Legislature(2015 - 2016)BUTROVICH 205

01/28/2016 09:00 AM Senate STATE AFFAIRS

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09:01:20 AM Start
09:01:44 AM SB128
10:37:25 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                     
9:01:44 AM                                                                                                                    
CHAIR STOLTZE announced the consideration of SB 128.                                                                            
9:02:27 AM                                                                                                                    
RANDALL  HOFFBECK, Commissioner,  Alaska  Department of  Revenue,                                                               
set forth that  the Alaska Permanent Fund  Protection Act (APFPA)                                                               
is the component of SB 128  that allows the state to maximize the                                                               
efficiency of its  existing wealth in helping  to fund government                                                               
going forward. He  related that in June,  statewide meetings were                                                               
held to  discuss the  fiscal situation  with Alaskans,  to inform                                                               
and listen to them. He said  Director Pat Pitney and he held over                                                               
50-statewide  meetings  and  discussed  standard-type  government                                                               
solutions  to the  fiscal  problem such  as:  new taxes,  cutting                                                               
expenditures, and new wealth.                                                                                                   
He said that  there have been ongoing discussions  related to how                                                               
to  use  the  state's  wealth,  such  as  leveraging  within  the                                                               
Permanent Fund  which led to  the conclusion that  using standard                                                               
processes  could  lead to  fiscal  stability,  but it  could  not                                                               
remove the volatility out of  the budgeting process. He specified                                                               
that  using  only new-wealth  methods,  the  volatility could  be                                                               
removed,  but there  was not  enough wealth  to do  it by  itself                                                               
because the  state's savings  were not  sufficient. He  set forth                                                               
that the two  plans coalesced into the plan  before the committee                                                               
9:05:44 AM                                                                                                                    
CHAIR   STOLTZE  pointed   out  that   the  Governor's   proposed                                                               
expenditure reductions were modest and  the plan appears to focus                                                               
more on new revenue. He asked  if the current budget proposal was                                                               
the right size and sustainable.                                                                                                 
COMMISSIONER HOFFBECK said APFPA works  and gets to a sustainable                                                               
budget; however, he specified that  "it is written in pencil" and                                                               
the  Governor  was willing  to  talk  about the  balance  between                                                               
spending  cuts  and  new  revenues   in  a  discussion  with  the                                                               
9:07:44 AM                                                                                                                    
He addressed  "The New Sustainable  Alaska Plan,"  beginning with                                                               
APFPA, which is  the focus of SB  128. He said the  fund would be                                                               
able to generate about $3.3  billion toward resolving the state's                                                               
fiscal  issue. He  detailed  that if  the  revenue from  existing                                                               
taxes, fees and  earnings on savings is added to  that, the total                                                               
is about $4.285 billion. Last  year's starting budget, minus one-                                                               
time  savings,  was about  $5.2  billion,  which leaves  about  a                                                               
billion dollars to make up.                                                                                                     
CHAIR  STOLTZE asked  if there  would be  a commitment  to making                                                               
cuts in the  budget process in order to solve  the billion dollar                                                               
COMMISSIONER  HOFFBECK   replied  that  the  Governor   would  be                                                               
actively engaged  with the leadership  in both the House  and the                                                               
Senate to work toward a compromise.                                                                                             
SENATOR  MCGUIRE   asserted  that  she  termed   Chair  Stoltze's                                                               
questions relevant because  the public wants to know  if the plan                                                               
maintains the  current size  of government.  She opined  that the                                                               
plan will be to stabilize the  economy, but leave enough room for                                                               
a dialogue about the size and  cost of government. She noted that                                                               
Wyoming was an example of a state  with a budget half the size of                                                               
Alaska's.  She stated  that people  want  to know  that cuts  are                                                               
being  made  before  their  Permanent   Fund  dividend  (PFD)  is                                                               
9:10:42 AM                                                                                                                    
COMMISSIONER  HOFFBECK agreed  and  noted that  after talking  to                                                               
people around the state, the  price of admission to talking about                                                               
any other  budget plans was  "additional cuts." He  asserted that                                                               
people  are  not  convinced that  the  government  is  delivering                                                               
services as efficiently  as it can; however, they  also said they                                                               
liked the services the government was delivering.                                                                               
CHAIR STOLTZE added that people from  all walks of life should be                                                               
included in the discussion.                                                                                                     
9:12:18 AM                                                                                                                    
SENATOR HUGGINS  stated that he  agreed with Senator  McGuire. He                                                               
asserted  that  the  Legislature  and the  governor  should  work                                                               
together to decide on the  appropriate level of cuts. He referred                                                               
to a poll  of his constituents who said they  want the budget cut                                                               
before their PFD.                                                                                                               
SENATOR  WIELECHOWSKI agreed  that figuring  out the  appropriate                                                               
budget size  was important. He  said his constituents  are asking                                                               
where the  promised oil production  is and  noted that SB  21 was                                                               
enacted  three  years  ago. He  highlighted  the  oil  production                                                               
decline which is having a  dramatic impact on the state's revenue                                                               
and  asked  that the  administration  focus  more effort  on  the                                                               
promised oil production.                                                                                                        
9:15:26 AM                                                                                                                    
COMMISSIONER HOFFBECK  disclosed that  he heard  similar concerns                                                               
across the  state. He described  that after the  "New Sustainable                                                               
Alaska  Plan" is  in place,  Alaska  will still  have the  lowest                                                               
taxes in the nation. He asserted  that the state will continue to                                                               
have a dividend, grow its  savings, provide essential savings and                                                               
have money to invest in future resource development.                                                                            
He set forth that the three components of APFPA were as follows:                                                                
   · Creates a sustainable draw from the earnings reserve,                                                                      
   · Minimizes oil price volatility on the general fund,                                                                        
   · Adjusts the dividend.                                                                                                      
CHAIR STOLTZE  asked if the dividend  will be in a  more volatile                                                               
COMMISSIONER HOFFBECK  replied that there would  be discussion of                                                               
the dividend in the presentation.                                                                                               
9:17:44 AM                                                                                                                    
CRAIG RICHARDS, Attorney General,  Alaska Department of Law, said                                                               
he would  be defining the  state's financial  problem, discussing                                                               
the impacts that oil volatility  has on Alaska's finances and the                                                               
options the administration examined in developing the APFPA.                                                                    
CHAIR STOLTZE requested  that the committee have  a discussion on                                                               
the conflicting legal opinions.                                                                                                 
ATTORNEY GENERAL  RICHARDS replied  that Mr. Milks  would address                                                               
the conflicting legal opinions at the end of the presentation.                                                                  
He  organized the  discussion of  the  state's financial  problem                                                               
into  three categories:  short-term, medium-term,  and long-term.                                                               
He said  the short-term problem  is that  the drop in  oil prices                                                               
has resulted  in large  budget gaps.  The medium-term  problem is                                                               
that the  state's savings will be  spent in about four  years. If                                                               
left uncorrected,  the budget hole will  damage Alaska's economy.                                                               
Dividends payments will be unsustainable under the status quo.                                                                  
9:20:56 AM                                                                                                                    
He said the  discussions of the fiscal problem  by the Department                                                               
of Revenue, the Department of  Law, and the Governor's Office led                                                               
to the  question about what  is causing the problem  of boom-and-                                                               
bust cycles  in Alaska.  The conclusion  was that  Alaska's long-                                                               
term  problems are  caused by  the  state's undiversified  budget                                                               
that is highly dependent on  petroleum revenues, by the declining                                                               
trend   in  North   Slope  petroleum   production,  and   by  the                                                               
cyclicality  of  petroleum  prices  creating  an  unstable  state                                                               
budget and economy.                                                                                                             
9:23:13 AM                                                                                                                    
He  showed  three  graphics that  highlight  the  state's  budget                                                               
problems  due  to:  general fund  revenue  volatility,  declining                                                               
revenue,   disappearing   savings,   and   potential   need   for                                                               
withdrawals from  the PFD earnings  reserve. He showed  the state                                                               
budget's  high   level  of  correlation  with   the  unrestricted                                                               
petroleum revenue and  spending. The APFPA attempts  to break the                                                               
pattern  of high  spending when  oil revenues  are high  and cuts                                                               
when they are low and to get off the boom-and-bust cycle.                                                                       
9:27:49 AM                                                                                                                    
CHAIR STOLTZE remarked about a  concern regarding the eradication                                                               
of the Constitutional Budget Reserve (CBR) Fund.                                                                                
COMMISSIONER   HOFFBECK  replied   that  the   enemy  of   fiscal                                                               
responsibility is  no plan. He  said the  state's plan up  to now                                                               
was to  save 25 percent of  its wealth by putting  royalties into                                                               
the Permanent  Fund, which has  grown to $50 billion.  Any excess                                                               
earnings were put into the CBR  for use during volatile times. He                                                               
concluded that the plan was to  chase oil prices up and down. The                                                               
mindset in  the proposed plan  is to  take the volatility  out of                                                               
the  entire system.  The issue  with  the CBR  is spending  money                                                               
without  a  plan  to   sustain  government's  capabilities  going                                                               
forward. He  stressed that  there is more  stability in  the cash                                                               
flow if the money is not subjected to a three-quarter vote.                                                                     
9:31:42 AM                                                                                                                    
COMMISSIONER  HOFFBECK said  in  response to  Chair Stoltze,  the                                                               
administration is  not trying to  side step the  constitution and                                                               
there would be  a vote by the Legislature as  provided for in the                                                               
constitution.  He asserted  that the  goal is  to stabilize  cash                                                               
SENATOR  MCGUIRE opined  that  moving the  CBR  into a  statutory                                                               
place is  an interesting  philosophical discussion.  She referred                                                               
to a  legal opinion pointing  to possible challenges  about other                                                               
monies being put into the Earnings Reserve Account (ERA).                                                                       
9:34:21 AM                                                                                                                    
COMMISSIONER HOFFBECK  explained that the plan  works whether the                                                               
money resides  in the ERA or  the CBR, as long  as the investment                                                               
process is  similar in  both places.  He said  the issue  is that                                                               
when it is  in the CBR, there  is a little less  certainty on the                                                               
annual draw because  it is subject to the  three-quarter vote. He                                                               
said it  is not a  fatal flaw if the  money gets swept  back into                                                               
the CBR.                                                                                                                        
CHAIR STOLTZE  said he is  trying to understand the  mechanics of                                                               
the plan.                                                                                                                       
COMMISSIONER  HOFFBECK  deferred  to  the Department  of  Law  to                                                               
address Senator McGuire's question.                                                                                             
ATTORNEY GENERAL RICHARDS specified  that Mr. Milks would address                                                               
that  question. He  echoed the  idea that  the Department  of Law                                                               
believes that the CBR sweep is  not necessary, but even if it is,                                                               
it is not fatal to the plan.                                                                                                    
He turned to  the long term problem the  administration is trying                                                               
to  address;  addressing  the   high  correlation  between  state                                                               
spending  and petroleum  revenues,  which becomes  less and  less                                                               
feasible over time. Under declining  oil production there is less                                                               
volatility  to capture  in  the up  years and  the  world of  oil                                                               
prices is going to become more volatile.                                                                                        
9:37:11 AM                                                                                                                    
He addressed  the subject of  the commodities roller  coaster and                                                               
highlighted  a  study by  the  International  Monetary Fund  from                                                               
October of 2015.  The study was on  commodity-based economies and                                                               
showed  that  Alaska  is  not  alone  or  unique  in  its  budget                                                               
challenges.  It  is  different  than the  Lower  48  states,  but                                                               
similar  to  many  national  governments with  a  high  level  of                                                               
dependence on one economy, such as oil or minerals.                                                                             
ATTORNEY GENERAL RICHARDS  said the study looked  at 85 economies                                                               
over  three  decades  and  found   that  government  spending  in                                                               
commodity-based  economies  tends  to  move   up  and  down  with                                                               
commodity  revenue. He  detailed  that the  study concluded  that                                                               
pro-cyclical  government spending  stunts economic  growth and  a                                                               
stabilizing fiscal policy has the  inverse effect, increasing the                                                               
GDP growth by 0.3 percent annually.                                                                                             
9:39:54 AM                                                                                                                    
He  showed break-even  oil  prices for  various  oil regimes.  He                                                               
revealed that  Alaska's break-even  oil price  is at  $109, which                                                               
compares to Russia and Saudi Arabia,  but not to Norway or Kuwait                                                               
who  have a  much  lower break-even  price  and, therefore,  more                                                               
sustainable economies.                                                                                                          
He concluded that well-managed petroleum  economies have done one                                                               
of two  things: enacted  broad-based tax  measures that  make the                                                               
amount  of petroleum  revenue to  the total  budget small  enough                                                               
that it  lessens the volatility,  or use  sovereign-wealth assets                                                               
to smooth the volatility; examples  of those who have broad-based                                                               
tax  measures are  Canada,  Australia, and  Norway,  all who  had                                                               
well-developed  economies  well   before  petroleum  wealth  came                                                               
online. Alaska is similar to  a Middle Eastern or African country                                                               
in that  it does not have  the economic base to  sustain revenues                                                               
once gained from  oil. He suggested looking at  economies such as                                                               
Abu Dhabi and Kuwait who use sovereign-wealth assets.                                                                           
9:42:05 AM                                                                                                                    
CHAIR  STOLTZE asked  how the  administration is  looking at  oil                                                               
ATTORNEY GENERAL  RICHARDS said  he does not  know, and  even the                                                               
Department of  Revenue's forecast is  a straight line  similar to                                                               
the  current oil  price.  He  expected a  whole  spectrum of  oil                                                               
prices in the future, if history repeats itself.                                                                                
COMMISSIONER  HOFFBECK  added  that  his  view  is  similar.  The                                                               
official  position  is that  volatility  within  oil prices  will                                                               
increase.   He  noted   that  shale   oil   has  relatively   low                                                               
expenditures to bring product on quickly  at a price point of $60                                                               
to $80,  which may put  a ceiling  on the projections,  but could                                                               
also easily flood the market  and depress the price. He suggested                                                               
that the long  term, real price may  be $50 to $70 with  a lot of                                                               
9:44:51 AM                                                                                                                    
CHAIR STOLTZE asked how long term.                                                                                              
COMMISSIONER HOFFBECK replied three to ten years.                                                                               
SENATOR WIELECHOWSKI  asked if all projections  are predicated on                                                               
the  idea  that  oil  production will  continue  to  decline.  He                                                               
questioned  where  the  new  production   is  that  the  industry                                                               
COMMISSIONER  HOFFBECK noted  the administration's  forecasts are                                                               
based on  meetings with the  oil industry.  He said he  could not                                                               
address the broader question about promised production.                                                                         
ATTORNEY GENERAL  RICHARDS added that the  department's forecasts                                                               
are fairly conservative and relate  to the status quo; they don't                                                               
project substantial new  events, such as opening  new fields. The                                                               
status quo  is a declining  oil base.  He said the  Department of                                                               
Natural Resources and  others are optimistic that  there is "some                                                               
to good" probability that there will be "new things happening."                                                                 
9:47:38 AM                                                                                                                    
COMMISSIONER HOFFBECK  pointed out that  even at $55 to  $60 oil,                                                               
the state  would need  1.6 billion  barrels-a-day to  balance the                                                               
budget. The status  quo is at 500,000 barrels a  day. He spoke of                                                               
a discovery in  the Colville Delta similar in size  to Alpine and                                                               
Kuparuk in  the 100 to  200 barrel-a-day range; five  fields that                                                               
size would be needed to get to a balanced budget.                                                                               
SENATOR  HUGGINS commented  that  a trait  of  a reasonable  plan                                                               
includes bands of  assumptions as well as the  inclusion of known                                                               
data.  He  asserted  that  the   administration  is  tasked  with                                                               
synchronizing their assumptions and data.                                                                                       
COMMISSIONER  HOFFBECK  noted  that  an  analysis  has  been  run                                                               
looking  at   the  impacts  of  potential   returns  on  gas-line                                                               
investments and associated costs.                                                                                               
SENATOR  HUGGINS  requested  to  see  the  analysis  Commissioner                                                               
Hoffbeck referred to.                                                                                                           
9:51:33 AM                                                                                                                    
SENATOR MCGUIRE  concurred with Senator Huggins.  She stated that                                                               
the  idea of  a sovereign-wealth  fund or  endowment in  order to                                                               
stabilize  Alaska's economy  is  absolutely right.  She said  the                                                               
broader  questions  concern  production  and  new  revenues  from                                                               
developments and the  gas line. She requested  information on how                                                               
to protect  on the upside. She  also said the gas-line  plan must                                                               
be shared  with the Legislature and  explained as to how  it fits                                                               
into the governor's financial plan.  She suggested that there are                                                               
many other opportunities that will fit into the plan.                                                                           
9:54:59 AM                                                                                                                    
ATTORNEY  GENERAL RICHARDS  said the  administration has  already                                                               
been working  on the exercise  of what more  optimistic petroleum                                                               
outcomes would  look like  in terms  of a  royalty-based dividend                                                               
and in  terms of  the governor's financial  plan and  the state's                                                               
long-term fiscal  health. He offered  to present  the information                                                               
to the Legislature.                                                                                                             
SENATOR HUGGINS asked if the  state's partnership in the gas line                                                               
is 25 percent.                                                                                                                  
COMMISSIONER HOFFBECK answered yes.                                                                                             
ATTORNEY GENERAL  RICHARDS noted that the  partnership is subject                                                               
to  the royalty-in-kind  finding  that the  Alaska Department  of                                                               
Natural Resources makes.                                                                                                        
SENATOR HUGGINS opined  that Alaskans need to  understand how the                                                               
Permanent Fund might be used as a solution.                                                                                     
9:58:39 AM                                                                                                                    
ATTORNEY  GENERAL  RICHARDS  highlighted a  quote  regarding  the                                                               
Permanent Fund from Governor Hammond,  "I wanted to transform oil                                                               
wells pumping  oil for a  finite period into money  wells pumping                                                               
money for infinity."  He said the administration  wants to figure                                                               
out a way to optimize the pumping of the money for infinity.                                                                    
He  related  that the  administration  also  wants to  spend  the                                                               
Permanent Fund earnings sustainably  by preserving an appropriate                                                               
amount  of  wealth across  generations  going  forward and  using                                                               
financial  assets to  sustain a  level of  government that  could                                                               
also  be  maintained  equitably across  generations.  He  defined                                                               
"sustainable"  as   protecting  the   constitutionally  protected                                                               
corpus,  making  sure the  earning  reserve  has durability,  and                                                               
includes inflation proofing.                                                                                                    
CHAIR  STOLTZE  asked  if inflation  proofing  would  require  an                                                               
appropriation or would be part of the fund management.                                                                          
ATTORNEY GENERAL  RICHARDS replied that Chair  Stoltze's question                                                               
would be answered  in a moment. He explained that  the cash flows                                                               
in  APFPA are  very  similar  to what  they  are  now. Under  the                                                               
existing model, the Permanent  Fund corpus produces statutory-net                                                               
income to  the earnings reserve,  and out of the  earning reserve                                                               
inflation proofing  goes back  to the  corpus and  dividends come                                                               
out.  Over  time,  to  the  extent  that  dividend  payments  and                                                               
inflation proofing  is less  than the  statutory net  income, the                                                               
earnings  reserve grows.  Roughly,  30 percent  of royalties  are                                                               
currently going into the Permanent Fund.                                                                                        
ATTORNEY  GENERAL  RICHARDS  explained  that  APFPA  changes  the                                                               
"plumbing"  slightly   by  putting  all  of   the  royalties  and                                                               
production taxes  into the Permanent  Fund. Out of the  corpus of                                                               
the Permanent Fund comes the  same statutory net income that goes                                                               
to  the earnings  reserve.  He  added that  out  of the  earnings                                                               
reserve comes the  dividend payment, which is 50  percent of last                                                               
year's royalties, and a steady-state  $3.3 billion to the general                                                               
10:02:40 AM                                                                                                                   
CHAIR STOLTZE  requested that  Attorney General  Richards clarify                                                               
what goes into the "corpus."                                                                                                    
ATTORNEY  GENERAL  RICHARDS  explained  that  there  still  is  a                                                               
mechanism for  inflation-proofing in the  model. The  state needs                                                               
to be confident  that the earnings reserve has  enough money that                                                               
it can  meet its cash  calls, which includes the  dividend payout                                                               
and the  $3.3 billion to  the general  fund. He said,  "We change                                                               
inflation-proofing   that   exists   now  by   eliminating   that                                                               
provision,  but  instead, we  have  a  provision that,  when  the                                                               
earnings  reserve is  greater than  four times  the $3.3  billion                                                               
payout, everything extra  in the earnings reserve  goes back into                                                               
the corpus."  Rather than an annual  inflation-proofing, there is                                                               
a delayed inflation-proofing mechanism that occurs over time.                                                                   
10:04:01 AM                                                                                                                   
SENATOR WIELECHOWSKI  referred to the  fall forecast and  said he                                                               
is, "Trying  to model those numbers."  He asked if 75  percent of                                                               
the $650-million mineral royalties in  2016 would be put into the                                                               
earnings reserve.                                                                                                               
ATTORNEY GENERAL RICHARDS answered yes.                                                                                         
SENATOR  WIELECHOWSKI asked  if 100  percent of  the $172-million                                                               
production taxes  also goes  into the  Earnings Reserve  and then                                                               
the dividend is calculated by dividing by two.                                                                                  
ATTORNEY GENERAL  RICHARDS corrected that only  the royalties are                                                               
divided by two.                                                                                                                 
SENATOR WIELECHOWSKI  asked if the  dividend is  calculated based                                                               
on only the royalties.                                                                                                          
ATTORNEY GENERAL RICHARDS answered yes.                                                                                         
SENATOR  WIELECHOWSKI asked  if the  royalties were  roughly $500                                                               
million would half of that goes to dividends.                                                                                   
ATTORNEY GENERAL RICHARDS answered yes.                                                                                         
SENATOR WIELECHOWSKI divided $250  million by 750,000 Alaskans to                                                               
get a total of $300 to $400 for a dividend.                                                                                     
COMMISSIONER HOFFBECK  clarified that  the 50 percent  number was                                                               
of the total  royalties. If oil prices remain at  $30 per barrel,                                                               
the dividend will be low.                                                                                                       
SENATOR  WIELECHOWSKI  asked  if  under the  2016  forecast,  the                                                               
dividend would have been about $300 to $500.                                                                                    
COMMISSIONER HOFFBECK answered yes.                                                                                             
SENATOR  COGHILL  voiced  concern  about  shifting  risk  to  the                                                               
Permanent Fund  to stabilize government.  He asserted  that there                                                               
has to be a balance.                                                                                                            
CHAIR STOLTZE opined  that the questions from  the committee were                                                               
educational and not confrontational.                                                                                            
SENATOR  MCGUIRE agreed  with Senator  Coghill.  She opined  that                                                               
there has  to be a  conversation with  the public on  the state's                                                               
cash flow.  She pointed  out that if  royalties are  connected to                                                               
the PFD check,  a new chapter is created in  Alaska where the PFD                                                               
absorbs the risk,  the amount of government take  will be lowered                                                               
and it  will be  less stable.  She remarked  that there  are four                                                               
versions of using the state's  wealth to fund government that all                                                               
treat the PFD differently.                                                                                                      
10:09:14 AM                                                                                                                   
ATTORNEY GENERAL  RICHARDS said both the  governor's proposal and                                                               
Senator McGuire's proposal can accommodate  any number of ways to                                                               
calculate the dividend,  but there are consequences  that must be                                                               
considered depending on the amount of  money that would go to the                                                               
general fund  versus to  dividends and the  timing of  those cash                                                               
SENATOR  COGHILL  remarked  that  discussions  on  the  level  of                                                               
services  the  state  should  provide  and  on  how  the  state's                                                               
sovereign wealth  will be  used to  stabilize government  will be                                                               
10:12:36 AM                                                                                                                   
ATTORNEY   GENERAL  RICHARDS   discussed   how   the  state   has                                                               
historically  had  a  fiscal  rule   for  saving  30  percent  of                                                               
royalties, but there has been no  fiscal rule for spending out of                                                               
the  Permanent  Fund. In  researching  fiscal  rules for  how  to                                                               
spend, the economic research group  and the administration looked                                                               
at two  ways to do so.  One method is to  consider the percentage                                                               
of market  value (POMV),  which is  sustainable and  will protect                                                               
the value of  the fund. The other method is  what the APFPA does,                                                               
the fixed method that treats the savings as an annuity.                                                                         
He highlighted the attributes and risks  of a POMV versus a fixed                                                               
draw. The  amount that  comes out of  the POMV  fund self-adjusts                                                               
and the risk  lies with the state budget. With  a fixed draw, the                                                               
risk lies with the PFD and  provides stability for the budget. He                                                               
added  that  the  governor's plan  builds  in  a  periodic-review                                                               
mechanism as well.                                                                                                              
He showed  a graph of  year-to-year budget volatility  under both                                                               
schemes, which  showed more volatility  in the budget  under POMV                                                               
and less volatility  in the budget under a fixed  draw. He stated                                                               
that the Governor's plan maintains  that the state should use its                                                               
sovereign  wealth   assets  to   buffet  volatility   by  putting                                                               
petroleum revenues  into them and  then drawing out  a percentage                                                               
or fixed draw.                                                                                                                  
He  stressed  that  the  math  calculations  for  POMV  get  very                                                               
complicated and  a periodic  review is needed  for the  amount of                                                               
the POMV  draw. He  cautioned that  the POMV  method needs  to be                                                               
done on the value of Permanent Fund assets, less debt.                                                                          
10:17:47 AM                                                                                                                   
He set forth  that the Governor's plan is the  better one because                                                               
the POMV  plan, "Gets you most  of the way there  on a rule-based                                                               
framework,"  but it  does not  address the  long-term problem  of                                                               
oil-price  volatility;  it adds  revenue,  but  does not  address                                                               
volatility and  works when oil prices  are low, but not  when oil                                                               
prices are high.                                                                                                                
10:19:16 AM                                                                                                                   
CHAIR STOLTZE  suggested that a revenue/spending  limit mechanism                                                               
be included. He  asked if Attorney General  Richards was amenable                                                               
to his suggestion.                                                                                                              
ATTORNEY  GENERAL RICHARDS  offered  to look  at Chair  Stoltze's                                                               
CHAIR  STOLTZE opined  that  Alaskans would  be  amenable to  his                                                               
ATTORNEY  GENERAL  RICHARDS  replied  that  volatility  could  be                                                               
addressed in  a number of  ways: spending limits;  endowment draw                                                               
rules; or as in the Governor's plan, an annuity concept.                                                                        
SENATOR MCGUIRE voiced appreciation  for the discussion. She said                                                               
she has  considered a range  in SB 114  that would be  subject to                                                               
annual review  by a board  of financial experts. She  agreed with                                                               
building  in safety  measures. She  stated that  she thought  the                                                               
annuity concept would work.                                                                                                     
10:21:01 AM                                                                                                                   
ATTORNEY GENERAL RICHARDS  said that finding a way  to adjust the                                                               
POMV payment  up or  down as  needed is  challenging and  has not                                                               
been discovered.  He suggested using  a period review  unless the                                                               
formula could be determined.                                                                                                    
He reported  that the Governor's  annuity model assumes  that the                                                               
starting value of the Permanent Fund  (on the target date) is $55                                                               
billion and  includes $45  billion in the  corpus, $7  billion in                                                               
earnings reserve, and  a $3 billion transfer from the  CBR to the                                                               
earnings reserve in order to  ensure that the earnings reserve is                                                               
large  enough that  there is  a high  probability that  the state                                                               
will ride out  low probability, bad stock market  events, even if                                                               
they occur, to maintain a stable system.                                                                                        
He specified that  the financial model assumes  an inflation rate                                                               
of 2.25 percent. He listed  the total investment return rate over                                                               
10 years  at 6.9  percent and  the statutory  net income  at 6.01                                                               
10:24:22 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked if the  total value of  the Permanent                                                               
Fund was $49 billion and if the earnings reserve was included.                                                                  
ATTORNEY GENERAL  RICHARDS specified that the  Permanent Fund was                                                               
$49.175 billion.                                                                                                                
SENATOR WIELECHOWSKI asked  if the Permanent Fund  has dropped $6                                                               
ATTORNEY GENERAL  RICHARDS answered  that the Permanent  Fund has                                                               
dropped $3 billion because $3 billion  of it is the transfer from                                                               
the CBR.  He detailed  that the  end of  FY 16  was used  for the                                                               
projected ending value.                                                                                                         
SENATOR  WIELECHOWSKI asked  how  another drop  would affect  the                                                               
fund and if more would have to be pulled from the CBR.                                                                          
ATTORNEY GENERAL RICHARDS replied that  there are several ways to                                                               
think of  it and  one is  the raw numbers.  He said  reducing the                                                               
total  value  of the  fund  in  the  annuity calculations  by  $3                                                               
billion, the  sustainable draw would  be roughly reduced  by $100                                                               
SENATOR WIELECHOWSKI asked that  instead of pulling $3.3 billion,                                                               
$3.2 billion would be pulled out.                                                                                               
ATTORNEY  GENERAL RICHARDS  concurred with  Senator Wielechowski,                                                               
He emphasized the importance of  picking a target date. He shared                                                               
details of  the analysis  and the predicted  returns. He  said he                                                               
does  not  worry about  short-term  drop  offs, but  whether  the                                                               
earnings reserve is big enough to  preserve the POMV model or the                                                               
fixed-draw model. He set forth  that the $3-billion draw provides                                                               
a cushion.                                                                                                                      
10:27:57 AM                                                                                                                   
He  turned to  the  petroleum  model and  how  the  oil price  is                                                               
calculated. He  said for production  volumes and costs,  the same                                                               
forecast as the  Revenue Sources Book is used. He  noted that the                                                               
governor's  plan  used  the  Economic   Research  Group  for  the                                                               
modeling. He  specified that the mean  value of oil is  about $56                                                               
per barrel.                                                                                                                     
He summarized  that the  governor's plan  makes few  changes from                                                               
the  status  quo base  formula.  He  noted that  the  rules-based                                                               
framework is  constitutional in the  form of its savings  rule at                                                               
25 percent of royalties. He  detailed that approximately 35 years                                                               
ago the Legislature overlaid, on  top of a constitutional system,                                                               
a  statutory  system subject  to  change  by majority  vote.  The                                                               
statutory system  did a couple  of things:  inflation-proofed the                                                               
fund, provided for a dividend,  and was developed around the idea                                                               
that the Legislature  does not spend the  earnings reserve except                                                               
for  inflation-proofing  and  dividends;   even  though  it  only                                                               
required a  majority vote not  to follow the  rules-based system,                                                               
legislatures  did through  custom  and expectation.  He said  the                                                               
amazing outcome for the state  has resulted in having $49 billion                                                               
in savings.                                                                                                                     
ATTORNEY GENERAL RICHARDS  set forth that today,  SB 128 proposes                                                               
to slightly modify  the rules by adding an increase  of what goes                                                               
into  the fund  from  30  percent of  royalties  to  half of  the                                                               
royalties and all of the  production taxes, and devise a spending                                                               
rule  that  takes  money  out  of  the  fund  under  a  formulaic                                                               
calculation meant  to be sustainable  for general  fund spending.                                                               
He  opined   that  the  governor's   plan  is  not   complex,  is                                                               
understandable, and is a variation  of the existing plan with the                                                               
added spending rule.                                                                                                            
10:32:53 AM                                                                                                                   
CHAIR STOLTZE  announced that the presentation  would continue at                                                               
the next meeting.  He requested to hear  legal opinions regarding                                                               
SB 128.                                                                                                                         
ATTORNEY GENERAL RICHARDS agreed to provide them.                                                                               
10:36:47 AM                                                                                                                   
CHAIR STOLTZE noted that the next  referral of the bill is to the                                                               
Senate  Finance Committee.  He disclosed  that  the Senate  State                                                               
Affairs  Committee would  spend  several weeks  on  the bill  and                                                               
would plan  to hear from  the public  as well. He  suggested that                                                               
Attorney General Richards talk to  people that were architects of                                                               
the Permanent Fund.                                                                                                             
[SB 128 was held in committee.]