Legislature(2015 - 2016)BILL RAY CENTER 230

06/06/2016 03:00 PM Senate FINANCE

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03:04:08 PM Start
03:05:02 PM SB128
04:39:48 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved CSSB 128(FIN) Out of Committee
Bills Previously Heard/Scheduled
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."                                                                          
3:05:02 PM                                                                                                                    
Vice-Chair Micciche MOVED to ADOPT the committee substitute                                                                     
for SB 128, Work Draft 29-GS2859\U (Wallace/Martin,                                                                             
Co-Chair MacKinnon OBJECTED for DISCUSSION.                                                                                     
3:05:20 PM                                                                                                                    
AT EASE                                                                                                                         
3:08:45 PM                                                                                                                    
Co-Chair MacKinnon explained that the committee substitute                                                                      
could be found online.                                                                                                          
LAURA CRAMER, STAFF, SENATOR ANNA MACKINNON, discussed the                                                                      
Summary of Changes (copy on file):                                                                                              
     Section 8: Excludes the Amerada Hess funds from the                                                                        
     POMV calculation                                                                                                           
          Removed     inflation     adjustment    on     the                                                                    
          $1,200,000,000 revenue limit                                                                                          
     Section 9: The Amerada Hess funds which are deposited                                                                      
     into the capital income fund are not available for                                                                         
     distribution under the POMV calculation                                                                                    
     Section 11: Added a Savings Rule:                                                                                          
          Sec. 37.13.148  Appropriation of  Revenue: Creates                                                                    
          a savings  rule that the legislature  may annually                                                                    
          appropriate unrestricted  general fund  revenue in                                                                    
          excess   of   the    unrestricted   general   fund                                                                    
          appropriations. Fifty  percent would  be deposited                                                                    
          into  the  Permanent  Fund and  the  remaining  50                                                                    
          percent    would    be    deposited    into    the                                                                    
          constitutional budget reserve fund                                                                                    
     Section 23: Management of the CBR is transferred to                                                                        
     the Permanent Fund Corporation effective July 1, 2016                                                                      
     Title: Added the language: relating to unrestricted                                                                        
     state revenues available for appropriation - this                                                                          
     relates to the savings rule found in Sec. 11                                                                               
     Section 4: Removed the repeal of the Capital Income                                                                        
Co-Chair MacKinnon  WITHDREW the  OBJECTION. There  being NO                                                                    
further  OBJECTION, the  proposed committee  substitute (CS)                                                                    
was adopted.                                                                                                                    
3:11:44 PM                                                                                                                    
3:30:18 PM                                                                                                                    
Co-Chair  MacKinnon  discussed  the  budget  shortfall,  and                                                                    
informed that  funds would be drawn  from the constitutional                                                                    
budget reserve (CBR)  to fill the gap. She  relayed that the                                                                    
administration had alleged that if  a draw from the CBR were                                                                    
to take place,  it would create an opportunity  cost loss of                                                                    
between  $50  million and  $200  million.  She asked  for  a                                                                    
comment on  the opportunity cost  of a $3 billion  draw from                                                                    
the CBR.                                                                                                                        
ROB  CARPENTER,   ANALYST,  LEGISLATIVE   FINANCE  DIVISION,                                                                    
replied that  under the plan  being proposed in the  CS, the                                                                    
cost was negligible  due to the fact that  management of the                                                                    
CBR  was  being transferred  to  the  Alaska Permanent  Fund                                                                    
Co-Chair  MacKinnon  relayed   that  Department  of  Revenue                                                                    
Commissioner  Randall Hoffbeck  would  discuss the  subject.                                                                    
She stated  that CSSB 128(FIN)  examined use of  the state's                                                                    
pooled assets.                                                                                                                  
Mr.  Carpenter  discussed   the  presentation,  "LFD  Fiscal                                                                    
Model"  (copy on  file). He  explained that  slide 1,  which                                                                    
showed 4 graphs, was a status quo scenario.                                                                                     
3:33:16 PM                                                                                                                    
Co-Chair  MacKinnon asked  for  an explanation  of the  four                                                                    
graphs, which  the committee was  using as  criteria through                                                                    
for evaluating  the success of any  proposals. She explained                                                                    
that one  graph showed  the operating budget,  one pertained                                                                    
to budget  reserves, one showed the  permanent fund dividend                                                                    
(PFD), and  the final graph  depicted the overall  health of                                                                    
the permanent fund.                                                                                                             
Mr. Carpenter  indicated that the upper  left graph depicted                                                                    
the unrestricted general fund (UGF)  budget with a bar graph                                                                    
that  indicated what  revenue sources  were  being used.  He                                                                    
drew attention to the column for  FY 17, which showed use of                                                                    
the CBR  for a large  part of the  budget. He noted  the CBR                                                                    
use in  other years,  and the  projected elimination  of the                                                                    
funds  by  FY 19.  The  graph  showed  use of  the  earnings                                                                    
reserve account (ERA)  after the CBR was  expended. He added                                                                    
that the  ERA would decline  and be gone  by FY 23,  and the                                                                    
graph  showed a  blank space  to  signify a  deficit in  its                                                                    
place. He  noted small red  bars that indicated  earnings in                                                                    
the ERA, but  pointed out there would be  no ongoing balance                                                                    
to fill the deficit.                                                                                                            
Co-Chair MacKinnon  wondered if  the graph  demonstrated the                                                                    
administration's assertion that the  dividend program was in                                                                    
jeopardy if the ERA fell to zero.                                                                                               
Mr.  Carpenter pointed  out  the graph  in  the upper  right                                                                    
entitled "Dividend Check," and noted  that the graph did not                                                                    
depict the PFD  going to zero. Rather, the  graph showed the                                                                    
status quo of dividends. He  directed attention to the graph                                                                    
on the lower  left of slide 1, called  "Budget Reserves." He                                                                    
noted that the  graph showed the balance of the  CBR gone by                                                                    
FY 18,  and the balance  of the ERA  gone by FY  21; thereby                                                                    
the dividend would have to be eliminated.                                                                                       
3:36:23 PM                                                                                                                    
Senator  Dunleavy remarked  that part  of the  input to  the                                                                    
graphs on slide  1 assumed that state  spending remained the                                                                    
Mr. Carpenter directed  attention to a column  in the middle                                                                    
of  the  slide that  showed  some  growth in  the  operating                                                                    
budget, as  well as  some growth in  the capital  budget. He                                                                    
added  that there  was  an  assumption of  oil  and gas  tax                                                                    
credits  being paid  at $250  million per  year, given  that                                                                    
there  was  earned  credits projected  at  approximately  $2                                                                    
billion over  the following 8  years. He concluded  that the                                                                    
black  line on  the  first graph  depicting  the budget  was                                                                    
Senator  Dunleavy   looked  forward  to  hearing   from  the                                                                    
administration  regarding   the  aforementioned  opportunity                                                                    
cost and what went in to  the calculation. He thought it was                                                                    
certain that  if spending  remained the  same, there  was no                                                                    
opportunity  cost;  and  if spending  was  reduced  by  $100                                                                    
million,  it  could be  argued  that  there was  opportunity                                                                    
cost.  He  wondered  about the  assumptions  of  status  quo                                                                    
spending. He  reminded the committee about  opportunities to                                                                    
reduce the size of the budget in the following years.                                                                           
Co-Chair Kelly  queried scenarios that showed  what happened                                                                    
in the  FY 17  budget as  a baseline.  He thought  the slide                                                                    
assumed the  spring forecast and  the FY 16  management plan                                                                    
for a spending baseline.                                                                                                        
Mr. Carpenter relayed  that the slide used the  FY 17 budget                                                                    
as it was in conference committee.                                                                                              
Senator  Olson  referred to  the  bottom  right quadrant  of                                                                    
slide 1, which showed the  graph "Permanent Fund - FY Ending                                                                    
Balance," and asked if the  depiction of the fund being flat                                                                    
for the next 10 years was accurate.                                                                                             
Mr. Carpenter  thought that  given the use  of the  ERA, the                                                                    
state would be earning money but  pulling from the ERA in an                                                                    
amount that  would flatten out  the fund. He  continued that                                                                    
once the ERA was exhausted in  FY 21, the permanent fund was                                                                    
predicted to grow again.                                                                                                        
Senator  Olson found  it bothersome  that there  had been  a                                                                    
significant rise  in the  corpus of the  fund over  the past                                                                    
ten years, yet the fund was  predicted to lack growth in the                                                                    
near future. He wondered if there  was a way for the fund to                                                                    
grow even if the ERA was down.                                                                                                  
Mr. Carpenter was  not sure how to answer  the question, and                                                                    
stated  that the  slide  assumed a  certain  rate of  return                                                                    
based on the asset allocation of the permanent fund.                                                                            
3:40:16 PM                                                                                                                    
Mr. Carpenter  looked at  slide 2, which  showed the  same 4                                                                    
graphs as slide 1, reflecting  the passage of CSSB 128(FIN).                                                                    
He pointed  out the budget graph  in the upper left,  with a                                                                    
new bar depicting use of  the Percent of Market Value (POMV)                                                                    
payout   to  the   general  fund   (GF).  The   POMV  payout                                                                    
significantly  filled  the  budget  deficit  under  the  new                                                                    
scenario. In  the lower  left quadrant,  he pointed  out the                                                                    
graph depicting the life of the  CBR extending to FY 23; and                                                                    
a  healthy ERA  through  FY  25. He  drew  attention to  the                                                                    
"Dividend Check" graph  in the upper right,  noting that the                                                                    
bill set  the PFD at $1000  for the first three  years, then                                                                    
falling  into  the  formula  thereafter  with  dividends  at                                                                    
roughly $1000.                                                                                                                  
Mr.  Carpenter continued  discussing  slide 2,  highlighting                                                                    
the  "Permanent  Fund -  FY  Ending  Balance" graph  in  the                                                                    
bottom right corner. He pointed  out that the balance of the                                                                    
fund itself  [under the  CSSB 128 scenario]  had grown  to a                                                                    
larger balance  of over  $60 billion  versus the  status quo                                                                    
scenario on  slide 1  that showed a  flat balance.  He noted                                                                    
that  for FY  17, even  with a  POMV payout  of almost  $2.4                                                                    
billion, there was a remaining  deficit of $1.5 billion that                                                                    
could be seen  on the table on the lower  left of the slide.                                                                    
He added that  the remaining deficit amount  would be filled                                                                    
by the CBR in FY 17.                                                                                                            
Co-Chair MacKinnon turned to slide  1, and drew attention to                                                                    
the table  at the bottom  left of  the slide. She  looked at                                                                    
the row "Years  to Exhaust," and explained  that the numbers                                                                    
(starting with 4  in FY 17 and moving steadily  down to zero                                                                    
in FY 22) indicated how  in many years until budget reserves                                                                    
would be  gone. She compared it  to the same table  on slide                                                                    
2,  which reflected  what would  happen under  conditions of                                                                    
the proposed  plan. The  "Years to Exhaust"  row on  slide 2                                                                    
showed the  reserves starting  at 9 for  FY 17,  and growing                                                                    
steadily because of the change in the use of the funds.                                                                         
Co-Chair MacKinnon  continued to  compare the tables  at the                                                                    
bottom left  of slide  1 and  slide 2,  and pointed  out the                                                                    
"Deficit" row. She noted that  the status quo table on slide                                                                    
1 showed  approximately $3.3  billion of  deficit in  FY 17;                                                                    
and the  same figure  on slide 2  [reflecting implementation                                                                    
of the  proposal in the CS]  showed a much lower  deficit of                                                                    
$1.5 billion.  She explained that the  committee was looking                                                                    
to  extend the  health of  the state's  budget reserves,  as                                                                    
well as keeping the corpus of the permanent fund healthy.                                                                       
Senator Hoffman  asked if both  scenarios assumed  a capital                                                                    
budget of approximately  $185 million from FY  19 through FY                                                                    
25. He  asked Mr. Carpenter  to remind the committee  of the                                                                    
standing of the current capital budget.                                                                                         
Mr. Carpenter relayed that the  capital budget was currently                                                                    
at $96 million.                                                                                                                 
Senator Hoffman noted  that the amount for FY  19 through FY                                                                    
25 was double what the capital budget was currently.                                                                            
Mr. Carpenter concurred.                                                                                                        
3:44:00 PM                                                                                                                    
Senator  Dunleavy  discussed  federal  matching  funds,  and                                                                    
wondered  if the  state  doubled its  capital  budget if  it                                                                    
would also double the receipt of federal funds.                                                                                 
Co-Chair  MacKinnon stated  that the  proposal had  tried to                                                                    
leverage  as  many  dollars  as   possible  with  the  money                                                                    
allocated  from the  GF,  but  there was  not  an excess  of                                                                    
federal   funds.  Rather,   there   was   a  Department   of                                                                    
Transportation  and  Public  Facilities funding  match.  She                                                                    
thought there might  be a bit more federal funds,  but not a                                                                    
doubling of expenditures by the state.                                                                                          
Mr. Carpenter  confirmed that the state  had leveraged every                                                                    
federal dollar that was possible.                                                                                               
Senator Hoffman  asked if doubling  the capital  budget over                                                                    
the proposed period  of time was a good  start in leveraging                                                                    
federal dollars.                                                                                                                
Co-Chair MacKinnon  stated that many Alaskans  believed that                                                                    
the capital budget,  if it remained low for  too long, would                                                                    
mean  increased  costs   though  deferred  maintenance.  She                                                                    
relayed that  state assets were struggling  with maintaining                                                                    
Senator  Bishop  thought  the deferred  maintenance  problem                                                                    
would only  worsen if it  were not addressed. He  added that                                                                    
it was important  to consider fixing what  the state already                                                                    
owned rather than investing in new capital purchases.                                                                           
Mr. Carpenter addressed slide 3,  "20/20 Plan Cash Flow." He                                                                    
drew attention to the circled  area, which encompassed boxes                                                                    
for the permanent  fund principal, the ERA, and  the CBR. He                                                                    
explained  that the  funds  were shown  inside  a circle  to                                                                    
denote  an investment  pool, while  other cash  flow sources                                                                    
(royalties,  production tax,  and  other  UGF revenue)  were                                                                    
outside the circle with arrows  toward the GF. He noted that                                                                    
the royalties  were split between  the public  school trust,                                                                    
the principal of  the permanent fund, and the  GF; while the                                                                    
other two fund sources flowed  toward the GF at 100 percent.                                                                    
He  relayed that  the graph  showed the  POMV payout  coming                                                                    
from the ERA  to the GF; while a dotted  line on the diagram                                                                    
illustrated  CBR  draws  (as  necessary  to  fill  deficits)                                                                    
flowing to  the GF. Finally,  the diagram showed  20 percent                                                                    
of royalties and 20 percent of the POMV paid out for PFDs.                                                                      
3:47:35 PM                                                                                                                    
Co-Chair MacKinnon  clarified that the slide  depicted where                                                                    
the money  currently resided, and  how the bill  proposed to                                                                    
manage and direct the money.                                                                                                    
Senator Olson  asked about PFDs  and observed that  the bill                                                                    
proposed a  dividend at  a flat amount  near $1000  over the                                                                    
next  3  years.  He  wondered   what  would  happen  to  the                                                                    
dividends after FY 19.                                                                                                          
Mr. Carpenter returned to slide  2, which showed a projected                                                                    
dividend at roughly $1000 under the bill formula.                                                                               
Senator  Olson  thought  the   graph  illustrated  that  the                                                                    
dividend  amount  was  projected indefinitely  at  the  same                                                                    
Mr. Carpenter stated  that the amount was  projected for the                                                                    
time  period  shown on  the  graph,  and if  production  and                                                                    
royalty  were  to decline  there  would  be  a drop  in  the                                                                    
dividend. He  added that  growth of  the permanent  fund and                                                                    
the POMV amount would offset the decline in royalty.                                                                            
Co-Chair MacKinnon asked  if it was accurate  that there was                                                                    
a variety of variables under  the proposal that would affect                                                                    
the dividend.                                                                                                                   
Mr. Carpenter agreed.                                                                                                           
Co-Chair   MacKinnon  surmised   that  the   permanent  fund                                                                    
earnings and  the royalties were  part of what  would affect                                                                    
the dividend. She  thought the forecast was  based on spring                                                                    
projections, and asked if the  spring projections were above                                                                    
or below what the state was currently experiencing.                                                                             
Mr. Carpenter  thought the projections  were below  what was                                                                    
expected, but growing in line with the spring projections.                                                                      
Co-Chair  MacKinnon thought  the  committee  could get  more                                                                    
information   from   Commissioner    Hoffbeck   to   enhance                                                                    
understanding of the variables affecting the PFD.                                                                               
Senator  Olson commented  on the  variables  and thought  it                                                                    
would be helpful to be  able to communicate more information                                                                    
to his constituents.                                                                                                            
3:51:01 PM                                                                                                                    
Mr.  Carpenter  looked  at  slide  4,  "PRPA  Payout/Revenue                                                                    
Limit," which  showed two graphs  depicting the  UGF revenue                                                                    
limit, which he explained was  put in place against the POMV                                                                    
payout. He noted  that the graph to the  left portrayed what                                                                    
would happen without the payout  limit. The bar graph showed                                                                    
non-volatile  revenue (such  as corporate  income tax),  the                                                                    
POMV payout,  the volatile  revenue (such  as oil  and gas),                                                                    
and  the deficit  (which indicated  CBR  use). He  explained                                                                    
that  the  graph  used  FY   17  revenue  under  the  spring                                                                    
forecast. He  pointed out the  black line that  depicted the                                                                    
budget. He noted that the  POMV payout was consistent across                                                                    
the oil  price scenario (the  values on the bottom).  As the                                                                    
price of oil grew, the  total volatile revenue grew as well.                                                                    
He indicated  that at  a certain price  point on  the graph,                                                                    
the budget line showed surplus revenue.                                                                                         
Mr.  Carpenter continued  discussing  slide  4, and  relayed                                                                    
that  there  had been  concern  over  what  to do  with  the                                                                    
forecast surplus  revenue, therefore  the revenue  limit had                                                                    
been  proposed  by  the  governor's  office.  When  volatile                                                                    
revenue reached $1.2  billion, the POMV would  be reduced on                                                                    
a dollar-per-dollar  basis, as  illustrated by the  graph on                                                                    
the  right, "UGF  Revenue with  Payout  Limit." He  directed                                                                    
attention to the point of oil  revenue (at $75 to $85) where                                                                    
the POMV started to decline  as the volatile revenue started                                                                    
to  increase  beyond a  certain  point.  He added  that  the                                                                    
payout limit  proposal would  mean that oil  had to  be $110                                                                    
before there would be surplus revenue.                                                                                          
Co-Chair MacKinnon  asked if  the POMV  was reduced  and not                                                                    
paid out, if  it would sit in the ERA.  Mr. Carpenter turned                                                                    
to slide 5,  "Savings Rule." He pointed  out surplus revenue                                                                    
on the graph,  which showed 50 percent going to  the CBR and                                                                    
50 percent going to the permanent fund principal.                                                                               
3:54:18 PM                                                                                                                    
AT EASE                                                                                                                         
3:55:49 PM                                                                                                                    
Co-Chair MacKinnon  referred to  her earlier  question about                                                                    
POMV funds. She  looked at the green bars on  slide 4, which                                                                    
represented  the POMV  with a  payout limit,  and understood                                                                    
that the excess funds would stay  in the ERA. She asked what                                                                    
would happen when the funds remained in the ERA.                                                                                
Mr. Carpenter  detailed that  as the  revenue limit  was put                                                                    
into  effect and  the  POMV payout  was  reduced; the  funds                                                                    
would  stay  in the  ERA  and  the permanent  fund,  provide                                                                    
additional  assets for  investment  and  grow the  permanent                                                                    
fund, and then cause the dividend to grow.                                                                                      
Co-Chair  MacKinnon  restated  that the  excess  POMV  funds                                                                    
would be saved to help drive the dividend up.                                                                                   
Senator Olson  asked what  would happen  to the  dividend if                                                                    
there was a financial crisis such as in 2008.                                                                                   
Mr.  Carpenter  replied  that  any  financial  crisis  would                                                                    
impact the dividend negatively.                                                                                                 
Senator Olson asked if the effect would be significant.                                                                         
Mr. Carpenter  recounted that there  had been  potential for                                                                    
the state to  have a zero ERA with no  dividend in 2008; and                                                                    
thought the possibility still existed.                                                                                          
Co-Chair  MacKinnon  stated  that   the  difference  in  the                                                                    
dividend  formula (under  the proposed  plan  of 20  percent                                                                    
market value  and 20 percent royalty)  diversified risk. She                                                                    
thought the worst  case scenario was if the  price of return                                                                    
on investment  dropped significantly. She continued  that if                                                                    
oil production  remained the same  and the price  stayed up,                                                                    
then  the dividend  would be  higher  than if  it were  only                                                                    
based on  a percentage  of market  value from  the permanent                                                                    
fund earnings.                                                                                                                  
Senator  Olson  understood  that  the risk  would  still  be                                                                    
significant, but  not as  significant as  it had  been under                                                                    
the existing formula.                                                                                                           
Co-Chair MacKinnon reiterated that  the PFD would be blended                                                                    
from two sources, therefore the  risk should be diversified.                                                                    
She added that  under the proposed plan,  the dividend would                                                                    
not swing upwards as dramatically as in the past.                                                                               
Senator Hoffman asked about the  dividend amount, as well as                                                                    
the  diminished   volatility  of  the  dividend   under  the                                                                    
proposal in the bill compared to the current plan.                                                                              
Mr. Carpenter replied that the  current dividend formula was                                                                    
based  on 20  percent of  the previous  five years  earnings                                                                    
calculation, and recounted historic  low PFD amounts as well                                                                    
ask spikes due to  dramatic fluctuations calculated into the                                                                    
average. Under the new scenario,  the amount of the dividend                                                                    
would maintain,  given that  the formula  would be  a 5-year                                                                    
payout of a  calculation based on the entire  balance of the                                                                    
permanent fund.                                                                                                                 
Senator  Hoffman surmised  that the  people of  Alaska could                                                                    
better  predict the  range  of the  PFD  under the  proposed                                                                    
Mr. Carpenter replied in the affirmative.                                                                                       
4:00:42 PM                                                                                                                    
Co-Chair  MacKinnon  shared   that  the  administration  had                                                                    
proposed an  annuity-style draw, as  a way to close  part of                                                                    
the fiscal gap  and diversify the revenue  stream. She asked                                                                    
if the  commissioner of  the Department  of Revenue  had any                                                                    
comments on the CS that was before the committee.                                                                               
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
stated  that the  CS was  different than  the bill  that was                                                                    
originally proposed, but it did  accomplish the purpose that                                                                    
the  administration   had  set  out  within   the  bill.  He                                                                    
continued  that  the original  intent  had  been to  have  a                                                                    
systematic  way  to use  the  ERA  that protected  both  the                                                                    
corpus of the  permanent fund and the PFD.  He affirmed that                                                                    
the administration was  pleased with the CS,  and thought it                                                                    
represented  cooperation.  He  thanked  the  committee,  and                                                                    
particularly Co-Chair  MacKinnon for  the work on  the bill.                                                                    
He  echoed  the governor's  comments  about  the bill  being                                                                    
subject to change.                                                                                                              
Co-Chair MacKinnon  stated that the committee  had questions                                                                    
about the  opportunity cost of  not moving forward  with the                                                                    
proposed  plan.  She  recounted passing  a  balanced  budget                                                                    
including a significant draw from  savings. She relayed that                                                                    
there had  been bipartisan support  in the Senate  and House                                                                    
for  the necessary  three-quarter  vote to  access the  CBR,                                                                    
which had  a lower rate  of return  than the ERA.  She asked                                                                    
the commissioner if he had the same understanding.                                                                              
Commissioner Hoffbeck answered in the affirmative.                                                                              
Co-Chair  MacKinnon   asked  for  explanation  of   how  the                                                                    
opportunity  cost  was  calculated, so  that  the  committee                                                                    
members could  contemplate the calculation  in consideration                                                                    
of the bill.                                                                                                                    
Commissioner   Hoffbeck  replied   that   there  was   three                                                                    
components  that  drove  the change  in  the  equation.  The                                                                    
primary  issues  were:  how  much the  state  spent  on  the                                                                    
budget, what  other revenue sources were  available, and how                                                                    
much  would be  spent for  supporting government  versus the                                                                    
PFD program  (considering the Permanent Fund  Protection Act                                                                    
(PFPA)).  He  continued  that when  the  administration  had                                                                    
considered the  opportunity cost,  it had  looked at  a $700                                                                    
million  difference  between  the   dividend  payout  as  it                                                                    
currently  was  versus  under the  PFPA.  Additionally,  the                                                                    
administration had reviewed $300  million to $400 million in                                                                    
new revenues, as  well as the impact of the  oil and gas tax                                                                    
Commissioner Hoffbeck  continued, and summarized  that there                                                                    
was  a $1  billion to  $1.5 billion  difference between  the                                                                    
status  quo and  the implementation  of the  PFPA and  other                                                                    
programs.  He elucidated  that the  biggest  issue with  the                                                                    
PFPA   would  be   the   $700   million  investment   return                                                                    
difference; which  at a 7.25  percent rate of  return, would                                                                    
equate  to  $50  million  of lost  revenue.  He  added  that                                                                    
considering other  components, there  would be  $100 million                                                                    
that would not be recovered for the future.                                                                                     
Co-Chair MacKinnon noted  that the bill proposed  to move $3                                                                    
billion from  the CBR, and  asked what the  opportunity cost                                                                    
loss was on spending the funds.                                                                                                 
Commissioner Hoffbeck  stated that the  loss was in  the $50                                                                    
million range,  due to the fact  that the bill did  not have                                                                    
the  adjustments associated  with  the  components that  had                                                                    
been  proposed earlier.  He clarified  that the  totality of                                                                    
the   governor's   proposed   finance   package   (including                                                                    
additional  revenues  and credit  reform)  was  in the  $100                                                                    
million range.                                                                                                                  
Senator  Dunleavy  mentioned  an earlier  reference  to  the                                                                    
amount of $200 million, and asked for an explanation.                                                                           
4:05:35 PM                                                                                                                    
AT EASE                                                                                                                         
4:07:00 PM                                                                                                                    
Co-Chair  MacKinnon  shared  that   she  had  requested  the                                                                    
Legislative  Finance Division  (LFD)  to provide  additional                                                                    
dialogue  on  the subject.  She  wanted  to provide  greater                                                                    
understanding  about the  assertion from  the administration                                                                    
that there was a $200  million opportunity cost if the state                                                                    
used $3 billion from the CBR.                                                                                                   
ALEXEI  PAINTER,  ANALYST,   LEGISLATIVE  FINANCE  DIVISION,                                                                    
considered that the $200 million  was the difference between                                                                    
if the deficit were filled with  the CBR rather than the ERA                                                                    
(without a permanent fund plan).  He recalled that there had                                                                    
been  discussion  in the  legislature  about  using the  ERA                                                                    
instead of  the CBR.  He furthered that,  in the  absence of                                                                    
the PFPA, which allowed the CBR  to be invested for a higher                                                                    
return,  there   would  be  a  significant   difference  (an                                                                    
estimated $200 million) in  investment revenue between using                                                                    
the ERA and the CBR.                                                                                                            
Senator Dunleavy asked if the  calculation had been based on                                                                    
the CBR being invested differently.                                                                                             
Mr. Painter replied in the affirmative.                                                                                         
Co-Chair   MacKinnon  added   that   the  calculation   also                                                                    
considered  the  elimination  of  the  $3  billion  and  the                                                                    
earning potential.                                                                                                              
Senator Dunleavy wondered if it  was possible to isolate the                                                                    
investment  in  order  to get  the  desired  return  without                                                                    
having to do anything with POMV.                                                                                                
Mr.  Painter replied  in the  affirmative, but  advised that                                                                    
the scenario  would require  statutory change.  He explained                                                                    
that currently the CBR had  to be invested conservatively if                                                                    
it was going to be used within the following five years.                                                                        
Senator Dunleavy  thought some  had alleged that  passage of                                                                    
the bill would cause the  opportunity cost loss, but thought                                                                    
the  legislature could  make the  necessary changes  through                                                                    
legislation to change how the CBR was invested.                                                                                 
Mr.  Painter concurred,  considering the  difference between                                                                    
using  the CBR  and  the ERA.  He added  that  there was  an                                                                    
opportunity cost, as the commissioner  had mentioned, of the                                                                    
dividends and other factors.                                                                                                    
Senator Dunleavy  stated that there was  also an opportunity                                                                    
cost of not reducing the budget further.                                                                                        
Vice-Chair   Micciche  discussed   the  difference   between                                                                    
investing the CBR and the ERA,  and asked if not passing the                                                                    
bill  under   consideration  (or   another)  would   mean  a                                                                    
difference of between $800 million and $900 million.                                                                            
Mr. Painter replied in the affirmative.                                                                                         
4:10:07 PM                                                                                                                    
Co-Chair MacKinnon acknowledged  that the administration had                                                                    
a  different outline  for  opportunity cost  as  well as  an                                                                    
assertion  of  a $200  million  difference  in returns.  She                                                                    
reiterated that  she wanted to  edify the subject to  aid in                                                                    
considering the bill.                                                                                                           
Co-Chair  MacKinnon stated  that the  bill being  considered                                                                    
would establish  a POMV, and  pooled all the  state's assets                                                                    
to generate  revenue. She furthered  that the  revenue would                                                                    
pay  the  dividends at  20  percent  of  the POMV,  plus  20                                                                    
percent   of  royalties.   Additionally,   the  bill   would                                                                    
guarantee a  dividend of  $1,000 for  three years.  The bill                                                                    
would also set a revenue  limit of $1.2 billion, above which                                                                    
the POMV  spending would be  reduced by whatever  amount was                                                                    
earned. Funds above the revenue  limit would stay in the ERA                                                                    
to help drive up future dividends.                                                                                              
Co-Chair  MacKinnon continued  discussing  the bill,  noting                                                                    
that it would create a  savings rule that stipulated that in                                                                    
a  high-price  environment,  legislators may  contribute  50                                                                    
percent  of  excess  funds  to the  permanent  fund  and  50                                                                    
percent  to the  CBR to  pay back  the money  that had  been                                                                    
spent.  The  bill transferred  management  of  all funds  to                                                                    
create  pooled assets  under the  management  at the  Alaska                                                                    
Permanent Fund  Corporation (APFC) to receive  a higher rate                                                                    
of return.                                                                                                                      
Vice-Chair  Micciche  relayed  that  he  had  asked  DOR  to                                                                    
provide him  with a scenario illustrating  the difference if                                                                    
the legislature  had changed the CBR  investment protocol 10                                                                    
years previously. He recalled  the difference was about $1.6                                                                    
billion. He  pondered how investments  worked over  the long                                                                    
term, and  thought the state  should have made the  change a                                                                    
long  time ago.  He recognized  the effort  to keep  the CBR                                                                    
more liquid,  but thought  the practice  had cost  the state                                                                    
Commissioner   Hoffbeck  stated   that   the  numbers   were                                                                    
accurate, and  pointed out that  the management  mandate for                                                                    
the CBR was  different (than for the permanent  fund) as the                                                                    
state had  to remain more liquid,  particularly during years                                                                    
where the state had  substantial draws. He acknowledged that                                                                    
the  constraints had  held down  rates of  return. He  hoped                                                                    
that  by co-managing  the funds  within the  permanent fund,                                                                    
returns  would   be  generated  similar  to   those  of  the                                                                    
permanent fund. He noted that  some liquidity measures would                                                                    
have to  be taken  in the  current year  to ensure  that the                                                                    
cash calls could be met.                                                                                                        
Senator Olson  discussed management  of the  permanent fund,                                                                    
and  wondered if  the commissioner  thought it  was wise  to                                                                    
have the management of the CBR transferred to the APFC.                                                                         
Commissioner Hoffbeck thought that  there was an opportunity                                                                    
available by  transferring the CBR  management to  the APFC.                                                                    
He thought his staff did a  very good job managing the fund,                                                                    
but  recognized there  were opportunities  available through                                                                    
merging the  funds. He noted  that he had  discussed looking                                                                    
at opportunities  for co-management  of funds  with Co-Chair                                                                    
MacKinnon before the matter was in the bill.                                                                                    
Senator Olson asked  if the governor had  strong feelings on                                                                    
the matter.                                                                                                                     
Commissioner Hoffbeck replied in the negative.                                                                                  
4:15:28 PM                                                                                                                    
CHRIS   POAG,  GENERAL   COUNSEL,   ALASKA  PERMANENT   FUND                                                                    
CORPORATION,   JUNEAU,  invited   the   committee  to   pose                                                                    
questions about APFC as it related to the bill.                                                                                 
Co-Chair MacKinnon asked if Mr.  Poag was up for co-managing                                                                    
pooled investments for Alaskans.                                                                                                
Mr. Poag answered  in the affirmative and  expanded that the                                                                    
sole  responsibility  of  APFC  was  to  invest  and  manage                                                                    
assets. He explained  that by making the  pool larger, there                                                                    
would be  better investments  and returns.  He added  that a                                                                    
POMV   draw   was   very   common   among   endowments   and                                                                    
universities,  and  typically ranged  from  4  percent to  5                                                                    
percent. He noted  that the proposed POMV  was 5.25 percent,                                                                    
and was based on five of  the preceding six fiscal years, so                                                                    
the effective  rate was  not likely to  be 5.25  percent. He                                                                    
informed  that  the  trend  was   for  markets  to  incline,                                                                    
therefore one would artificially deflate the value.                                                                             
Mr. Poag continued discussing the  bill, noting that Section                                                                    
1  gave  the  APFC  comfort  in  that  in  three  years  the                                                                    
legislature  would  reevaluate  the   use  of  the  ERA,  to                                                                    
determine  whether  there  was  over-consumption  or  under-                                                                    
consumption.  He thought  the reevaluations  were important,                                                                    
and ventured that in three years  the state would be able to                                                                    
determine whether 5.25 percent was the right level.                                                                             
Vice-Chair  Micciche  asked  if   Mr.  Poag  envisioned  the                                                                    
reporting  of the  performance of  the  co-mingled funds  to                                                                    
become  a sub-set  of  the annual  report  of the  permanent                                                                    
fund, or if it would be reported through DOR.                                                                                   
Mr.  Poag  believed  the  bill  addressed  the  subject.  He                                                                    
referred   to  Section   5,  line   13;  which   outlined  a                                                                    
requirement that  APFC provide  a report to  the legislature                                                                    
by March  15, communicating the  balance of the fund  at the                                                                    
beginning and end of the  fiscal year. He expanded that APFC                                                                    
would communicate  the nominal,  real, and  realized returns                                                                    
of  the CBR  portion of  the managed  assets. He  noted that                                                                    
there was  already pooling  of the  main permanent  fund and                                                                    
the  ERA, as  well as  some portion  of mental  health trust                                                                    
funds. If the legislation were  to pass, there would be four                                                                    
pools that made one large asset pool.                                                                                           
4:18:44 PM                                                                                                                    
Vice-Chair Micciche asked if Mr.  Poag envisioned a separate                                                                    
asset allocation, or similar investment  of all of the funds                                                                    
in the pool.                                                                                                                    
Mr. Poag stated that the  APFC board had discussed holding a                                                                    
special  board meeting  if the  legislature acted  to change                                                                    
the way  the ERA  was accessed; at  which it  would consider                                                                    
the current  asset allocation and  determine whether  or not                                                                    
to  make   adjustments.  He   discussed  the   necessity  of                                                                    
determining  the rate  of spend  for  the CBR,  in order  to                                                                    
decide  if  the current  asset  allocation  would be  liquid                                                                    
enough.  He noted  that  APFC's intention  was  to start  by                                                                    
using the  same asset allocation  for the main fund  and the                                                                    
ERA. He  stated that APFC  was hopeful that it  could manage                                                                    
the cash needs that the legislature  had for a fixed draw or                                                                    
any CBR appropriations.                                                                                                         
Vice-Chair Micciche  asked if APFC  maintained a  portion of                                                                    
the permanent fund corpus in liquidity.                                                                                         
Mr. Poag  answered in the  affirmative, and noted  that APFC                                                                    
had 6 percent of the fund in cash and interest.                                                                                 
Vice-Chair Micciche wondered whether  the liquidity could be                                                                    
transferred for a  draw from one account  to another without                                                                    
affecting the various asset allocations.                                                                                        
Mr.  Poag  stated  that  the   board  had  set  up  a  "risk                                                                    
dashboard" with allocations,  which established authority to                                                                    
act  within  the boundaries.  He  expanded  that there  were                                                                    
levels  which  necessitated  different  involvement  of  the                                                                    
chief investment  officer, chief executive officer,  and the                                                                    
board. He  explained that  if the cash  draw was  within the                                                                    
established boundaries it would not  be a problem, however a                                                                    
larger cash  draw would possibly  necessitate accommodations                                                                    
by realizing  an investment. Alternatively, it  was possible                                                                    
to utilize a line or letter  of credit to solve a short-term                                                                    
cash need while  allowing less liquid assets  to maintain in                                                                    
the current profile.                                                                                                            
Co-Chair MacKinnon  understood from  past meetings  that the                                                                    
bill  would allow  DOR to  work cooperatively  with APFC  to                                                                    
establish a smooth transition of the management.                                                                                
Mr. Poag concurred.                                                                                                             
Senator Dunleavy  asked if APFC  had any concerns  about the                                                                    
Mr. Poag expressed  that the decision to access  the ERA was                                                                    
a policy decision  that was outside the purview  of APFC. He                                                                    
noted that  the board had a  meeting in January at  which it                                                                    
evaluated the  legislation and had  given input.  He thought                                                                    
APFC had  been afforded  a great  opportunity to  advise the                                                                    
state on  how to make an  informed decision on how  to spend                                                                    
funds at a sustainable level.  He communicated that APFC was                                                                    
in  support   of  the  proposal,   and  looked   forward  to                                                                    
reevaluating the success  of the asset pool  in three years'                                                                    
4:22:43 PM                                                                                                                    
Co-Chair MacKinnon  stated that  the new fiscal  notes would                                                                    
not  be adopted,  but she  wanted to  discuss them  with the                                                                    
committee.  She  shared  that because  of  the  sequence  of                                                                    
events,  the  committee  could not  incorporate  new  fiscal                                                                    
notes in  to the budget.  She informed that the  notes would                                                                    
be advisory  only, and would have  to come back in  the form                                                                    
of a supplemental request to  the legislature. She wanted to                                                                    
highlight the  difference in approach that  the fiscal notes                                                                    
Vice-Chair Micciche  explained that  both fiscal  notes were                                                                    
related to  the projected change (increase  and decrease) in                                                                    
management  fees  due  to the  modifications  in  investment                                                                    
proposed in  the bill.  He explained  that the  first fiscal                                                                    
note  was for  DOR,  with an  appropriation  for APFC,  APFC                                                                    
Operations.  The  note  proposed operating  expenditures  of                                                                    
$14,800,000 from the  1105 permanent fund gross  fund for FY                                                                    
17 through  FY 22. The  funds were for a  projected increase                                                                    
in management fees due to a  change in how the fund would be                                                                    
Vice-Chair  Micciche discussed  the second  fiscal note  for                                                                    
DOR Taxation  and Treasury, for  the Treasury  Division. The                                                                    
note   proposed  a   decrement  of   $130,000  in   external                                                                    
management fees for  managing the CBR from FY  17 through FY                                                                    
22. He detailed that the  decrement had been included in the                                                                    
governor's FY 17 request. The  fiscal note analysis detailed                                                                    
that the  total cost of  managing the CBR  was approximately                                                                    
$1.4  billion,  and  with  the  exception  of  the  $130,000                                                                    
decrement, the  costs would be  allocated to other  funds in                                                                    
the Treasury.                                                                                                                   
Co-Chair  MacKinnon  relayed  that the  committee  would  be                                                                    
looking  for  actual  costs  for  managements,  and  if  the                                                                    
department was managing quite a  bit of the work internally,                                                                    
she would expect to see  a downturn in staffing positions at                                                                    
4:25:30 PM                                                                                                                    
Senator Dunleavy remarked that  there were different ways of                                                                    
looking  at opportunity  costs,  which he  thought had  been                                                                    
demonstrated during  the meeting. He thought  many committee                                                                    
members  shared  the  concern that  there  were  opportunity                                                                    
costs to realize through continued  reduction of the budget.                                                                    
He  thought  there would  be  less  pressure to  reduce  the                                                                    
budget if  new revenue streams  were found. He  thought some                                                                    
believed the  Senate had cut  too much from the  budget, and                                                                    
others thought not enough had been cut.                                                                                         
Senator   Dunleavy  continued   discussing   the  bill.   He                                                                    
personally believed  there was  much to  be done  in cutting                                                                    
the budget. He noted that with  the passage of the bill, the                                                                    
state would still  have $1 billion gap  between revenues and                                                                    
expenditures.  He questioned  how the  gap would  be filled,                                                                    
and   expressed  concern   about  keeping   the  growth   of                                                                    
government in check.  He questioned taking funds  out of the                                                                    
economy  (with  capping  of the  dividend)  and  thought  it                                                                    
presented  an opportunity  cost  as well.  He thought  state                                                                    
government would keep growing at  the expense of the private                                                                    
sector. He was  concerned that the plan  would take pressure                                                                    
off the legislature in tackling  budget issues the following                                                                    
Senator  Hoffman stressed  that  the current  issue was  the                                                                    
budget  deficit. He  felt that  without the  legislation the                                                                    
state would be  in a worse financial  situation. He recalled                                                                    
the last  time he  saw a  piece of  legislation of  the same                                                                    
magnitude  was   when  the   legislature  passed   the  bill                                                                    
establishing the  CBR account.  He discussed  the importance                                                                    
of  the  legislation  and noted  that  without  putting  the                                                                    
settlement funds  into a fund,  the dollars would  have been                                                                    
spent instead of utilized to meet the state's needs.                                                                            
Senator  Hoffman   continued  to   discuss  the   bill,  and                                                                    
commented that  the restructuring of the  permanent fund did                                                                    
several things:  it protected  and stabilized  the permanent                                                                    
fund, and it gave the state  long-term cash flow to meet its                                                                    
needs. He emphasized the need  for action on the fiscal gap,                                                                    
but acknowledged that  the plan would not  fill the complete                                                                    
gap. He thought  the vast majority of  Alaskans were looking                                                                    
to the legislature to come up with a fiscal plan.                                                                               
4:30:25 PM                                                                                                                    
Vice-Chair  Micciche   shared  that   he  had   listened  to                                                                    
transcripts  of the  meetings from  when the  permanent fund                                                                    
was created.  He had gleaned  that the fund was  designed to                                                                    
help  support  government  when  times  were  difficult.  He                                                                    
acknowledged  the bill  did  not fill  the  fiscal gap,  and                                                                    
thought it was imperative to  continue to cut the budget and                                                                    
make government  more efficient.  He emphasized that  he did                                                                    
not  feel reduced  pressure to  cut the  budget. He  thought                                                                    
that without taking action, the  PFD would likely go away in                                                                    
about five years; whereas with  passage of the bill it could                                                                    
be maintained in perpetuity.                                                                                                    
Vice-Chair Micciche discussed opportunity  cost and the vast                                                                    
earnings differential  if the allocation  of the  funds were                                                                    
changed. He  mentioned oil and  gas tax  credit legislation.                                                                    
He thought  there were more cuts  to make on the  budget. He                                                                    
though the  key to  surviving a fiscal  downturn was  to use                                                                    
all the  tools available. He  thought the investment  of the                                                                    
last forty years  was being used to continue  to manage down                                                                    
the  size  of  government.  He was  not  enthusiastic  about                                                                    
passing the bill but saw the necessity of passing it.                                                                           
Vice-Chair  Micciche MOVED  to report  CSSB 128(FIN)  out of                                                                    
Committee  with individual  recommendations. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
4:34:33 PM                                                                                                                    
AT EASE                                                                                                                         
4:37:22 PM                                                                                                                    
Co-Chair MacKinnon thanked  the Legislative Finance Division                                                                    
team, her  own staff, and the  Legislative Legal department.                                                                    
She   thanked  the   Department  of   Revenue,  Commissioner                                                                    
Hoffbeck,  Mr.  Alper,  and associated  staff.  She  thanked                                                                    
Attorney  General Richards,  and expressed  appreciation for                                                                    
Governor Walker and Senator Lesil McGuire.                                                                                      
CSSB 128(FIN) was REPORTED out of committee with a "do                                                                          
pass" recommendation.                                                                                                           

Document Name Date/Time Subjects
SB 128 CSSB 128 work draft version U.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 - Summary of Changes Version S to U.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 - Highlights Version U.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 - Sectional Analysis Version U.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 20-20 plan cashflow_w Surplus Split.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 Public Testimony Packet 2 060616.pdf SFIN 6/6/2016 3:00:00 PM
SB 128
SB 128 Public Testimony Packet 060616.pdf SFIN 6/6/2016 3:00:00 PM
SB 128