Legislature(2015 - 2016)BUTROVICH 205

01/26/2016 09:00 AM Senate STATE AFFAIRS

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09:00:48 AM Start
09:01:28 AM SB128
10:47:46 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Presentation by Governor's Administration TELECONFERENCED
Making Appropriations from the Permanent
Fund/Permanent Fund Dividend
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                     
9:01:28 AM                                                                                                                    
CHAIR STOLTZE announced the consideration  of SB 128. He detailed                                                               
that   SB   128   is    the   governor's   initiative   regarding                                                               
appropriations from  the Permanent Fund earnings  and dividend to                                                               
address the state's fiscal crisis.                                                                                              
9:03:11 AM                                                                                                                    
At ease.                                                                                                                        
9:04:23 AM                                                                                                                    
CHAIR STOLTZE called the committee back to order.                                                                               
9:04:30 AM                                                                                                                    
CRAIG W.  RICHARDS, Attorney General,  Alaska Department  of Law,                                                               
Juneau, Alaska, announced  that the administration's presentation                                                               
focuses on  the theory  of sovereign wealth  funds (SWF)  and how                                                               
Alaska's SWF would  operate within the SWF system as  well as its                                                               
advantages and disadvantages relative to other SWFs.                                                                            
CHAIR  STOLTZE asked  Attorney General  Richards to  lay out  his                                                               
vision of  SB 128 in  order to assist the  public as much  as the                                                               
committee members.                                                                                                              
ATTORNEY  GENERAL  RICHARDS  explained   that  SB  128  does  the                                                               
   1. Creates a way for Alaska to transition from a budget that                                                                 
     is 90  percent based on  oil revenues  to a budget  based on                                                               
     financial   assets.  SB   128  places   the  royalties   and                                                               
     production  taxes that  the state  receives every  year into                                                               
     the Permanent  Fund and draws  $3.3 billion. The goal  is to                                                               
     provide a long term, stable  source of financial revenues to                                                               
     the state on an annuity basis.                                                                                             
   2. Changes the way the Permanent Fund dividend is calculated                                                                 
     so that rather than having  dividends based on the Permanent                                                               
     Fund's stock  market returns  and earnings,  dividends would                                                               
     reflect  the  financial  health   of  the  state  by  making                                                               
     dividends based upon royalties.                                                                                            
9:06:18 AM                                                                                                                    
CHAIR  STOLTZE asked  Attorney General  Richards  to provide  the                                                               
committee with the Mr. Rietveld's background.                                                                                   
ATTORNEY  GENERAL RICHARDS  explained that  Mr. Rietveld  and his                                                               
team has  a consulting  and academic  background in  advising oil                                                               
dependent  nation-state  and  provincial   clients  on  SWFs.  He                                                               
detailed that SWFs allow oil-dependent  states to transition away                                                               
from budgets  that are  based on  boom-bust oil-price  cycles. He                                                               
revealed that  Mr. Rietveld and  his team recently  advised Saudi                                                               
Arabia  on  transitioning  to  a  rule-based  SWF.  He  said  the                                                               
administration  determined   that  designing  an   efficient  and                                                               
sustainable SWF using the Permanent  Fund required the assistance                                                               
from  Mr.  Rietveld,  one  of the  world's  foremost  experts  on                                                               
designing rule-based frameworks around a  SWF. He stated that the                                                               
hope is Mr.  Rietveld can pass his knowledge on  to the committee                                                               
as well.                                                                                                                        
CHAIR STOLTZE thanked Attorney General  Richards on behalf of the                                                               
public.  He  addressed  Mr.  Rietveld  and asked  if  he  was  an                                                               
employee or graduate.                                                                                                           
9:09:53 AM                                                                                                                    
MALAN RIETVELD,  Fellow, Center for International  Development at                                                               
Harvard Kennedy  School, Cambridge,  MA, explained  that he  is a                                                               
"fellow"  at the  Harvard Kennedy  School, which  means he  is an                                                               
unpaid  researcher. He  noted that  he worked  with a  particular                                                               
team  at  the  Harvard  Kennedy  School  called  the  Center  for                                                               
International Development,  a team that  does a lot of  work with                                                               
resource   rich,   resource-dependent  countries,   states,   and                                                               
provinces  around  the  world.  He  noted  that  the  Center  for                                                               
International  Development  consists  of  people with  a  lot  of                                                               
practical experience, including former  finance ministers of oil-                                                               
rich countries.  He revealed that  he has been studying  SWFs for                                                               
more than  a decade,  has worked  on a  couple of  edited volumes                                                               
published by university presses, and  has written a number of SWF                                                               
9:11:09 AM                                                                                                                    
SENATOR  WIELECHOWSKI   asked  that  Mr.  Rietveld   discuss  his                                                               
MR.  RIETVELD detailed  that  he was  an  economics graduate  and                                                               
recently finalized  his PhD on the  topic of SWFs. He  noted that                                                               
he worked  in asset management  within the  investment management                                                               
industry for four years. He  added that although he was currently                                                               
a  Harvard Fellow,  he  also consulted  with  governments on  SWF                                                               
issues, especially big ones in  the Middle East. He revealed that                                                               
he has worked with U.S. states  on permanent funds, SWFs in Latin                                                               
America,  and a  whole bunch  of countries  looking to  introduce                                                               
legislation  to create  SWFs.  He summarized  that  SWFs are  his                                                               
particular area of  expertise within the field  of economics, but                                                               
he also looks  more generally at issues around  the management of                                                               
resource revenues.                                                                                                              
CHAIR STOLTZE quipped that Mr.  Rietveld's PhD dissertation might                                                               
be "How I fixed Alaska's economy."                                                                                              
MR. RIETVELD replied  that he was not  sure if he had  all of the                                                               
solutions, but Alaska's circumstances  were very interesting from                                                               
a comparative perspective. He set  forth that Alaska has a number                                                               
of comparative  strengths and an  interesting case with a  lot of                                                               
best-practice  ingredients   that  will  help   in  transitioning                                                               
towards  a system  that  helps  the state  cope  with some  tough                                                               
9:12:51 AM                                                                                                                    
He detailed the growth of new SWFs as follows:                                                                                  
     The   number   of   SWFs   has   really   proliferated,                                                                    
     particularly  since  the  2000s, driven,  I  think,  in                                                                    
     large part  from the resources  boom, both in  terms of                                                                    
     prices and  in terms  of new producers,  globally. Some                                                                    
     SWFs  have  certainly grown  in  number  and they  have                                                                    
     grown very  significantly in the  size of  assets under                                                                    
     management of  the existing funds  as well. One  of the                                                                    
     big drivers  has been the commodity-revenue  boom since                                                                    
     roughly 2003.  In some case  there are SWFs  that don't                                                                    
     manage  natural resource  revenues  per  se, but  other                                                                    
     kinds of  government surpluses  whether it  is proceeds                                                                    
     from  a  privatization  or  other  appropriated  fiscal                                                                    
     surpluses; but,  the overwhelming majority of  SWFs are                                                                    
     funded by resource revenues and  that's what almost all                                                                    
     of my remarks today will pertain to.                                                                                       
     Just as we are talking  about definitions and concepts,                                                                    
     I  think   it  is   important,  this  whole   issue  of                                                                    
     "sovereign." Of  course Alaska is not  sovereign, but I                                                                    
     use the  term "sovereign  wealth fund" and  most people                                                                    
     in  literature would  use  "sovereign  wealth fund"  to                                                                    
     describe  state funds  and  provincial  funds like  the                                                                    
     Canadian province of Alberta  Heritage Fund, the Alaska                                                                    
     Permanent Fund,  the Wyoming  Permanent Fund  and other                                                                    
     sub-national  funds owned  and managed  by sub-national                                                                    
     jurisdictions.  So I  don't want  the use  of the  word                                                                    
     "sovereign"   in  the   title  to   be  misleading.   I                                                                    
     definitely,  for  the   purposes  of  this  discussion,                                                                    
     certainly include  the Permanent Fund in  that category                                                                    
     of definitions of SWFs.                                                                                                    
9:14:52 AM                                                                                                                    
MR. RIETVELD addressed three-SWF categories as follows:                                                                         
     In  the  first  instance  for  resource-rich  countries                                                                    
     there is  "stabilization funds;" these  are essentially                                                                    
     highly liquid  buffer-funds the  intention of  which is                                                                    
     not to  grow the asset base,  but rather to be  able to                                                                    
     draw on  the assets when  you need  to in a  very short                                                                    
     term  manner and  those rules  might  be rule-based  or                                                                    
     discretionary.  I certainly  have  a  preference for  a                                                                    
     rule-based system,  but the defining  characteristic of                                                                    
     them  relative to  the  other funds  is  that they  are                                                                    
     largely  sitting on  fixed income  and cash  securities                                                                    
     and  it's not  controversial when  they are  drawn upon                                                                    
     heavily in times  like this and the idea  is to restore                                                                    
     them in boom periods.                                                                                                      
     The second  category that  I would  identify is  what I                                                                    
     would  call  "savings  funds,"  these  are  also  often                                                                    
     called "future  generations funds"  and here  the asset                                                                    
     allocation is  very different. The fund's  portfolio is                                                                    
     orientated towards  growth and a decent  amount of risk                                                                    
     exposure in  order to generate high  returns that funds                                                                    
     some kind of earmarked liability  in the future. So the                                                                    
     Australian  SWF, the  New Zealand  SWF  or such  funds,                                                                    
     they  have a  target date  of 2030  and 2035  I believe                                                                    
     respectively,  and the  idea is  that  their funds  are                                                                    
     supposed  to just  grow, they  have  no liabilities  to                                                                    
     them  and the  government  wants to  grow  this pot  of                                                                    
     money to  help meet an anticipated  pension liability a                                                                    
     decade and  a half, two  decades down the road.  So the                                                                    
     defining  characteristic  there  is  that  these  funds                                                                    
     don't have a draw component to them.                                                                                       
     The overwhelming  majority of funds however  are what I                                                                    
     would  call "investment  income  funds,"  of which  the                                                                    
     North American  permanent fund is a  prime example. The                                                                    
     asset  allocation is  relatively risk  exposed and  the                                                                    
     idea is  to grow the  corpus of the fund  and certainly                                                                    
     to protect  the corpus of  the fund from  drawdowns and                                                                    
     in  the  case  of  North American  permanent  funds  is                                                                    
     normally embedded  in the constitution  as it  is here,                                                                    
     which is  a very  positive and  important institutional                                                                    
     characteristic  which   I'll  come  to  later   in  the                                                                    
     presentation of  things that I  like about  the Alaskan                                                                    
     scenario. But  these funds the  defining characteristic                                                                    
     is that they  do have an annual draw  and best practice                                                                    
     is to have a fixed-amount  draw based on what you think                                                                    
     is a sustainable  return for the fund in  real terms so                                                                    
     that grows  the capital of the  fund through inflation,                                                                    
     or some  notion of a  percentage of market value,  or a                                                                    
     target  return or  observed past  return. But  in broad                                                                    
     strokes the point is these  funds, while the capital is                                                                    
     there  for   current  and  future   generations,  their                                                                    
     defining  characteristic is  they provide  a stream  of                                                                    
     financial income  in the form  of financial  returns to                                                                    
     help  fund   governments  and  they   are  particularly                                                                    
     popular in  resource-based countries  and jurisdictions                                                                    
     as a way to offset dependence on commodity revenues.                                                                       
9:17:59 AM                                                                                                                    
MR. RIETVELD noted that SWFs were very established and addressed                                                                
the growth of new SWFs as follows:                                                                                              
     The oldest SWFs  in my definition is  the Texas Special                                                                    
     Schools Fund,  now called  the Texas  Permanent Schools                                                                    
     Fund, which  was created  in 1850 in  Texas as  part of                                                                    
     the process that led to  Texas' statehood from federal-                                                                    
     land  grants  and there's  a  related  Texas fund  that                                                                    
     funds  the  university  system,  they  are  the  oldest                                                                    
     funds. But  what I'd like  to draw attention to  is the                                                                    
     proliferation  of funds  since  the 2000s  and this  is                                                                    
     just the number  of funds, not the  assets they manage,                                                                    
     just a  number of  new funds  created in  these decades                                                                    
     and it's quite  striking that the growth  period of the                                                                    
     past  15   years  has   been  significant.   The  other                                                                    
     significant growth  period was the late  1970s with the                                                                    
     commodity-price  boom   then  and  the  start   of  new                                                                    
     production as it was in the State of Alaska.                                                                               
9:19:08 AM                                                                                                                    
MR. RIETVELD addressed the context of major-global trends as                                                                    
     Having  defined and  sort of  categorized very  broadly                                                                    
     the SWF world, I'd like  to talk about the broad trends                                                                    
     that  I observe  studying  SWFs  and certainly  working                                                                    
     with them  fairly hands-on. If  I have  one overarching                                                                    
     message,  particularly  for  the resource  based  SWFs,                                                                    
     it's that the attention now  is on the fiscal framework                                                                    
     around SWFs.  What do I  mean by  that? I mean  that in                                                                    
     the past the  focus was perhaps on  simply the creation                                                                    
     of the funds, the  legislative process, or otherwise if                                                                    
     it's  more  of  an  autocratic system  of  how  do  you                                                                    
     establish this fund,  how do you create  this fund that                                                                    
     carves out  revenues and resources  out of  the budget,                                                                    
     and that  was the  emphasis and  that was  the struggle                                                                    
     and the process that had to go through.                                                                                    
     Given that  SWFs are now  fairly well known  and widely                                                                    
     regarded as state-of-the-art in  terms of how to manage                                                                    
     resource  revenues, the  emphasis  is  now moving  more                                                                    
     towards how do  we improve upon on our  rules that lead                                                                    
     to how money flows into these  funds and in the case of                                                                    
     investment-income  funds and  stabilization funds,  how                                                                    
     the  money  flows  out  in   a  rule-based  way,  in  a                                                                    
     predictable  way, and  in a  transparent and  fair way.                                                                    
     That's the  shift and  I can  say that  particularly in                                                                    
     resource-based countries,  every single country  in the                                                                    
     world is going through this  and every single state and                                                                    
     province  that is  resource-dependent or  resource-rich                                                                    
     and  has a  SWF  is going  through  this. Everybody  is                                                                    
     going  through  it  in  a  different  way  given  their                                                                    
     different  legal  context,   political  context,  their                                                                    
     existing institutional  infrastructure; but,  Alaska is                                                                    
     by no means  alone in this and in many  ways I think at                                                                    
     the vanguard in taking  appropriate and early action to                                                                    
     try and adjust to the new realities.                                                                                       
9:21:08 AM                                                                                                                    
MR. RIETVELD stated that he identifies the three-distinct SWF                                                                   
stages as: SWF 1.0, SWF 2.0, and SWF 3.0. He described the SWF                                                                  
stages as follows:                                                                                                              
     The past  decade has  been a  period of  SWF 2.0  and I                                                                    
     think we are transitioning to  SWF 3.0. SWF 1.0 was the                                                                    
     very-early stage  in which  the very-early  adopters of                                                                    
     the  SWF model  emerged as  I mentioned:  Texas in  the                                                                    
     1850s,  followed by  New Mexico.  Then in  the 1970s  a                                                                    
     whole bunch of Middle  Eastern countries: Saudi Arabia,                                                                    
     Kuwait, Abu  Dhabi, a little bit  later Qatar; Alberta,                                                                    
     and  Alaska. Here  the emphasis  was on  creating these                                                                    
     funds,  it was  very  much  dominated by  resource-rich                                                                    
     countries  and the  investment model  was very  simple.                                                                    
     The  overriding  purpose was  to  cut  out a  share  of                                                                    
     revenues   from  the   budget  process   and  park   it                                                                    
     somewhere.  Consequently  the  investment  models  were                                                                    
     very  simple, it  was largely  deposited  in bonds  and                                                                    
     cash  securities without  a  huge  amount of  attention                                                                    
     paid to  the portfolio  and the characteristics  of the                                                                    
     portfolio itself.                                                                                                          
     SWF 2.0  emerged at  the turn of  the century  where we                                                                    
     saw, as  I have  already mentioned,  significant growth                                                                    
     in the number of funds,  significant growth in the size                                                                    
     of assets  managed by these funds,  driven by commodity                                                                    
     revenues  in the  case of  Asian  countries, driven  by                                                                    
     trade  surpluses  and  privatizations. The  funds  also                                                                    
     grew, not  just by their  funding sources, but  also by                                                                    
     fairly  healthy  financial  returns  over  this  period                                                                    
     since the Asian financial crisis  in 1998 to 2014. With                                                                    
     the exception  of the collapse  of Lehman  Brothers, it                                                                    
     was  a  period  of  high and  fairly  steady  financial                                                                    
     returns which also buoyed the size of these funds.                                                                         
9:23:11 AM                                                                                                                    
He addressed the SWF model going mainstream as follows:                                                                         
     The important thing to understand  about this period is                                                                    
     that it  really led to  the idea  of a SWF  model going                                                                    
     fairly mainstream, so it now  sits in the International                                                                    
     Monetary Fund's  recommendations of best  practices for                                                                    
     any resource-rich  country to have a  SWF, to transform                                                                    
     its resource wealth and resource  income into some form                                                                    
     of  financial  wealth.   This  is  absolutely  standard                                                                    
     practice and  at the IMF  it's one of the  first things                                                                    
     they  mention  when  they go  visit  any  resource-rich                                                                    
     country  that  reports to  them,  it  also led  to  the                                                                    
     creation  of something  called the  International Forum                                                                    
     of Sovereign Wealth Funds, of  which the Permanent Fund                                                                    
     is  a  member;  they  meet  annually  and  it  includes                                                                    
     roughly  40  of the  world's  largest  funds. Very  few                                                                    
     funds now are not participating  in that forum, they do                                                                    
     a bunch  of things, most  important of which  they have                                                                    
     come up with  a set of 24 principles  and practices for                                                                    
     the governance  and management of these  funds. There's                                                                    
     no doubt in  my mind that the Alaska  Permanent Fund is                                                                    
     sort  of best-in-class  among this  group. I  have very                                                                    
     little doubt  that the Permanent  Fund would  adhere to                                                                    
     all 24  principles stated in the  International Forum's                                                                    
     principles of best practices.                                                                                              
     The other point  of the International Forum  is that it                                                                    
     is  a platform  for  SWFs to  meet,  to exchange  ideas                                                                    
     around the management of  their portfolios, to exchange                                                                    
     ideas  around the  fiscal frameworks  around them,  and                                                                    
     it's  a  way for  the  community  to engage  with  each                                                                    
     other, so  Alaska's participation  in this is  I'm sure                                                                    
     very beneficial and should be encouraged.                                                                                  
     The final aspect  of this era that  has proceeded where                                                                    
     we are today is that  in earlier stages, SWFs tended to                                                                    
     be fairly  politically controversial  and tended  to be                                                                    
     prone to  raids on  their capital  in tough  times, now                                                                    
     that's less of  an issue if your capital  and corpus is                                                                    
     constitutionally  protected; but,  in this  most recent                                                                    
     period I  think some of those  political pressures have                                                                    
     been  reduced   worldwide  as  people   understand  the                                                                    
     importance of  these funds in managing  medium and long                                                                    
     term fiscal affairs.                                                                                                       
9:25:25 AM                                                                                                                    
CHAIR  STOLTZE  noted  that Mr.  Rietveld  referenced  "political                                                               
compromise"  and "political  pressure" when  explaining SWFs.  He                                                               
asked what he meant by the two terms.                                                                                           
MR. RIETVELD explained that an  example of "political compromise"                                                               
would be when  Wyoming raised taxes in 1976 on  oil, gas and coal                                                               
companies. He  specified that Wyoming's compromise  occurred when                                                               
the added  revenue was  used to establish  its permanent  fund in                                                               
order to  benefit future generations rather  than just cashing-in                                                               
on  a  short-term commodity  price-spike.  He  explained that  he                                                               
referenced  "political pressure"  when SWFs  where formed  during                                                               
boom-periods that  ultimately broke  down in bust-periods  due to                                                               
political pressure.  He noted that  political pressure is  not an                                                               
issue  for  Alaska's  Permanent  Fund due  to  its  strong  legal                                                               
CHAIR STOLTZE commented that he was glad to hear that Alaska was                                                                
immune from the political pressure that Mr. Rietveld explained.                                                                 
9:28:22 AM                                                                                                                    
MR. RIETVELD explained the end of SWF 2.0 as follows:                                                                           
     SWF 2.0 came to an  end when commodity prices collapsed                                                                    
     towards  the end  of 2014  and  we all  know about  the                                                                    
     steady  and devastating  collapse in  global-oil prices                                                                    
     in  particular  since then.  For  some  SWF skeptics  I                                                                    
     imagine  the question  is now  really whether  SWFs and                                                                    
     particularly  the growth  that  we saw  since the  mid-                                                                    
     2000s in  SWFs will be  sort of a historic-blip  on the                                                                    
     radar whether  some of  these funds  will in  the first                                                                    
     instance  be drawn  down upon  and the  second instance                                                                    
     whether they  will actually be growing  as was expected                                                                    
     a few  years ago when  oil prices were still  high; for                                                                    
     me, that  is not really  called into question,  I think                                                                    
     the degree of consensus  around the importance of SWFs,                                                                    
     the many  incidences right now, well  designed SWFs are                                                                    
     helping    resource-dependent    countries   cope    is                                                                    
     significant and sufficient evidence  for the SWF models                                                                    
     appeal to  remain intact. But  what I do think  is that                                                                    
     the  current  era  is about  adjusting  to  the  fiscal                                                                    
     realities of SWFs.                                                                                                         
He explained SWF 3.0 and the adjustment to the new-fiscal                                                                       
realities as follows:                                                                                                           
     SWF 2.0  was a period  of rising-commodity  prices, SWF                                                                    
     3.0 will  be about coping with  lower commodity prices.                                                                    
     For resource-rich countries and what  a lot of the rest                                                                    
     of  my presentation  is all  about is  the need  now to                                                                    
     introduce   what  we   academically  call   "cyclically                                                                    
     robust"  or "counter  cyclical  fiscal frameworks"  and                                                                    
     that's  just a  mouth full  for saying  we want  fiscal                                                                    
     frameworks that  allow us to  accumulate assets  in the                                                                    
     SWF  in good  times and  we want  sensible, sustainable                                                                    
     policies for  drawing on SWF  assets and income  in the                                                                    
     tough times so  that you have a policy  that takes care                                                                    
     as much  for the  boom-period of the  cycle as  it does                                                                    
     for the  bust-period of the  cycle. Many rules  that we                                                                    
     see in place  right now only do one-half  of the story,                                                                    
     they  only take  care  of saving  some  portion of  the                                                                    
     boom, so  the emphasis  is now on  that second  half of                                                                    
     the equation.  As you  go through  that, the  two major                                                                    
     concerns is  how do you  avoid the depletion  of assets                                                                    
     and  I'll  say  again, unless  it  is  constitutionally                                                                    
     protected, you have less reason  I think to worry about                                                                    
9:30:54 AM                                                                                                                    
CHAIR  STOLTZE   stated  that   he  appreciated   Mr.  Rietveld's                                                               
parenthetic   remarks  pertaining   to  Alaska's   constitutional                                                               
protection. He  said the constitutional  protection was  an issue                                                               
for the committee  to discuss. He opined  that the constitutional                                                               
protection appeared to be a stronger threshold than any.                                                                        
MR.  RIETVELD  answered  correct.   He  said  the  constitutional                                                               
protection  of capital  is among  the  most firm  and robust  for                                                               
SWFs, a strong and very positive feature.                                                                                       
MR.  RIETVELD addressed  the  effect from  the  "ebbing tide"  of                                                               
commodity prices as follows:                                                                                                    
     I think big-picture what is  also emerging from the SWF                                                                    
     landscape  as we  deal with  lower-commodity prices  is                                                                    
     that  this   "ebbing  tide"  has  revealed   that  some                                                                    
     countries have  been swimming essentially naked  as the                                                                    
     ebbing  tide  sometimes  does;  their  policies,  while                                                                    
     appropriate  for the  boom-period, are  not necessarily                                                                    
     right and robust to the  tough times. So we are finding                                                                    
     out which structures and which  systems are equipped to                                                                    
     handle the  boom and the  bust and which ones  are more                                                                    
     for the boom.                                                                                                              
9:32:24 AM                                                                                                                    
He addressed  SWF 3.0  and the world's  adjustment to  new fiscal                                                               
realities by identifying three groupings as follows:                                                                            
     There is one group  of countries and jurisdictions that                                                                    
     are really  hurting right  now, group  A, and  they are                                                                    
     the group  that never  managed to save  at all  or save                                                                    
     enough of  the resource-boom of  the past decade  and a                                                                    
     half,  and they  are really  approaching "basket  case"                                                                    
     status  right  now.  Venezuela   is  the  most  obvious                                                                    
     example, Nigeria  and some other  countries are  in the                                                                    
     same boat.                                                                                                                 
     The second group of countries  did manage to accumulate                                                                    
     some amount  of assets,  you could argue  about whether                                                                    
     it was sufficient, whether they  saved enough, but what                                                                    
     they are  going through  right now  is drawing  down on                                                                    
     their  assets very  heavily. Russia  has drawn  down on                                                                    
     some $150  billion, it's hard  to know  exactly because                                                                    
     as you can imagine, the  Russian system is not the most                                                                    
     transparent one in the world,  but they have drawn down                                                                    
     on a huge  amount of assets. Saudi  Arabia likewise has                                                                    
     drawn down  on $150 billion  to $200 billion  in assets                                                                    
     since we wrote our Harvard Report.                                                                                         
     The  third group  of countries  are the  proactive ones                                                                    
     who in the first instance  saved a good amount of money                                                                    
     in the  previous boom and  are now looking at  if their                                                                    
     spending  policies and  their  withdrawal policies  are                                                                    
     appropriate  and sustainable.  I would  put Abu  Dhabi,                                                                    
     Norway and  Chili in that  group with  great certainty,                                                                    
     Kuwait most  likely, and Saudi  Arabia if they  were to                                                                    
     follow our recommendations.                                                                                                
9:34:35 AM                                                                                                                    
MR. RIETVELD referred to a graph which plotted Alaska's fiscal                                                                  
dependence on oil and break-even price relative to other                                                                        
countries and states, and detailed as follows:                                                                                  
     I've simply  gone and  said based on  the share  of oil                                                                    
     revenue  to the  budget just  prior to  the slump,  how                                                                    
     much does oil account  for total government revenue and                                                                    
     on that  metric? Alaska  finds itself  with a  bunch of                                                                    
     countries you would regard  as petro-states: Abu Dhabi,                                                                    
     Kuwait,  Qatar;   they  are  dependent  of   around  90                                                                    
     percent,  of course  that  share  drops when  commodity                                                                    
     prices drop,  but in  good times  we are  talking about                                                                    
     governments  that  fund  themselves  for  at  least  90                                                                    
     percent on oil revenues.                                                                                                   
He plotted the price of oil needed to balance budgets that                                                                      
prevailed before prices collapsed and addressed results as                                                                      
     Alaska finds  itself in rather  uncomfortable territory                                                                    
     to  the  extent  that  you  needed  $110  a  barrel  to                                                                    
     maintain the  level of  spending that  proceeded before                                                                    
     the price drop.  What is striking to me  is that Alaska                                                                    
     finds  itself  on  these  two   measures  in  the  same                                                                    
     territory as Saudi Arabia, which  by itself is not good                                                                    
     news. There's a  group of countries in  the Middle East                                                                    
     that I've  plotted there: Kuwait, Qatar  and Abu Dhabi,                                                                    
     that while having the same  degree of fiscal dependence                                                                    
     on oil  as Alaska does,  is able to balance  the budget                                                                    
     with much  lower oil prices  and the simple  reason for                                                                    
     that  is  they have  SWFs  that  can provide  a  stable                                                                    
     source of income  to supplement and offset  the drop in                                                                    
     oil  prices. What  I've  basically  indicated there  is                                                                    
     that in my  assessment, if Alaska was  to implement the                                                                    
     SWF  model to  the full  extent, you  would be  in that                                                                    
     group and conceivably be slightly  better off than that                                                                    
     group for reasons  I'll come to in a  second. You could                                                                    
     probably  balance the  budget  with a  $40  to $45  oil                                                                    
     price if you made sensible  and sustainable use of your                                                                    
     financial  assets.   The  other  group   of  countries,                                                                    
     provinces, and  states that  can balance  their budgets                                                                    
     at  lower oil  prices  includes  Wyoming, Alberta,  and                                                                    
     Norway;  the advantage  that  these  countries have  is                                                                    
     that they are  way less dependent on oil,  so for these                                                                    
     countries oil accounts for roughly  30 to 45 percent of                                                                    
     government  revenues, so  that's the  other way  out of                                                                    
     If you  want to be able  to adjust to a  world of lower                                                                    
     oil  prices  and balance  the  books,  you either  move                                                                    
     towards a system in which  you implement the SWF model,                                                                    
     draw on the financial  assets that you have accumulated                                                                    
     in a  rule-based sustainable manner, or  you find other                                                                    
     sources  of revenue  as Norway  does, oil  accounts for                                                                    
     roughly a  third of revenue  and Norway  has incredibly                                                                    
     high personal-income taxes and corporate taxes.                                                                            
MR. RIETVELD summarized that outside of the oil sector, Alaska                                                                  
does not have the economic and taxable base to cover the kind of                                                                
holes it sees in its fiscal framework.                                                                                          
9:38:43 AM                                                                                                                    
He explained the economies of Alberta and Australia relating to                                                                 
oil dependency as follows:                                                                                                      
     Their discovery  of oil essentially  came on  when they                                                                    
     had really  diversified industrial economies  and large                                                                    
     taxpayer pools that they could  draw on so oil for them                                                                    
     was a top-up  on top of other  established existing tax                                                                    
     base,  it's  much  harder  if  your  economy  is  still                                                                    
     largely  oil  dependent  to introduce  other  forms  of                                                                    
     revenue creation.                                                                                                          
CHAIR  STOLTZE noted  that  South Korea  has  two companies  that                                                               
account for  33 percent of  the country's gross  domestic product                                                               
and  Alaska is  at 90  percent  for oil.  He asked  if any  other                                                               
province  or  sovereignty  that has  anywhere  near  Alaska's  90                                                               
MR. REITVELD answered that in  terms of oil dependence, Alaska is                                                               
right up  there amongst  the most oil  dependent. He  opined that                                                               
the  only  places that  are  comparable  are the  Middle  Eastern                                                               
states. He  specified that there  is no  doubt that Alaska  is in                                                               
the highest category of oil  dependence worldwide where it's hard                                                               
to imagine a greater share of  oil accounting for revenue than it                                                               
does in Alaska. He stated  that he could have mentioned Venezuela                                                               
and Nigeria,  but Alaska  is incredibly  reliant on  oil revenues                                                               
based  on its  current infrastructure.  He summarized  that based                                                               
upon the  metrics of oil dependency  and the oil price  needed to                                                               
balance the  books under the  status quo,  the news was  not good                                                               
for Alaska.                                                                                                                     
SENATOR MCGUIRE  pointed out that  Venezuela, Nigeria  and Russia                                                               
were not  included on  Mr. Rietveld's  oil dependency  graph. She                                                               
surmised that the  exclusion was due to the  countries not saving                                                               
enough or depletion.                                                                                                            
MR. RIETVELD  pointed out that  the countries noted on  his graph                                                               
had some form of SWF. He said  Venezuela did not fit on the graph                                                               
because the country required $350 per barrel pricing.                                                                           
9:42:43 AM                                                                                                                    
He stated  that there was better  news on the way  for Alaska. He                                                               
examined SWF assets  that were relative to budgets  and noted the                                                               
     If you consider also just  the size of SWF assets, it's                                                                    
     easy to look  around the world and look  at Norway with                                                                    
     its $820 billion fund, Abu  Dhabi with its $775 billion                                                                    
     fund,  and Saudi  Arabia with  $600 billion,  and think                                                                    
     that these  funds sort of  dwarf Alaska,  and certainly                                                                    
     in purely  absolute terms,  Alaska's Permanent  Fund is                                                                    
     considerably smaller.  But I  think the  more pertinent                                                                    
     point  here is  that what  I do  in the  next slide  is                                                                    
     scale that  same pool of  capital held in the  SWFs and                                                                    
     scale it  relative to budget  and what I find  there is                                                                    
     that Alaska is  the richest country in  the world based                                                                    
     on  SWF  assets;  that  is,  Alaska's  SWF  assets  and                                                                    
     accumulated financial assets relative  to its budget is                                                                    
     the highest  in the world  and I've quantified  that by                                                                    
     saying there  is roughly 11  times the  budget coverage                                                                    
     in accumulated financial assets  and Norway, which is a                                                                    
     best-case  example  of  how  to  manage  SWFs  in  many                                                                    
     people's books,  isn't anyway near that,  in fact, it's                                                                    
     almost  half  of  that,  they've   got  about  6  times                                                                    
     coverage of  their annual budget  in the form  of their                                                                    
     financial wealth.                                                                                                          
     There's no  doubt to me  that while there  are problems                                                                    
     for Alaska based on commodity  dependence, based on the                                                                    
     kind of oil prices you  need to balance the budget, the                                                                    
     big  weapon in  your arsenal  is your  financial wealth                                                                    
     which  is a  direct consequence  of your  constitution,                                                                    
     it's a direct  consequence of prudence on  part of past                                                                    
     legislatures in terms  of making sure that  the fund is                                                                    
     inflation-proof, historically  it's a testament  to the                                                                    
     good  management  of  the Alaska  Permanent  Fund  over                                                                    
     time, a  whole bunch of  factors. But the good  news is                                                                    
     at least you  have the ingredients to  a solution which                                                                    
     many other countries don't have  or at least don't have                                                                    
     to the extent that Alaska has here.                                                                                        
9:45:14 AM                                                                                                                    
MR. RIETVELD addressed a sustainable draw as a percentage of                                                                    
budget as follows:                                                                                                              
     A similar sort of chart to  the previous one is just to                                                                    
     say  if  we  were  to   apply  a  very  standard,  very                                                                    
     uncontroversial  idea of  drawing 4.5  percent annually                                                                    
     from  those assets,  so  this  is not  I  think in  its                                                                    
     entirety,  the  proposal  on the  table,  but  just  to                                                                    
     quantify the financial wealth. If  you were to draw 4.5                                                                    
     percent per  annum on that  wealth, what  percentage of                                                                    
     the   budget  would   that   draw   cover?  Alaska   is                                                                    
     approaching 50  percent of  the draw  being able  to be                                                                    
     covered by what  is a sustainable draw  on those assets                                                                    
     that would not jeopardize  the real purchasing power of                                                                    
     the  Permanent Fund's  capital; again,  Norway is  in a                                                                    
     position  where just  slightly more  than a  quarter of                                                                    
     their budget can be covered by a sustainable draw.                                                                         
CHAIR STOLTZE asked Mr. Rietveld's if the 4.5-percent draw                                                                      
hypothesis takes inflation-proofing into consideration.                                                                         
MR. RIETVELD answered as follows:                                                                                               
     The 4  percent idea is  something that sort  of emerges                                                                    
     from    the   financial    planning   literature    for                                                                    
     individuals,  it's  something  that  emerges  from  the                                                                    
     university endowment  literature, and the idea  is that                                                                    
     with the  kind of  portfolio you  have in  a SWF,  or a                                                                    
     university  endowment,   or  a   diversified  financial                                                                    
     portfolio,  the  return  will  exceed  4.5  percent  by                                                                    
     enough  to   offset  inflationary  pressures.   So  the                                                                    
     nominal  return, taking  inflation into  account, would                                                                    
     be something  like 6.5 to  7.5 percent, so that  if you                                                                    
     draw 4.5  percent, you're essentially making  sure that                                                                    
     you are not eroding the purchasing power.                                                                                  
CHAIR STOLTZE  asked Mr. Rietveld  to clarify that  the mechanics                                                               
of the fund  will replace the mechanics  of actual appropriations                                                               
to inflation-proofing.  He pointed out that  the fund's mechanics                                                               
will be a pivotal point for a lot of members.                                                                                   
MR. RIETVELD  replied that he  was addressing a  notional concept                                                               
rather than  the fund's mechanics  and would get to  the dynamics                                                               
of the fund later in his presentation.                                                                                          
CHAIR STOLTZE remarked that there  was ambiguity about inflation-                                                               
proofing and the committee would come  back to the topic later in                                                               
the presentation.                                                                                                               
9:47:59 AM                                                                                                                    
MR. RIETVELD addressed Alaskan  strengths and weaknesses relative                                                               
to  other  countries,  states  and   provinces  by  listing  four                                                               
categories as follows:                                                                                                          
     The  first  set  of  criteria pertains  to  the  fiscal                                                                    
     story,  the  second  set  of  issues  pertains  to  the                                                                    
     potential  to  raise  non-oil revenues,  the  third  is                                                                    
     about  the  outlook  for  resource  production  in  the                                                                    
     jurisdiction, and  the fourth set of  questions pertain                                                                    
     to  the management  and governance  of  the entity  and                                                                    
     structure that manages the SWF asset.                                                                                      
     I think based  on the size of savings,  given what I've                                                                    
     just  shown  you  in  terms of  the  size  of  Alaska's                                                                    
     savings  relative  to  the  budget,   this  is  a  huge                                                                    
     positive.  On  any metric  that  I  can come  up  with,                                                                    
     Alaska is, scaled  to its fiscal need,  the richest SWF                                                                    
     in the world. So that's a huge positive.                                                                                   
     What I  think is  more concerning  here is  whether the                                                                    
     existing  infrastructure  gives  sufficient  access  to                                                                    
     accessible  financial  buffers.  I know  you  have  the                                                                    
     infrastructure here,  you have funds that  are intended                                                                    
     to be  drawn upon in  tough times, I think  the concern                                                                    
     there  is whether  those  are big  enough  to help  you                                                                    
     through a  protracted period of time  absent some other                                                                    
     changes.  Where  some  other countries  have  provision                                                                    
     funds  in their  stabilization  funds  or other  budget                                                                    
     buffer funds  that will  provide five  to ten  years of                                                                    
     fiscal coverage, here  in Alaska it is  much shorter. I                                                                    
     think something  needs to  be done  in that  respect to                                                                    
     increase the amount  and something can be  done in that                                                                    
     respect  to increase  the amount  of accessible  fiscal                                                                    
     buffers  at  the  state's  disposal.  As  I've  already                                                                    
     mentioned,  just purely  on fiscal  dependence, it's  a                                                                    
     big  negative for  me, Alaska  does have  a much  lower                                                                    
     recourse to non-oil revenues through taxation, etc.                                                                        
     The fourth  thing is  the existence  of a  savings rule                                                                    
     here,  it  is  a constitutionally  provisioned  and  25                                                                    
     percent  of   mineral  royalties   is  constitutionally                                                                    
     required.  I know  that  the  historical tradition  has                                                                    
     been  to  increase  that  to  30  percent,  effectively                                                                    
     that's a huge  positive, a lot of  countries don't even                                                                    
     have that.                                                                                                                 
9:50:27 AM                                                                                                                    
CHAIR STOLTZE asked Mr. Rietveld why he only showed a "one                                                                      
checkmark" approval for Alaska's "existence of saving rule."                                                                    
MR. RIETVELD answered as follows:                                                                                               
     The   question  for   me  is   whether  you   shouldn't                                                                    
     essentially  be saving  more, particularly  if you  are                                                                    
     transitioning  to  a SWF  model  in  which the  state's                                                                    
     ultimate  source   of  wealth  and  financing   is  its                                                                    
     financial assets rather than  oil wealth, whether there                                                                    
     shouldn't be  more money and  whether that  rule should                                                                    
     be adjusted  to allow for  more money to flow  into the                                                                    
     SWF.  I  do regard  it  as  a  positive that  the  rule                                                                    
     exists, I  think there's some  scope for  improving the                                                                    
     Finally,  so that  sort of  speaks to  my second  point                                                                    
     about  the appropriateness  of the  fiscal rule.  In my                                                                    
     preamble  I  was   talking  about  cyclically  adjusted                                                                    
     policies, policies that  are as good for  the upside as                                                                    
     they  are  for the  downside.  I  think that's  on  the                                                                    
     fiscal-rule side  where the bulk  of the  adjustment is                                                                    
     required. There is  action that needs to  be taken that                                                                    
     the  rule is  appropriate as  much for  tough times  as                                                                    
     they are for good times.                                                                                                   
9:51:31 AM                                                                                                                    
MR. RIETVELD addressed long-term and near-term non-oil revenue                                                                  
as follows:                                                                                                                     
     I put question  marks around the two  issues around the                                                                    
     prospects for raising  non-oil revenues, both long-term                                                                    
     and near-term.  I'm leaning  towards the  negative side                                                                    
     on  the near-term  front, I  don't  think there's  that                                                                    
     much you  can do  to plug the  magnitude of  the fiscal                                                                    
     hole by  non-oil revenues,  particularly in  the short-                                                                    
     term. In the long-term  I imagine there's potential for                                                                    
     it given the very low base,  but I'm not sure about it.                                                                    
     So  I haven't  taken a  definitive view  on it  and put                                                                    
     them as question marks.                                                                                                    
     In terms of the long-term  viability and profile of all                                                                    
     production,  I'm simply  going  here on  the model  you                                                                    
     have all received  that the state is  working with, the                                                                    
     assumption  there   is  of   gradual  decline   in  oil                                                                    
     production,  whereas a  lot  countries  I'm looking  at                                                                    
     quite  the  opposite,  they   are  looking  at  booming                                                                    
     production  off  a  very  low   base.  In  Alaska  it's                                                                    
     probably  the  case  that  you  need  to  confront  the                                                                    
     reality  of  declining  production. I  didn't  make  it                                                                    
     three-negatives  because  I  do believe  they  are  all                                                                    
     prospects,  perhaps in  a different  price environment,                                                                    
     perhaps in a different  set of circumstances there will                                                                    
     be more production coming on stream.                                                                                       
     My third  set of categories pertains  to the management                                                                    
     of  the  funds  themselves,  in this  case  the  Alaska                                                                    
     Permanent Fund.  I take it  as an absolute  strength of                                                                    
      your system that the Alaska Permanent Fund is a well-                                                                     
     managed entity  that it is independent.  Through public                                                                    
     and  political pressures,  the  Alberta Heritage  Fund,                                                                    
     which most  of you are familiar  with, suffered greatly                                                                    
     in  the   1980s  from  being   used  as   basically  an                                                                    
     instrument  through  which   to  provide  subsidies  to                                                                    
     invest in  uneconomically-unfeasible projects  in their                                                                    
     province. That's not really under  discussion at all in                                                                    
     the case of  the Permanent Fund and it's  managed by an                                                                    
     arms-length,    independent    authority    that    has                                                                    
     demonstrated  clear competence  over a  long period  of                                                                    
     Second,  I   would  say   that  the   Permanent  Fund's                                                                    
     investment  style,  its  asset  allocation,  what  it's                                                                    
     investing in,  is appropriate and makes  sense in terms                                                                    
     of what is  expected of it; that  again, sounds obvious                                                                    
     but  it's  something else  that  many  other funds  are                                                                    
     struggling with, they have  investment income funds and                                                                    
     savings funds that  are still sitting 70  to 80 percent                                                                    
     on  bonds because  of the  inability  to diversify  the                                                                    
     portfolio for a number of  reasons. That's not the case                                                                    
     in Alaska,  you have,  I think,  a very  sensible asset                                                                    
     allocation for  the fund relative  to what you  want it                                                                    
     to do.                                                                                                                     
     My   only  concern   around  the   Permanent  Fund   is                                                                    
     particularly  pertinent looking  forward  if Alaska  is                                                                    
     going to  transition towards a state  that funds itself                                                                    
     through financial income rather  than purely oil income                                                                    
     is whether there  is support for the  Permanent Fund to                                                                    
     really grasp the  nickel of what that  implies. If this                                                                    
     is the  transition that Alaska  is making, you  need to                                                                    
     be able  to devote more resources  to that organization                                                                    
     to do a  number of things, most pertinently  I think to                                                                    
     potentially manage  money in-house which  economizes on                                                                    
     fees  paid  to  third-party asset  managers  which  are                                                                    
     quite considerable  for the Permanent  Fund and  it's a                                                                    
     logical  consequence of  the  fact  that the  Permanent                                                                    
     Fund currently finds it hard  to build up its staff and                                                                    
     internal team.                                                                                                             
9:54:47 AM                                                                                                                    
SENATOR WIELECHOWSKI asked Mr. Rietveld  why he gave two-positive                                                               
checkmarks rather  than three to the  Permanent Fund's investment                                                               
style, what  risk level should  the Permanent Fund take,  and how                                                               
the risk level would impact the rate of return.                                                                                 
MR. RIETVELD answered as follows:                                                                                               
     The only  reason why I  wouldn't give three  "ticks" on                                                                    
     investment  style is  it's sort  of  more an  operation                                                                    
     issue. With me  with the Permanent Fund,  the fact that                                                                    
     under  the appropriate  set of  circumstances the  fund                                                                    
     and the  corporation could  probably economize  on fees                                                                    
     to  third-party   managers,  particularly   in  private                                                                    
     markets rather than public markets.  So I think if that                                                                    
     transition  was  successfully  made, I  would  give  it                                                                    
     three "ticks." I think if  this transition occurs, that                                                                    
     places Alaska  in a position of  funding itself through                                                                    
     financial wealth  and financial  income. That  is where                                                                    
     the  bulk of  the action  needs to  happen in  terms of                                                                    
     what the  Permanent Fund does  and it requires.  I have                                                                    
     to be very clear about  this, it requires political and                                                                    
     public support  for the Permanent Fund  to become truly                                                                    
     a world-class, in-house investment manager.                                                                                
     So,  SWFs   around  the  world,  the   large  and  very                                                                    
     successful Canadian public pension  funds have no issue                                                                    
     around having very significant  internal teams, sure it                                                                    
     costs  you to  hire  those people,  it  costs money  to                                                                    
     build that internal infrastructure,  but over the long-                                                                    
     run  you  certainly  economize  on  paying  third-party                                                                    
     asset manager fees  and it also changes the  way you do                                                                    
     things  like real-estate  investment. Instead  of going                                                                    
      to some Wall Street firm and investing in their real-                                                                     
     estate  fund  or  creating  some  kind  of  real-estate                                                                    
     investment   platform   run   by   some   bulge-bracket                                                                    
     investment  bank, you  are able  to  initiate the  deal                                                                    
     flow yourself and  find assets that you  want to invest                                                                    
     in. So  it's a  mind shift  and I  think it's  one that                                                                    
     would  serve  Alaska  very  well if  you  are  able  to                                                                    
     achieve that.                                                                                                              
9:57:06 AM                                                                                                                    
CHAIR STOLTZE  pointed out  that the  committee intends  to bring                                                               
forward Ms. Angela Rodell, the  Alaska Permanent Fund's executive                                                               
director, to address  the committee at a future  meeting. He said                                                               
the  committee  would  address  Mr.  Rietveld  remarks  with  Ms.                                                               
SENATOR  WIELECHOWSKI  recounted  that  the  historical  rate  of                                                               
return average  for the Permanent  Fund was around 6  percent. He                                                               
asked Mr.  Rietveld if  he envisioned  the investment's  level of                                                               
risk changing in a SWF.                                                                                                         
MR. RIETVELD  answered that  he envisioned  the fund's  broad and                                                               
balanced asset allocation  strategy to more or less  be the same.                                                               
He  remarked  that the  Permanent  Fund  was  in line  with  best                                                               
practices  for similar  investors such  as university  endowments                                                               
and other permanent funds.                                                                                                      
SENATOR  WIELECHOWSKI  asked  what   rate  of  return  should  be                                                               
expected from  Alaska's SWF in  order to have a  sustainable rate                                                               
of draw.                                                                                                                        
MR. RIETVELD  answered that  the fund's rate  of return  and draw                                                               
are directly related to each  other. He explained that the fund's                                                               
return has to  be realistic to what  the draw is going  to be. He                                                               
specified  that a  6.5 to  7.5 percent  rate of  return would  be                                                               
realistic and appropriate based upon  the fund's proposed draw, a                                                               
rate that had been achieved historically by the Permanent Fund.                                                                 
9:59:24 AM                                                                                                                    
CHAIR STOLTZE  opined that the  administration had  been focusing                                                               
more  on  the Permanent  Fund's  harvesting  rather than  on  its                                                               
SENATOR HUGGINS pointed that the  Permanent Fund has been good at                                                               
operating  independently   and  keeping   an  eye   on  Alaskan's                                                               
investment.  He   added  that   the  state's   other  independent                                                               
corporations should  also be recognized  as well for acting  as a                                                               
"check." He set forth that  the country was based on independence                                                               
and  Alaska would  be  wise  to make  sure  that independence  is                                                               
celebrated by each of the  entities that the state has developed,                                                               
not only for the Permanent Fund.                                                                                                
10:02:07 AM                                                                                                                   
MR.  RIETVELD addressed  the key  aspects for  a sustainable  SWF                                                               
model as follows:                                                                                                               
     What I would  like to do now is draw  down a little bit                                                                    
     into  the  critical  elements  of   if  you  make  this                                                                    
     transition to  what I call the  sustainable, rule-based                                                                    
     SWF model.  What do you need  to do? What is  the check                                                                    
     list of critical things that  need to be achieved? Just                                                                    
     to be  clear, what  I mean  by this  sustainable, rule-                                                                    
     based  SWF  model  in  broad  strokes  is  that  you're                                                                    
     transitioning away  from relying on  commodity revenues                                                                    
     directly, but you are rather  transferring it over to a                                                                    
     SWF  and drawing  down on  the  earnings and  financial                                                                    
     resources of the SWF.                                                                                                      
He explained  what the  resource-based SWFs  are really  about as                                                               
     What  are resource-based,  commodity-based SWFs  really                                                                    
     about? I think  it all really comes down to  a quote by                                                                    
     the  father of  economics,  the father  of free  market                                                                    
     thinking,  Adam  Smith,  who   described  in  his  case                                                                    
     mining,  but  he  might  as  well  been  talking  about                                                                    
     commodities    more    generally     as    "the    most                                                                    
     disadvantageous lottery in the  world," it is a lottery                                                                    
     if you  are dependent on commodity  revenues. Our human                                                                    
     ability  to  forecast  commodity prices  has  time  and                                                                    
     again been proved to be  very limited. Commodity prices                                                                    
     act in  a completely unpredictable way  and putting all                                                                    
     of your  eggs in  that basket  is a  particularly risky                                                                    
     So that's  really what  SWFs in a  very big  picture is                                                                    
     about, it is about  removing that degree of uncertainty                                                                    
     and dependence on commodities. The  first thing they do                                                                    
     is they save and in  doing so they transform a volatile                                                                    
     and depleting  asset and  income stream  into something                                                                    
     that  can be  held into  perpetuity, in  the case  of a                                                                    
     permanent fund,  and that's a very  important point. If                                                                    
     you set up  the permanent fund in the right  way, and I                                                                    
     don't think  any of  the proposals  under consideration                                                                    
     here would jeopardize that,  that financial wealth will                                                                    
     outlive oil  wealth if you  make sure that you  are not                                                                    
     unsustainably  drawing  on  the  fund.  Once  the  last                                                                    
     barrel of oil has come  out of the ground, you'll still                                                                    
     have  the Permanent  Fund,  that's  a very  significant                                                                    
     point to remember.                                                                                                         
     The  second point  is that  they provided  a degree  of                                                                    
     macroeconomic and fiscal  stabilization. The thing here                                                                    
     is you are trying to, through  the use of the funds and                                                                    
     sustainable   draws   on   the   fund,   decouple   the                                                                    
     government's spending  cycle from  the resource-revenue                                                                    
     cycle  and the  resource-price cycle.  In Alaska  since                                                                    
     1976,  essentially,  government  spending  and  capital                                                                    
     spending has tracked  the oil price and  oil revenue as                                                                    
     it has  done in  many resource-rich countries  prior to                                                                    
     the establishment of  the SWF model. So  you are trying                                                                    
     to break  that cycle,  the decoupling of  spending from                                                                    
     commodity  revenues.  You  can  never get  rid  of  the                                                                    
     inherent  volatility, it's  not  like  you're going  to                                                                    
     hide it  under someplace where  no one is going  to see                                                                    
     it  and  it's going  to  reside  in  your SWFs.  But  I                                                                    
     believe and  proponents of the  SWF model  believe that                                                                    
     that is a  better place to place  the volatility rather                                                                    
     than in  the budget.  The budget effects  all Alaskans,                                                                    
     it  effects property  prices, it  effects corporations'                                                                    
     planning   and  investment   cycles,  and   it  effects                                                                    
     households'  planning  and  savings cycles.  If  fiscal                                                                    
     policy   could   contribute   towards   stability   and                                                                    
     ameliorating  the volatility  of  the Alaskan  economy,                                                                    
     that would be a significant achievement.                                                                                   
10:05:42 AM                                                                                                                   
SENATOR  MCGUIRE  asked  if  there  were  other  funds  like  the                                                               
"Alberta  model" that  addressed volatility  by diverting  monies                                                               
when commodity prices hit trigger-prices.  She noted that she had                                                               
proposed trigger-pricing over a decade ago.                                                                                     
MR. RIETVELD answered yes and specified that the funds Senator                                                                  
McGuire described were called the reference-price model. He                                                                     
explained as follows:                                                                                                           
     You  set  a   price  for  oil,  if   oil  exceeds  that                                                                    
     reference-price,  you  save  equivalent  percentage  of                                                                    
     revenues, if  it is  under that price  you are  able to                                                                    
     draw  on it;  that is  that version  of the  rule-based                                                                    
     policy. That system  has some problems, the  one is how                                                                    
     do  you decide  which oil  price  to base  it on;  that                                                                    
     could  become  incredibly  controversial. I  think  two                                                                    
     years  ago  we  probably would  have  felt  comfortable                                                                    
     saying the  price should be  $100 a barrel, now  we see                                                                    
     oil  prices just  touched $26,  we probably  don't feel                                                                    
     comfortable with $100.  So there is this  risk that you                                                                    
     would constantly be  chasing-your-tail in adjusting the                                                                    
     reference-price,    unless   you    have   some    very                                                                    
     sophisticated process for  establishing that reference-                                                                    
     price, that's my  main concern with that  model, but it                                                                    
     is used and it is employed by some countries.                                                                              
10:07:11 AM                                                                                                                   
He addressed the prevention of waste and bad investments as                                                                     
     Finally, the  point of these resource-based  SWFs is to                                                                    
     avoid  really  wasteful   spending  on  the  boom-side.                                                                    
     Economies  all  have  a   limited  capacity  to  absorb                                                                    
     capital  in boom-times,  it leads  to poor  investments                                                                    
     and it leads to misallocation  of capital to very often                                                                    
     unsustainably rising  real estate  prices, particularly                                                                    
     in things that  cannot be easily traded  tend to really                                                                    
     rise. There's  a real prevalence of  "white elephants,"                                                                    
     that  is  large  scale investment  projects  with  poor                                                                    
     economic performance and rational.                                                                                         
CHAIR STOLTZE asked if a $65 billion gas line would be                                                                          
considered a "white elephant."                                                                                                  
MR. RIETVELD replied no comment. He addressed oil-to-equities as                                                                
     So just  to think through  some of the  other underling                                                                    
     logic of the  SWF model, the Norwegians,  whose model I                                                                    
     wouldn't  necessarily  advocate  in  its  entirety  for                                                                    
     Alaska  for  the  simple reason  that  Alaska  is  more                                                                    
     fiscally dependent on  oil than Norway is,  but some of                                                                    
     the logic  applies. The  Norwegians describe  what they                                                                    
     are doing  as turning oil-to-equities and  they believe                                                                    
     that  financial assets  have  historically  had a  much                                                                    
     better risk-adjusted  return than oil and  also that if                                                                    
     you think about it in  a truly risk-adjusted sense, the                                                                    
     risk   of   holding    oil   doesn't   compensate   you                                                                    
     sufficiently for  the return  that you  get and  if you                                                                    
     think  about standard  financial  theory,  the kind  of                                                                    
     risk  you observe  from oil  would  demand much  higher                                                                    
He referenced a graph showing rate of returns since the start of                                                                
"The Great Depression" in 1928 for stocks, oil, money markets,                                                                  
and bonds as follows:                                                                                                           
     Stocks  have essentially  massively outperformed  money                                                                    
     markets  and bonds,  but also  oil.  Oil has  exhibited                                                                    
     stock-like  levels of  volatility for  bond-like levels                                                                    
     of  returns. So  at least  historically, the  financial                                                                    
     case  for turning  oil into  financial wealth  has been                                                                    
     very  strong, it's  even more  compelling if  you think                                                                    
     about  the  total wealth  of  Alaska.  You have  wealth                                                                    
     under  the  ground and  you  have  wealth in  financial                                                                    
     wealth  and  if you  think  about  the balance  between                                                                    
     those two you  still will have a  significant amount of                                                                    
     your  current and  future wealth  in oil,  even if  you                                                                    
     adopt the  SWF model. So  it's just another  reason to,                                                                    
     as much  as you  can, break  the consolidation  of your                                                                    
     wealth  in the  form of  oil  wealth and  try and  grow                                                                    
     financial wealth.                                                                                                          
10:09:52 AM                                                                                                                   
He addressed the reasons to have a rule-based SWF as follows:                                                                   
     I  mentioned  on a  few  occasions  that the  framework                                                                    
     should be rule-based  and I think that  is easily said,                                                                    
     but is worth reflecting for  a moment on the attractive                                                                    
     feature of a  rule. As with all rules in  the domain of                                                                    
     economic  policymaking, the  ultimate idea  here is  to                                                                    
     constrain discretion.  Why is  that important  for oil-                                                                    
     based  economies?  In  oil-based economies  subject  to                                                                    
     significant booms and busts,  I find that memories tend                                                                    
     to be  quite short and  for all  of the pain  Alaska is                                                                    
     going through  right now fiscally  with low  oil prices                                                                    
     and  economically, when  oil prices  recover it's  very                                                                    
     easy to forget that and  continue on your merry way. If                                                                    
     you have  a rule-based policy, that  essentially forces                                                                    
     you to  save in good  times, it  makes it sort  of more                                                                    
     reasonable and  more sustainable  to draw on  assets in                                                                    
     tough times.                                                                                                               
CHAIR STOLTZE asked how rules are enforced.                                                                                     
MR.  RIETVELD answered  that  the  state has  a  number of  legal                                                               
options at its disposal. He stated  that the most obvious way was                                                               
to  introduce a  law that  had significant  legislative oversight                                                               
with public disclosure of what the plan was.                                                                                    
CHAIR STOLTZE pointed out to Attorney General Richards that Mr.                                                                 
Rietveld recommended legislative oversight.                                                                                     
MR. RIETVELD continued to address a rule-based SWF as follows:                                                                  
     I  think the  second reason  for having  a rule  is the                                                                    
     previously   mentioned   human  inability   to   really                                                                    
     forecast where oil prices are  going to go. If you have                                                                    
     a  rule and  a framework  that doesn't  require you  to                                                                    
     formulate  a budget  based on  your expectation  of oil                                                                    
     prices, but  rather allows you  to form a  budget based                                                                    
     an  assessment  of  your   financial  wealth,  you  are                                                                    
     basically  expecting  a  lot   less  and  you  are  not                                                                    
     expecting  the impossible  from  people  who write  the                                                                    
     budget to come up with a forecast of oil prices.                                                                           
10:11:57 AM                                                                                                                   
CHAIR STOLTZE asked Mr. Rietveld to verify that he had                                                                          
previously noted that the most enforceable rule was a                                                                           
constitutional amendment.                                                                                                       
MR. RIETVELD answered correct.                                                                                                  
SENATOR MCGUIRE recounted the following:                                                                                        
     Just on this  point to remind the  committee, we banded                                                                    
     together to pass a piece  of legislation that created a                                                                    
     competitive  oil-review  committee  that's made  up  of                                                                    
     members of  the public  and members of  the legislature                                                                    
     and  it's a  competitiveness-board  based on  Alberta's                                                                    
     model with an idea that  it is our bread-and-butter and                                                                    
     we  should  have  more  focus  on  how  we  manage  our                                                                    
     competitiveness as a state and  it seems like this is a                                                                    
     place where  that could come in,  having somebody, that                                                                    
     group, their task  is to be looking  at how competitive                                                                    
     we  are  with  respect   to  other  jurisdictions,  but                                                                    
     certainly assessing what  the price of oil  is based on                                                                    
     a forecast and things I think would be something.                                                                          
MR. RIETVELD  divulged that the International  Forum of Sovereign                                                               
Wealth Funds  codified an  encouragement for  clear communication                                                               
and transparency  around what  the rules are.  He set  forth what                                                               
the benefits of rules are as follows:                                                                                           
     Helps  manage  expectations  and it  helps  ensure  the                                                                    
     credibility of medium and  long-range fiscal policy and                                                                    
     that's  a  general  truth,  but I  think  it  has  some                                                                    
     specific   applications.   For  example,   the   rating                                                                    
     agencies   will  have,   I   think,   reason  to   take                                                                    
     significant confidence  in a plan that  is sustainable,                                                                    
     rule-based  and  clearly  communicated;  it  will  help                                                                    
     underline  the credibility  and  stability of  Alaska's                                                                    
     fiscal  future if  you could  communicate  a plan  like                                                                    
     this to  the rating  agencies; it will  help businesses                                                                    
     in Alaska break  the perception that Alaska  is a boom-                                                                    
     bust economy and encourage  long-term investment in the                                                                    
     state; it will help  the public's households plan their                                                                    
     financial  affairs; it  will leave  their home  prices,                                                                    
     which is where the majority  of their equity and wealth                                                                    
     resides, less  vulnerable to wild  swings based  on the                                                                    
     whims  of energy  prices. So  I think  that's all  very                                                                    
     important   and   enhancing  the   predictability   and                                                                    
     stability of fiscal policy  through this rule-based SWF                                                                    
     framework is one of its most attractive features.                                                                          
10:14:21 AM                                                                                                                   
CHAIR STOLTZE remarked that he  liked the most enforceable rules.                                                               
He said a  politician he admired, the late  Everett Dirksen, said                                                               
he  was  "a  man  of  unbending principles"  and  his  first  and                                                               
foremost principle was "flexibility."  He asserted that he wanted                                                               
to make sure that a SWF  does not become politically flexible and                                                               
noted that the best way to create a $20 billion permanent fund                                                                  
was to start with a $50 billion one.                                                                                            
10:15:00 AM                                                                                                                   
MR. RIETVELD addressed the changing nature of fiscal rules as                                                                   
     I want  to pay  a little  bit of  attention now  to how                                                                    
     rules  are changing,  so it's  not as  if there  aren't                                                                    
     rules in place  around the world right now.  There is a                                                                    
     rule in place  in Alaska, a savings rule,  but I'd like                                                                    
     to  talk a  little bit  about how  under this  SWF 3.0,                                                                    
     this  adjusting  to  new  fiscal  realities  where  the                                                                    
     action is  in terms of  the changes that  are happening                                                                    
     and  need to  happen. Essentially  what I  think is  in                                                                    
     place now  in the overwhelming  majority of cases  is a                                                                    
     rule-of-thumb measure for savings,  that is how I would                                                                    
     describe  what  Alaska  has  right  now.  You  have  25                                                                    
     percent   required  in   the   constitution  that   has                                                                    
     effectively  been  30 percent  of  savings;  let me  be                                                                    
     clear, having  that is better  than not having  it. The                                                                    
     question is can you improve  upon it and add a spending                                                                    
     component to it, add a  sensible policy that integrates                                                                    
     your  savings decisions  with your  spending decisions?                                                                    
     That's really what it's all about.                                                                                         
     In  terms  of  those rule-of-thumb  measures,  I  think                                                                    
     there's three  in principle. The  first one is  a fixed                                                                    
     percentage  savings, that's  what you  have in  Alaska,                                                                    
     that's  what frankly  the majority  of countries  have.                                                                    
     The second one is  a deviation from some moving-average                                                                    
     so  that  you save  when  revenues  exceed some  moving                                                                    
     average of let's say the  past four years and maybe you                                                                    
     draw down  on assets  when they  are below  the moving-                                                                    
     average.  The third  example is  the  one that  Senator                                                                    
     McGuire  mentioned  is   the  reference-price  approach                                                                    
     where you set  a price in the budget and  you say we're                                                                    
     going to formulate  a budget based on a  $75 per barrel                                                                    
     price  for  oil  for  example, and  if  prices  end  up                                                                    
     exceeding  that we  save that  equivalent amount.  As I                                                                    
     mentioned, these  are not terrible rules  to have, they                                                                    
     are  better than  not having  rules, but  they do  have                                                                    
     problems, particularly with respect  to the last one as                                                                    
     I  mentioned. How  do you  determine  what's the  right                                                                    
     price?  How   do  you  ensure  that   that  process  of                                                                    
     reference-price setting is not  backward looking and if                                                                    
     it's going to be forward  looking? How do you cope with                                                                    
     inherent unpredictability of oil  prices and how do you                                                                    
     make  sure  that the  process  does  not become  highly                                                                    
10:17:07 AM                                                                                                                   
SENATOR MCGUIRE commented as follows:                                                                                           
     Just  on that  point, you're  right, but  consider that                                                                    
     this  state  has been  relying  on  a spring  and  fall                                                                    
     forecast every year, which is  never right, without any                                                                    
     trigger at  all. So the  volatility of what we  have is                                                                    
     so immense that just ratcheting  it back a bit, even if                                                                    
     we are slightly  wrong on the trigger at  least puts us                                                                    
     in a place of a bit more predictability.                                                                                   
SENATOR  WIELECHOWSKI  asked  if  most SWFs  have  an  inflation-                                                               
proofing component.                                                                                                             
MR.  RIETVELD answered  that  inflation-proofing  was a  critical                                                               
element  and the  best  countries  did it.  He  pointed out  that                                                               
Alaska's proposed draw-down rate is  below its nominal return and                                                               
that sort of  ensures inflation-proofing because it  is through a                                                               
direct mechanism  where money  needs to  be transferred  based on                                                               
some calculation of what inflation was in previous periods.                                                                     
SENATOR  WIELECHOWSKI  asked  if   the  governor's  plan  had  an                                                               
inflation-proofing component.                                                                                                   
MR. RIETVELD answered  yes. He detailed that the  plan's draw was                                                               
prudent relative to the expected return of the fund.                                                                            
CHAIR STOLTZE remarked  that one of the rules he  did not see was                                                               
how to  avoid getting  back into the  same spending  scenario. He                                                               
asked if a  provision should be included that acts  as a de facto                                                               
spending  limit that  reduces the  amount of  money on  the table                                                               
when revenue streams are pretty good.                                                                                           
10:19:15 AM                                                                                                                   
MR. RIETVELD replied as follows:                                                                                                
     The way I  understand the governor's plan  is that will                                                                    
     happen because  the spending rule  is based on  a fixed                                                                    
     amount draw  so that  if good  times return,  the fixed                                                                    
     amount  of spending  will remain  the  fixed amount  to                                                                    
     spend and  the incremental  additional revenue  will go                                                                    
     to the fund.  So spending might be able to  rise in the                                                                    
     future, but  it won't  respond immediately  through the                                                                    
     budget  process,   it  will  lead  to   growth  in  the                                                                    
     Permanent   Fund  and   higher   spending  for   future                                                                    
CHAIR STOLTZE commented that the  Commissioner of Revenue and the                                                               
Attorney General will be asked  to address inflation-proofing and                                                               
spending   rules   more   in  depth.   He   remarked   that   the                                                               
administration has to, most importantly, convince the public.                                                                   
MR. RIETVELD  replied that  he agreed. He  specified that  he was                                                               
addressing the committee  to paint-the-broad-picture, but details                                                               
were important  to review as  well. He  stated that he  could not                                                               
say  that  he liked  the  details  of  the governor's  plan,  but                                                               
remarked that the plan fits with international best practices.                                                                  
SENATOR  WIELECHOWSKI  asked if  any  SWFs  existed that  spinoff                                                               
dividends for its citizens and  inquired if dividends were a good                                                               
MR. RIETVELD  addressed the  first question  and answered  no. He                                                               
specified  that the  dividend  was a  particular  feature of  the                                                               
Alaskan situation and remarked that  he did not take particularly                                                               
strong views  on whether the dividend  was a good thing  or a bad                                                               
thing. He  commented that the  dividend was a liability  that the                                                               
government knows  it needs to  fund and  it needs to  think about                                                               
what the dividend's appropriate level  was. He set forth that the                                                               
SWF was  a big-picture  plan for enduring  the fiscal  future for                                                               
the state  to the extent  that it helps  pay for the  dividend in                                                               
the  future.  He  conceded  that   dividends  might  create  some                                                               
opportunities and  hindrances in terms of  advancing legislation,                                                               
but  dividends should  not undermine  the transition  to the  SWF                                                               
CHAIR  STOLTZE pointed  out  that Mr.  Rietveld  showed that  the                                                               
Permanent  Fund's diversified  portfolio  was  far more  reliable                                                               
than a commodity and the  plan switches the dividend payment from                                                               
the  more   dependable  market-based  diversified  fund   to  the                                                               
vagaries of oil.                                                                                                                
10:22:49 AM                                                                                                                   
MR. RIETVELD addressed the Saudi Arabian report as follows:                                                                     
     I  wanted  to  discuss  it  here  because  I  think  it                                                                    
     underlines  the  danger  of  not  having  a  rule-based                                                                    
     system in place,  it's a very different  country to the                                                                    
     U.S. and  it's a very  different set up to  the Alaskan                                                                    
     set up,  I think  fortunately in  your case,  but there                                                                    
     are a number  of important lessons that I  think we can                                                                    
     draw on in doing this. I  hope that at the end of these                                                                    
     slides, nobody  should think that  if this  proposal is                                                                    
     the Saudi  Report that I  or anyone else  is advocating                                                                    
     that Alaska does what Saudi  Arabia does, it's more the                                                                    
     avoidance of the Saudi Arabian Plan.                                                                                       
MR. RIETVELD provided details of the Saudi Arabian report as                                                                    
     The basic economics  of Saudi Arabia is that  it is the                                                                    
     world's  largest  oil producer,  it  has  sort of  been                                                                    
     challenged  now by  Russia and  the U.S.,  but on  some                                                                    
     metrics  it's  the largest  and  certainly  one of  the                                                                    
     largest-oil producers, it has  decades if not centuries                                                                    
     of remaining  oil reserves under  the ground,  which in                                                                    
     general has the lowest-marginal  cost of extraction, so                                                                    
     their  oil wealth  is not  really in  question. At  the                                                                    
     time  we  finished  writing this  report  in  September                                                                    
     2014, they  had $850  billion in  accumulated financial                                                                    
     assets, so you might look  at those things and say what                                                                    
     on earth  could be wrong  with this country,  they have                                                                    
     oil  beyond   their  wildest   dreams  and   they  have                                                                    
     financial  wealth;  but  in fact,  there  are  quite  a                                                                    
     number of things wrong with  the Saudi Arabian economy.                                                                    
     The  overarching   one  is  that  their   policies  for                                                                    
     accumulating and  spending assets  was entirely  ad hoc                                                                    
     rather  than rule-based,  rather  than sustainable  and                                                                    
     rather  than   appropriately  counter-cyclical.   In  a                                                                    
     nutshell,  they didn't  save enough  in the  good times                                                                    
     and they were drawing too heavily in the bad times.                                                                        
10:24:55 AM                                                                                                                   
He addressed the lessons for Alaska from the Saudi Arabian                                                                      
report and referenced the estimated-oil price required to                                                                       
balance 2015 budgets in various countries as follows:                                                                           
     This  is one  estimate of  the kind  of oil  price they                                                                    
     need to balance the budget  [$106 per barrel], and they                                                                    
     are essentially  in a different  league from  the likes                                                                    
     of  Norway  [$40  per  barrel],   Abu  Dhabi  [$55  per                                                                    
     barrel],  and  Kuwait  [$54   per  barrel];  they  need                                                                    
     roughly twice  as high oil  price to balance  the books                                                                    
     compared  to those  other states  who have  implemented                                                                    
     the SWF model more fully and more appropriately.                                                                           
MR.  RIETVELD pointed  out that  Saudi Arabia's  aging population                                                               
might require  oil prices in  excess of  $300 a barrel  under its                                                               
current spending path to balance its books by 2030.                                                                             
He  addressed Saudi  Arabia's budgeted  versus actual  government                                                               
spending as follows:                                                                                                            
     Another mistake that they have  made is to consistently                                                                    
     increase the budget in line  with rising oil prices and                                                                    
     they have more  overspending of the budget  in the past                                                                    
     decade and  a half consistently by  roughly 20 percent,                                                                    
     which  is just  directly  meaning they  are not  saving                                                                    
     enough money.                                                                                                              
He addressed  a chart that  showed Saudi Arabia's  cyclicality in                                                               
capital spending  since 1980. He  noted a very  close correlation                                                               
to oil prices and detailed as follows:                                                                                          
     We  can see  they  track each  other historically.  The                                                                    
     first thing to give in  the Saudi fiscal setup when oil                                                                    
     prices  collapse  is  to  cut  capital  spending,  that                                                                    
     exacerbates the  inherent boom-bust cycle of  the Saudi                                                                    
     economy and I  believe has done the same  in Alaska and                                                                    
     a   number  of   other   resource-rich  countries   and                                                                    
     resource-dependent  countries,   that's  certainly  not                                                                    
10:26:44 AM                                                                                                                   
He addressed  a set of  investment policies recommended  to Saudi                                                               
Arabia as follows:                                                                                                              
     Have  them  manage  their wealth  institutionally  much                                                                    
     more   like  Alaska   does,   through  an   independent                                                                    
     investment authority  with clear expectations  in terms                                                                    
     of  financial returns,  people know  what targets  they                                                                    
     have to  hit and it's governed  in a way that  with the                                                                    
     particularities   of    their   political    setup   is                                                                    
     essentially arms-length. We call  for them to establish                                                                    
     a clear demarcation of what  is their investment income                                                                    
     fund, what is  their buffer fund, and  we really stress                                                                    
     the  importance  of  implementing a  rule-based  fiscal                                                                    
He stated that  he has three-key takeaway messages  for Alaska as                                                               
     The  first  message is  Alaska  is  not alone  in  this                                                                    
     response  to the  oil-price slump;  that said,  I think                                                                    
     Alaska is  better placed than  almost any place  that I                                                                    
     have been to with respect  to the magnitude of previous                                                                    
     savings. You  have that  very, very  significant string                                                                    
     in your  bow to  draw on  and that  is frankly  not the                                                                    
     case for  many other  countries that are  going through                                                                    
     the kind of pain that Alaska is.                                                                                           
     My second and  third takeaways pertain to  the logic of                                                                    
     the SWF model.  The SWF model in the  first instance is                                                                    
     about  dealing with  the volatility  of the  budget and                                                                    
     it's  about transferring  that  volatility  out of  the                                                                    
     budget, out  of spending,  out of capital  spending and                                                                    
     into the level  of the SWF, that's  very important. The                                                                    
     SWF model  is a  means through  which to  stabilize the                                                                    
     Alaskan  budget and  to break  your historic  boom-bust                                                                    
     type link to commodity prices.                                                                                             
     The third  thing I  want to leave  you with  around the                                                                    
     SWF model is  that it is part of the  transition of the                                                                    
     Alaskan-state funding  itself, no  longer as it  has in                                                                    
     the  past   through  oil  revenues,  but   through  its                                                                    
     financial wealth  and relying  on investment  income on                                                                    
     the wealth rather than revenues  from oil production to                                                                    
     fund government. I  go back to the  first point, you're                                                                    
     not alone, but  you are in a  stronger position. You've                                                                    
     laid the foundations to make  this transition and under                                                                    
     the  right set  of rule-based  policies, Alaska  has no                                                                    
     reason  to think  that  it doesn't  have  a stable  and                                                                    
     sustainable fiscal future.                                                                                                 
10:29:34 AM                                                                                                                   
SENATOR WIELECHOWSKI asked that if  dividends are a high priority                                                               
for Alaskans,  wouldn't tying  dividends to  the stock  market be                                                               
safer than to oil prices. He  pointed out that oil prices greatly                                                               
fluctuate and are projected to continue to decline.                                                                             
MR. RIETVELD answered yes and pointed out that there are various                                                                
ways for the state to formulate its dividend policy. He                                                                         
explained the advantage of the governor's proposal as follows:                                                                  
     The advantage  of the proposal as  I see it is  that it                                                                    
     allows  in  good  times for  the  Alaskan  citizens  to                                                                    
     benefit  from increased  oil revenues,  if they  are to                                                                    
     return,  but at  the  same time  allowing  the fund  to                                                                    
     grow, so it  sort of is equitable in  terms of Alaska's                                                                    
     underlying economic  wealth and fortunes tying  in part                                                                    
     to the Alaskan citizen and  in part to the stability of                                                                    
     the fiscal  framework. So I think  the current proposal                                                                    
     has  the  features,  I  think   others  are  worthy  of                                                                    
     consideration too.                                                                                                         
SENATOR WIELECHOWSKI asked Mr. Rietveld to verify that the                                                                      
proposed plan prioritizes government spending over dividends to                                                                 
Alaskans because the government receives a more stable flow.                                                                    
MR. RIETVELD answered yes. He specified as follows:                                                                             
     I  think the  rules sort  of balances  the benefits  of                                                                    
     potential  higher future-commodity  prices to  citizens                                                                    
     and to the  budget. I think there is  a tradeoff there,                                                                    
     but  I think  dramatically cutting  government spending                                                                    
     in  the future  has an  impact on  Alaskans' households                                                                    
     and individuals  too through, for example,  their house                                                                    
     prices. If  you have a  20 to  30 percent drop  in your                                                                    
     house  prices due  to a  period  of protracted  low-oil                                                                    
     prices; that is a much  more significant impact on your                                                                    
     household balance-sheet and net wealth.                                                                                    
10:31:34 AM                                                                                                                   
CHAIR STOLTZE pointed out the confusion with the plan because                                                                   
the bill is called "The Dividend Protection Act."                                                                               
SENATOR WIELECHOWSKI  asked if  Mr. Rietveld  would be  okay with                                                               
the  plan being  flipped where  dividends are  tied to  the stock                                                               
market and the  government expenditures are tied to  the price of                                                               
oil and production.                                                                                                             
MR. RIETVELD answered as follows:                                                                                               
     I  would rather  not have  government spending  tied to                                                                    
     the stock  market, but I think  the SWF model is  a way                                                                    
     to  filter the  volatility of  the stock  market. I  do                                                                    
     think  it's worthy  of consideration  of other  ways of                                                                    
     thinking  about the  dividend.  As I  said,  the way  I                                                                    
     think  about the  dividend,  and not  to  get into  the                                                                    
     details of  exactly how it  is structured, I  think the                                                                    
     SWF model,  to the extent  that it helps  ensure fiscal                                                                    
     sustainability in the future  of Alaska, feeds into the                                                                    
     ability to  continue paying  the dividend,  which might                                                                    
     otherwise be under  threat under whatever circumstances                                                                    
     are proposed, particularly the status quo.                                                                                 
10:32:34 AM                                                                                                                   
SENATOR HUGGINS  asked Mr. Rietveld  to verify that  Saudi Arabia                                                               
was bonding their debt.                                                                                                         
MR. RIETVELD explained as follows:                                                                                              
     What they  have essentially done in  the first instance                                                                    
     is to cut  capital spending and the  second instance to                                                                    
     draw on their accumulated  financial assets to the tune                                                                    
     of $150  billion to $200  billion since  December 2014.                                                                    
     They have  gone to the  local bond market and  a Saudi-                                                                    
     riyal  bond of  $37 billion  and there's  talk of  them                                                                    
     going  to  the international  bond  market  to raise  a                                                                    
     dollar bond. So that's the  spectrum of things they are                                                                    
     needing  to do,  all  of which  are  different ways  of                                                                    
     essentially  drawing  down  on savings  that  they  had                                                                    
     previously committed.                                                                                                      
SENATOR HUGGINS  pointed out that  the U.S. has a  horrible track                                                               
record with $18  trillion in debt and that some  people in Alaska                                                               
have advocated  that the state  use bonding  to take on  debt and                                                               
have somebody  pay for it  in the future.  He asked if  the state                                                               
should consider taking on debt during its transition period.                                                                    
MR. RIETVELD replied that Alaska  has the financial resources not                                                               
to have to  be in a situation  where its recourse is  to the debt                                                               
markets  and burning  future generations.  He  remarked that  the                                                               
state  has  the  resources  in-hand to  avoid  issuing  debt.  He                                                               
pointed  out  that Alaska's  high-credit  rating  would be  under                                                               
serious threat if the state were  to issue debt if the status quo                                                               
prevailed  in the  fiscal framework,  which would  make the  debt                                                               
more costly for future generations.                                                                                             
SENATOR  HUGGINS  stated  that Mr.  Rietveld's  presentation  was                                                               
meaningful and he was hopeful that  the average Alaskan got a lot                                                               
out of it.                                                                                                                      
10:35:11 AM                                                                                                                   
SENATOR  MCGUIRE  remarked  that  a SWF  could  be  created  that                                                               
included dividends  being paid out.  She said the  thinking about                                                               
attaching  a dividend  to  the  royalty itself  was  to create  a                                                               
revenue-source connection  with Alaskans as well  as providing an                                                               
opportunity to  experience some highs. She  remarked that putting                                                               
the  dividend  within  a  SWF   would  by  definition  limit  the                                                               
dividend.  She opined  that  what good  was  paying dividends  if                                                               
rating  agencies said  the state  was down-the-tubes,  businesses                                                               
relying  on ratings  were no  longer investing  and creating  new                                                               
jobs, the  public loses its  hope and belief, and  housing prices                                                               
start to go, a scenario that  occurred in the 1980s. She asserted                                                               
that  lawmakers were  not sitting  around finding  a way  to keep                                                               
funding  government, but  were trying  to find  ways to  keep the                                                               
state economically stable  in a way that  provides basic services                                                               
and keeps the economy alive  so that the private sector continues                                                               
to invest.                                                                                                                      
CHAIR  STOLTZE reiterated  that  the  administration focused  the                                                               
discussion  on the  dividend by  calling the  bill the  "Dividend                                                               
Protection Act."                                                                                                                
SENATOR MCGUIRE  opined that  the bill  was called  the "Dividend                                                               
Protection Act"  because the  dividend would  go away  if nothing                                                               
was done.                                                                                                                       
CHAIR  STOLTZE asked  Attorney General  Richards  to address  Mr.                                                               
Rietveld's presentation,  primarily on the deferred  questions to                                                               
the  administration   relating  to  inflation-proofing   and  the                                                               
10:38:58 AM                                                                                                                   
ATTORNEY GENERAL RICHARDS explained  that the governor's proposal                                                               
does inflation-proof  the assets  by defining  sustainability and                                                               
assessing risk for the fund's draw.                                                                                             
CHAIR STOLTZE  replied that the  committee looked forward  to the                                                               
administration's  elaboration  on  its  plan  for  the  fund.  He                                                               
pointed out  that the Permanent  Fund belonged to the  people and                                                               
not  the government.  He stated  that  addressing the  governor's                                                               
bill is an Alaskan debate  and the committee would welcome public                                                               
testimony at a future hearing.                                                                                                  
10:42:10 AM                                                                                                                   
SENATOR  COGHILL  commented   that  Mr.  Rietveld's  presentation                                                               
focused on sovereign  wealth and the "sovereigns"  are the people                                                               
of  Alaska.  He asserted  that  with  the  way Alaska  came  into                                                               
statehood,  private individuals'  subsurface  rights were  barred                                                               
and the  state's sovereign wealth is  a way to balance  and share                                                               
royalty rights. He  said a discussion about  sovereign wealth has                                                               
to include sharing royalty rights with Alaskans.                                                                                
He  remarked that  SB  128  is a  matter  of  balancing risk  and                                                               
reward. He  said the  bill stabilizes the  function of  income to                                                               
the  government,   but  the  benefit  to   Alaskans  as  dividend                                                               
recipients  would  be  destabilized.   He  said  stabilizing  the                                                               
government's  economy  is  a  real   benefit,  but  the  dividend                                                               
destabilization's impact on  the private economy has  to be taken                                                               
into consideration as well.                                                                                                     
10:44:56 AM                                                                                                                   
CHAIR   STOLTZE  announced   that  the   committee  would   spend                                                               
additional  time  on  the  fiscal  issues  and  hold  SB  128  in                                                               
committee until  the committee also  heard SB 114. He  added that                                                               
public testimony as  well as constitutional issues  would also be                                                               
addressed to facilitate a thorough and public-vetting process.                                                                  
10:46:56 AM                                                                                                                   
ATTORNEY  GENERAL RICHARDS  announced  that  he and  Commissioner                                                               
Hoffbeck  from  the Department  of  Revenue  were presenting  the                                                               
bill's framework at the next committee meeting.                                                                                 
CHAIR STOLTZE remarked to Attorney  General Richards that probing                                                               
questions  on behalf  of committee  members' constituents  may be                                                               
asked at the next meeting.                                                                                                      
[SB 128 was held in committee.]