                    
wondered if  the dividend  was capped,  or was  the dividend                                                                    
guaranteed at $1000 and tie  it directly with the volatility                                                                    
of oil with the opportunity  for interest earnings. Mr. Teal                                                                    
replied that  the dividend  guaranteed at  $1000 and  tie it                                                                    
directly  with the  volatility of  oil with  the opportunity                                                                    
for  interest  earnings.  He stated  that  the  calculations                                                                    
showed a  consistent $1000 dividend.  The dividend  would be                                                                    
less volatile than the current dividend calculation.                                                                            
Co-Chair  MacKinnon remarked  that  the modeled  projections                                                                    
represented  the spring  forecast. Mr.  Teal replied  in the                                                                    
Co-Chair MacKinnon  queried the highest price  per barrel in                                                                    
the spring forecast model. Mr.  Teal replied that he thought                                                                    
it was  close to $60 per  barrel at the end  of the forecast                                                                    
Co-Chair MacKinnon  shared that Alaska currently  at $40 per                                                                    
Vice-Chair  Micciche wondered  if the  revenue should  be in                                                                    
statute. Mr. Teal replied that  it may seem like revenue was                                                                    
limited to  $200, but the  limited revenue at $130  was just                                                                    
under 7. He stated that beyond  $100, there was a $2 billion                                                                    
revenue limit at every price.                                                                                                   
4:52:51 PM                                                                                                                    
Vice-Chair  Micciche  remarked  that   it  was  a  dangerous                                                                    
revenue  limit,  with  no  control in  the  bill.  Mr.  Teal                                                                    
understood  that the  inflation proofing  transfer would  be                                                                    
subject  to  appropriation.  He  stressed  that  the  entire                                                                    
earnings reserve  was subject to appropriation.  He remarked                                                                    
that  regardless  of  the  balance,  the  legislature  could                                                                    
appropriate the  fund for  any purpose.  He stated  that one                                                                    
could not bind or  restrict future legislators their ability                                                                    
to spend the earnings reserve account.                                                                                          
Senator  Dunleavy   queried  the  oil  production   for  the                                                                    
following year. Mr. Teal replied that he did not know.                                                                          
Senator  Dunleavy queried  oil production  in one  year. Mr.                                                                    
Teal responded that he did not know.                                                                                            
Co-Chair   MacKinnon  stressed   that   the  committee   was                                                                    
attempting to create  a revenue stream that  had a different                                                                    
volatility than oil                                                                                                             
Senator Bishop  wanted to know  what the revenue  would look                                                                    
like in 2030.                                                                                                                   
Senator  Dunleavy  wondered  how  long  Mr.  Teal  had  been                                                                    
working  for  the  Legislative Finance  Division.  Mr.  Teal                                                                    
replied that he had been there for approximately 20 years.                                                                      
Senator  Dunleavy  wondered  whether the  state  could  ever                                                                    
control  its spending.  Mr.  Teal felt  that  the state  had                                                                    
controlled   its  spending,   because   there  was   savings                                                                    
available to sustain the budget so far.                                                                                         
4:57:10 PM                                                                                                                    
CRAIG RICHARDS, ATTORNEY GENERAL,  DEPARTMENT OF LAW, stated                                                                    
that  the  administration  was  supportive  of  the  current                                                                    
committee substitute.                                                                                                           
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
agreed with General Richards.                                                                                                   
Senator  Hoffman understood  that  the administration  would                                                                    
look  at the  proposal in  a favorable  manner. He  remarked                                                                    
that  some  legislators  were concerned  with  the  dividend                                                                    
level. He  understood the utilization  of the fund,  and the                                                                    
guarantee  of $1000  for three  years. He  expressed concern                                                                    
with  putting  that  formula  in  statute.  He  suggested  a                                                                    
formula  of  guaranteeing  $1000,  and  then  adjusting  the                                                                    
dividend  for  inflation over  the  following  four to  five                                                                    
years. He stressed that the fund was the peoples' money.                                                                        
Co-Chair  MacKinnon remarked  that  there  was a  three-year                                                                    
review period to address some of those specific issues.                                                                         
Senator Bishop echoed Senator Hoffman's comments.                                                                               
5:04:02 PM                                                                                                                    
Senator  Dunleavy stressed  that there  was a  concern about                                                                    
the  ceasing the  focus on  reducing the  budget. He  shared                                                                    
that  the proposal  did not  include any  taxes. He  queried                                                                    
efforts  by  the  administration   to  reduce  spending.  He                                                                    
wondered  if   the  public  should  expect   any  vetoes  on                                                                    
expenditures  in order  to reduce  the budget.  Commissioner                                                                    
Hoffbeck responded  that he could  not speak to what  may or                                                                    
may not be vetoed by the  government. He remarked that a $70                                                                    
per  barrel oil  price, there  was not  a limitation  in the                                                                    
plan. He  stressed that  there would  always be  pressure to                                                                    
fill the budget  gap. The governor had a  revenue package to                                                                    
fill some  of that gap.  He stated  that this model  did not                                                                    
reduce the downward pressure to balance the budget.                                                                             
5:06:21 PM                                                                                                                    
Co-Chair MacKinnon  looked at "Document  B" (copy  on file).                                                                    
She remarked  that there  were four  "health checks"  on the                                                                    
fiscal model.  She noted that  the upward left  hand portion                                                                    
outlined  spending.  She stated  that  it  showed where  the                                                                    
money would be withdrawn, based  on the spring forecast. She                                                                    
noted  that  the  right  hand  corner  showed  dividends  to                                                                    
Alaskans.  She  stated  that  the  model  worked  under  the                                                                    
current  downward price  forecast. She  noted that  Alaskans                                                                    
had seen very different  volatility recently. The right hand                                                                    
corner  showed the  health  of the  Permanent  Fund and  the                                                                    
corpus itself.  She remarked that under  the scenario, there                                                                    
were 36 years before  the budget reserves were extinguished.                                                                    
She stressed  that the corpus  of the Permanent  Fund should                                                                    
continue to  grow, but  noted that a  5.25 percent  draw may                                                                    
fare less well than a 5  percent draw. She remarked that the                                                                    
scenario showed  a target cut  for the current year  of $250                                                                    
million. She  shared the efforts  of the legislature  to fix                                                                    
the crisis.  She wondered if  the proposal  provided revenue                                                                    
diversity  of  approximately  $2.5   to  $2.5  billion.  She                                                                    
stressed   that  there   would  still   be  a   budget  gap.                                                                    
Commissioner Hoffbeck replied in the affirmative.                                                                               
Co-Chair MacKinnon  stressed that her constituents  were not                                                                    
interested in  taxes, and other Alaskans  were interested in                                                                    
taxes.  She shared  that the  proposed calculation  included                                                                    
tax credit reform.                                                                                                              
5:10:54 PM                                                                                                                    
Senator  Hoffman remarked  that the  gap was  not completely                                                                    
filled, and  the capital budget  was fixed at  $185 million.                                                                    
He felt that number over the long-term was unrealistic.                                                                         
Co-Chair MacKinnon  looked at the "Cash  Flow Analysis", and                                                                    
stated that  the UGF  pay out  limit allowed  for additional                                                                    
dollars  that could  be diverted  to  the CBR  or a  capital                                                                    
account for deferred maintenance.                                                                                               
Vice-Chair  Micciche remarked  that Alaska  was a  sovereign                                                                    
with most of  its income from the sale of  oil in the global                                                                    
market. He felt  that, with normal corpus  growth, the state                                                                    
could  be sustainable  without taxing  Alaskans. He  queried                                                                    
the  actions  that  would  result  in  a  fully  sustainable                                                                    
budget.  Commissioner Hoffbeck  replied that  there must  be                                                                    
additional  revenue to  maintain  a  sustainable budget.  He                                                                    
stressed that the  current climate may be a  reflection of a                                                                    
structural change  in oil price,  because of  the technology                                                                    
changes  that have  allowed a  tremendous amount  of oil  be                                                                    
brought  online. He  stated that  a  $60 to  $70 per  barrel                                                                    
price point  did not allow  enough money  in oil and  gas to                                                                    
sustain a budget.                                                                                                               
Vice-Chair  Micciche  noted  that  there  would  be  a  4.62                                                                    
percent draw  from the Permanent  Fund. He queried  a vision                                                                    
of  what  would  occur  when  revenue  exceeded  responsible                                                                    
spending.  General  Richards  replied that  the  fundamental                                                                    
difference  between the  revenue limit  versus the  original                                                                    
drafting of the Permanent Fund  Protection Act, was that the                                                                    
act would  have "sliced off  the spikes." The  original bill                                                                    
would  have  maintained the  flat  spending  level from  the                                                                    
three cash flows across all price ranges.                                                                                       
5:16:23 PM                                                                                                                    
Vice-Chair Micciche  queried a  time limit for  the meeting.                                                                    
Co-Chair  MacKinnon  responded  that   there  was  one  more                                                                    
presenter and three members in line for questions.                                                                              
Vice-Chair Micciche queried another  mechanism that would be                                                                    
largely  statutory, where  the  legislature  did not  relent                                                                    
their control.  General Richards remarked that  the language                                                                    
stated that "the Legislature may inflation proof."                                                                              
Senator  Olson remarked  that noted  that  most people  were                                                                    
concerned with the dividend  calculation, which was somewhat                                                                    
different  than  the  Permanent   Fund  Protection  Act.  He                                                                    
queried a  plan that  would "ride the  market." Commissioner                                                                    
Hoffbeck  replied   that  the  governor's  plan   "rode  the                                                                    
market", and  would give more  of a dividend  reflecting the                                                                    
income  available. He  stated that  funding  would keep  the                                                                    
dividend in the $1000 range.                                                                                                    
Senator Olson queried  the effect on the bond  rating in the                                                                    
short-term  between  the   governor's  proposal  versus  the                                                                    
committee  substitute.  Commissioner Hoffbeck  replied  that                                                                    
either  plans  would be  received  in  a relatively  similar                                                                    
fashion.  He remarked  that it  was important  for the  bond                                                                    
rating agencies to see that  Permanent Fund was an available                                                                    
source of revenue to secure the bonds.                                                                                          
Co-Chair   MacKinnon  thanked   Commissioner  Hoffbeck   and                                                                    
General  Richards for  their collaborative  approach to  the                                                                    
formulation of the legislation.                                                                                                 
5:21:52 PM                                                                                                                    
Vice-Chair  Micciche  wondered   if  the  legislature  could                                                                    
create a  regular draw to help  with liquidity. Commissioner                                                                    
Hoffbeck the  bill had a  provision to remove Section  C for                                                                    
the  five  year requirement,  which  allowed  for a  prudent                                                                    
investor for the CBR.                                                                                                           
Co-Chair  MacKinnon   queried  setting  a   spending  limit.                                                                    
General Richards  replied that he  did not have  an official                                                                    
position.  He  shared that  in  the  initial stages  of  the                                                                    
Permanent Fund Protection Fund,  there was an examination of                                                                    
a number of different ways  to address the volatility issue,                                                                    
including a more broadly defined  revenue or spending limit.                                                                    
He  stated that  it  was difficult  to  create an  effective                                                                    
spending limit.                                                                                                                 
Senator Bishop commented  that the bill seemed  to provide a                                                                    
spending limit.                                                                                                                 
Co-Chair MacKinnon  shared that Alaskans were  interested in                                                                    
government  spending more  than any  other time,  especially                                                                    
when facing a reduction in their dividend.                                                                                      
Senator Dunleavy  wondered whether the  administration would                                                                    
continue  to pursue  the tax  concept, should  this proposal                                                                    
move  forward.  General Richards  replied  that  he had  not                                                                    
heard anything  other than the governor's  original plan. He                                                                    
did  not want  to  speak  for the  governor  outside of  the                                                                    
Permanent Fund.                                                                                                                 
5:27:16 PM                                                                                                                    
ANGELA  RODELL, EXECUTIVE  DIRECTOR,  ALASKA PERMANENT  FUND                                                                    
CORPORATION,  shared   that  the   goal  of   the  committee                                                                    
substitute was  to understand the  mechanics of  the intent.                                                                    
She appreciated  the flexibility  to work  with DOR  on cash                                                                    
management, so there  would only be a requirement  to make a                                                                    
withdrawal when  necessary. She appreciated the  addition of                                                                    
the  procurement  language,  which   would  help  to  pursue                                                                    
investments in a timely manner.                                                                                                 
Senator  Bishop wondered  if there  was a  discount for  the                                                                    
money managers.  Ms. Rodell replied  that it depends  on the                                                                    
investment.  She stated  that  the  internal managed  items,                                                                    
such  as fixed  income and  real estate  were set  fees. She                                                                    
remarked that the  fees would be lower for  the CBR, because                                                                    
the  size of  the  asset  did not  matter.  She stated  that                                                                    
externally   managed  accounts   often   had  attached   fee                                                                    
schedules, so those had thresholds for the management fees.                                                                     
Ms.  Rodell  stated  that  she  did  not  have  any  closing                                                                    
comments, but  remarked that  she was ready  to do  the work                                                                    
requested by the committee.                                                                                                     
Co-Chair MacKinnon  recalled a year when  the Retirement and                                                                    
Management Board investment performance  was better than the                                                                    
Permanent  Fund  performance.  Ms.  Rodell  replied  in  the                                                                    
Co-Chair MacKinnon  queried value in the  diversification of                                                                    
who  would invest  the  money, rather  than  one group.  She                                                                    
queried  anything that  the  legislature  might consider  to                                                                    
avoid  duplication  of  services.   She  remarked  that  the                                                                    
Permanent  Fund  Corporation  was  prestigious.  Ms.  Rodell                                                                    
responded  that the  commissioner of  DOR was  had fiduciary                                                                    
responsibility for all of the  state's financial assets. She                                                                    
felt  that there  were benefits  of both  diversification as                                                                    
long as there was  continuity. She felt that diversification                                                                    
was  most helpful  in  asset allocation,  as  opposed to  an                                                                    
individual running a particular portfolio.                                                                                      
5:33:57 PM                                                                                                                    
Senator  Olson  wondered if  Ms.  Rodell  had an  optimistic                                                                    
perspective on the bill. Ms.  Rodell replied that it was the                                                                    
intent to  examine three years  of earnings.  She encouraged                                                                    
the committee  to expand that  intent to examine  more areas                                                                    
of the reserve.                                                                                                                 
Co-Chair   MacKinnon   shared    that   she   had   observed                                                                    
presentations by  the governor  to the Permanent  Fund Board                                                                    
ideas for  use of the  assets. She  had seen the  models and                                                                    
the  actuaries  that  supported   the  board.  She  wondered                                                                    
whether the  board would  be able  to examine  the committee                                                                    
substitute. Ms.  Rodell replied that the  next board meeting                                                                    
was  scheduled  for  May  24  and 25.  She  hoped  that  the                                                                    
legislative process would be complete  before that time. She                                                                    
shared  that the  board  felt it  was  important to  respect                                                                    
their roles as  trustees to manage the funds  of the corpus.                                                                    
She  stated  that  the  legislature  had  the  authority  to                                                                    
determine how the fund was used.                                                                                                
Co-Chair MacKinnon thanked the day's presenters.                                                                                
5:38:38 PM                                                                                                                    
AT EASE                                                                                                                         
5:39:00 PM                                                                                                                    
5:39:03 PM                                                                                                                    
Co-Chair MacKinnon  announced that there would  be a meeting                                                                    
the following day.                                                                                                              
Vice-Chair Micciche  remarked that there was  room to reduce                                                                    
the size of  government, but stressed that there  would be a                                                                    
point when once could no longer make any more reductions.                                                                       
SB 128 was HEARD and HELD in committee for further                                                                              

Document Name Date/Time Subjects