Legislature(2015 - 2016)BUTROVICH 205

02/02/2016 09:00 AM Senate STATE AFFAIRS

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
09:00:37 AM Start
09:01:10 AM SB128
10:13:47 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Continuation of Presentation by Governor's TELECONFERENCED
Commissioner Randall Hoffbeck & Attorney General
Craig Richards
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS                                                                     
9:01:10 AM                                                                                                                    
CHAIR  STOLTZE announced  the  consideration of  SB  128 and  the                                                               
continued  presentation  from  the administration  about  "Making                                                               
Appropriations from the Permanent Fund/Permanent Fund Dividend."                                                                
9:02:01 AM                                                                                                                    
RANDALL  HOFFBECK, Commissioner,  Alaska  Department of  Revenue,                                                               
Juneau,  Alaska, reviewed  how the  "draw" is  calculated in  the                                                               
petroleum  model  from  the  Department   of  Revenue  (DOR).  He                                                               
specified that in the petroleum  model, the oil price forecast is                                                               
based  on  the mean  value  from  probabilistic distribution  and                                                               
inputs a  range of prices for  each year, but uses  only a single                                                               
price,   "the  median,"   from  the   forecasting  session.   Oil                                                               
production volumes are based on forecasts depicted in the Fall-                                                                 
2015 Revenue  Sources Book. He specified  that production volumes                                                               
do not  take into account  undeveloped fields,  are conservative,                                                               
and use the shortcut model from DOR.                                                                                            
COMMISSIONER  HOFFBECK   explained  that  the  "draw"   would  be                                                               
calculated by using an annuity-like  fixed payment to the general                                                               
fund.  He noted  that the  starting  balance is  $55 billion.  He                                                               
detailed that there  are "inflows" each year,  such as investment                                                               
income,  100 percent  of  production taxes,  and  100 percent  of                                                               
royalties, both  from the  petroleum model.  He added  that there                                                               
are  also "outflows"  such  as expenses,  the  dividend, and  the                                                               
fixed draw  that is taken out  of the system until  2020 at which                                                               
point in time the draw begins to inflate going forward.                                                                         
CHAIR  STOLTZE  requested  that   more  information  be  provided                                                               
regarding when the draw inflates.                                                                                               
COMMISSIONER  HOFFBECK  clarified  that not  inflating  the  draw                                                               
until 2020 stabilizes expenditures.                                                                                             
He said  the $3.3  billion draw  can be  sustained as  an annuity                                                               
from the state's  financial and petroleum wealth.  He pointed out                                                               
that  the 2040  balance would  look like  the 2016  balance, plus                                                               
9:05:44 AM                                                                                                                    
He turned to the subject of  creating durability in the model. He                                                               
said the  model starts with  a target  balance of four  times the                                                               
prior  draw  and transfers  $3  billion  from the  Constitutional                                                               
Budget Reserve  (CBR) as  part of the  starting balance  of $11.6                                                               
billion  the first  year.  He noted  that the  FY  16 income  was                                                               
He stressed  that the Permanent  Fund itself is not  large enough                                                               
to sustain the draw without the  ability to work with the inflows                                                               
during  the  life of  the  modeling.  He  explained that  if  the                                                               
earnings reserve  is at the  target balance, then 100  percent of                                                               
production taxes and  50 percent of royalties  are deposited into                                                               
the corpus of the fund, which  then builds in strength. The other                                                               
50 percent of  royalties is deposited into  the earnings reserve.                                                               
He  detailed that  if the  earnings reserve  is under  the target                                                               
balance,  then up  to  100  percent of  production  taxes and  75                                                               
percent  of royalties  are deposited  directly into  the earnings                                                               
reserve in  order to build up  the size of the  earnings reserve.                                                               
He specified that  the only part that would flow  into the corpus                                                               
would be  the mandated 25  percent of royalties. If  the earnings                                                               
reserve exceeds the target, the  excess would be transferred back                                                               
to the corpus.                                                                                                                  
9:08:05 AM                                                                                                                    
SENATOR  COGHILL asked  that  Commissioner  Hoffbeck explain  the                                                               
math  regarding  the  draw  from  the  earnings  reserve  when  a                                                               
dividend is paid as well.                                                                                                       
COMMISSIONER  HOFFBECK  replied  that  the  dividend,  after  the                                                               
transfer, would  determine which direction the  monies would flow                                                               
at the start of the next year.                                                                                                  
SENATOR COGHILL summarized his understanding of the process.                                                                    
9:09:23 AM                                                                                                                    
SENATOR HUGGINS joined the committee meeting.                                                                                   
COMMISSIONER HOFFBECK reported on  the durability of the earnings                                                               
reserve  because of  the annuity  model. He  asserted that  there                                                               
would be  robust earnings-reserve cash  inflows and no  chance of                                                               
it going  to zero during  the life  of the modeling.  He reviewed                                                               
the cash  inflows: $3  billion transfer  from CBR,  statutory net                                                               
income, and petroleum revenue. He  said there would also be long-                                                               
lead adjustment opportunities such  as the 4-to-1 coverage ratio,                                                               
which  provides coverage  between the  four-year periodic  review                                                               
period, the periodic review itself,  robust modeling by staff and                                                               
the  McKenzie  and  Company,  and sufficient  time  to  react  to                                                               
SENATOR  COGHILL asked  whether the  modeling is  embedded in  SB
COMMISSIONER HOFFBECK  answered that  modeling won't  be embedded                                                               
in the bill, but would be presented to the Legislature.                                                                         
SENATOR COGHILL said the principles of modeling are important.                                                                  
COMMISSIONER  HOFFBECK  replied that  he  agreed.  He said  there                                                               
would  be a  standardized  review that  matches  the modeling  so                                                               
there is no opportunity to skew the data in the review period.                                                                  
CHAIR STOLTZE  commented on the  possibility of  a constitutional                                                               
amendment  to  define  it and  noted  that  the  administration's                                                               
consultant suggested  that the  constitutional amendment  was the                                                               
preferable route.                                                                                                               
9:12:11 AM                                                                                                                    
SENATOR  COGHILL  requested  clarification of  the  CBR  transfer                                                               
process and the  possible need for a constitutional  change or an                                                               
annual vote.                                                                                                                    
COMMISSIONER HOFFBECK said  he sees the $3 billion  transfer as a                                                               
one-time event.  He noted  that Mr. Milks  could talk  more about                                                               
CHAIR STOLTZE explained that the  CBR was established when voters                                                               
approved a  constitutional amendment  in 1990. He  specified that                                                               
SB 128  would take the  constitutionally protected money  and put                                                               
it into a straight majority spending account.                                                                                   
9:13:48 AM                                                                                                                    
COMMISSIONER  HOFFBECK  clarified  that  SB 128  would  move  the                                                               
monies into  either the  Permanent Fund  earnings reserve  or the                                                               
statutory budget reserve and would  not dismantle the CBR because                                                               
there  would  still  be  monies  that flow  into  it  from  legal                                                               
settlements and  audits on an  annual basis. He added  that there                                                               
is  also  a  potential  to  leave  some  money  in  the  CBR  for                                                               
unexpected events that might occur.                                                                                             
CHAIR STOLTZE  opined that  the legal requirement  is that  it is                                                               
repaid when  it is borrowed.  He said under the  governor's plan,                                                               
it  would  permanently  exit  that   requirement.  He  asked  how                                                               
Commissioner Hoffbeck sees it being repaid.                                                                                     
COMMISSIONER HOFFBECK deferred to Mr. Milks to answer.                                                                          
CHAIR STOLTZE called the strategy political and not legal.                                                                      
COMMISSIONER HOFFBECK said there  is an underlying legal argument                                                               
about what has to  be swept back into the CRB  versus what can be                                                               
kept  into the  earnings reserve.  The  bill does  not intend  to                                                               
change the repayment  structure; there would still be  a sweep of                                                               
funds back  to the CBR  after any given  year to repay  the debt.                                                               
The legislation does not see  the earnings reserve as a sweepable                                                               
CHAIR STOLTZE he  pointed out that the appropriation  can be done                                                               
by a simple majority.                                                                                                           
COMMISSIONER HOFFBECK agreed.                                                                                                   
SENATOR  WIELECHOWSKI noted  dueling legal  opinions and  said he                                                               
expects to see  a lawsuit. He asked what  the legal ramifications                                                               
of a lawsuit might be regarding this issue.                                                                                     
9:16:20 AM                                                                                                                    
SENATOR MCGUIRE joined the committee meeting.                                                                                   
9:16:45 AM                                                                                                                    
WILLIAM MILKS,  Assistant Attorney General, Alaska  Department of                                                               
Law,  summarized the  issue as  the question  whether or  not the                                                               
earnings  reserve  would  be  subject to  a  sweep.  He  provided                                                               
background on the four parts of the CBR: A, B, C, and D.                                                                        
He said  part A identifies monies  that go into the  CBR, such as                                                               
settlements of  disputes over  royalties and  related litigation.                                                               
The  other  three  parts  (B,  C,  and  D)  talk  about  how  the                                                               
legislature can  appropriate from  the CBR,  such as  by majority                                                               
vote, three-quarters vote,  and by payback (sweep)  into the CBR.                                                               
The latter is what is being discussed as it relates to SB 128.                                                                  
He explained that one Alaska  Supreme Court case analyzed the CBR                                                               
on the  question of what  is available for appropriation  and how                                                               
it  can be  appropriated.  Regarding the  payback provision,  the                                                               
court decision,  "Hickel vs. Cowper,"  concluded that there  is a                                                               
difference between the language  used in the constitution between                                                               
"B and  C, and  D." The  decision was clear  for D,  the "payback                                                               
provision,"  that  what must  be  paid  back  are monies  in  the                                                               
general fund available at the  end of the succeeding fiscal year.                                                               
The court was  clear that it was "general fund  only," not monies                                                               
in other  funds, and it  used the  earnings reserve account  as a                                                               
specific example; it said the  entire earnings reserve account is                                                               
available  by the  legislature to  appropriate,  but the  payback                                                               
provision is restricted to funds in the general fund. `                                                                         
He discussed  the current situation  where an  appropriation bill                                                               
transfers monies  from the  CBR to  the earnings  reserve account                                                               
and the question whether the  earnings reserve account is subject                                                               
to payback or  sweep. He said Department of  Law's (DOL) analysis                                                               
is  that it  is not  subject to  payback or  sweep, based  on the                                                               
plain language  of the constitution,  as "Hickel vs.  Cowper" has                                                               
informed  us. He  maintained  that  SB 128  does  not change  the                                                               
statute and  does not change  the fact that the  earnings reserve                                                               
account is  not in the  general fund. The provision  still exists                                                               
that funds  in the general fund  would be subject to  a sweep and                                                               
the earnings reserve would not.                                                                                                 
He said  the argument has been  raised that if the  nature of the                                                               
earnings  reserve  is changed  so  it  can  be used  for  general                                                               
government expenditures and  monies will be added to  it, that it                                                               
is possible the  court will change its mind. He  pointed out that                                                               
existing law  is that it  is not  subject to payback;  however, a                                                               
court could decide to change that.  He said DOL does not view the                                                               
earnings reserve as a dedicated account.                                                                                        
9:23:22 AM                                                                                                                    
MR. MILKS said  the first point that has been  raised is that the                                                               
monies would be used for  general government expenditures and DOL                                                               
does not think  that would change the analysis.  The second point                                                               
is that  monies will be appropriated  into it, so it  is not just                                                               
going  to  be  an  account  comprised only  of  income  from  the                                                               
Permanent Fund.  He admitted  that both points  are true,  but he                                                               
questioned whether  they were meaningful differences.  He pointed                                                               
out that  the legislature in  the past has appropriated  from the                                                               
CBR  and general  fund  to  other accounts,  such  as Power  Cost                                                               
Equalization funds and pension funds.                                                                                           
He concluded that DOL is comfortable with its analysis.                                                                         
9:25:20 AM                                                                                                                    
CHAIR STOLTZE noted  a potential problem mentioned  by the Office                                                               
of  Budget  and Management  and  the  need for  a  constitutional                                                               
"fix." He questioned the definition  of "fix." He argued that the                                                               
earnings reserve has been treated  like a general fund in several                                                               
ways. He  said he hoped to  see the past legal  decisions related                                                               
to this issue.                                                                                                                  
9:28:33 AM                                                                                                                    
SENATOR WIELECHOWSKI opined that the  issue of the "sweep" is one                                                               
issue  and   Mr.  Milks   has  a   different  opinion   than  the                                                               
Legislature's counsel  has. He  said the other  issue was  on the                                                               
fact that  money is being  deposited into the Permanent  Fund and                                                               
quoted from the Legislature's counsel as follows:                                                                               
     The  attorney general  has in  the past  concluded that                                                                    
     once money  is deposited  into the Permanent  Fund, the                                                                    
     money   may  only   be   used   for  income   producing                                                                    
     investments and  the Legislature  may not, even  if the                                                                    
     deposits  exceeded the  constitutional requirement  and                                                                    
     were  made with  the intent  that they  be retrievable,                                                                    
     transfer the money out of the Permanent Fund.                                                                              
He noted that  the Legislature's counsel sites a  1977 AG opinion                                                               
and compared the situation to today's situation.                                                                                
CHAIR   STOLTZE  added   that  there   were  inquiries   by  past                                                               
administration and  individual legislators  about the  process of                                                               
re-appropriations.  He said  he wished  to have  a discussion  on                                                               
that topic.                                                                                                                     
SENATOR  WIELECHOWSKI  requested  Mr.   Milks'  opinion  of  that                                                               
MR.  MILKS  stated  that  when money  is  appropriated  into  the                                                               
principal   of  the   corpus  of   the  Permanent   Fund  it   is                                                               
irretrievable. The difference  in SB 128 is that  it provides for                                                               
appropriating  money   into  the  earnings  reserve   account,  a                                                               
separate  statutory  account  comprised  only of  income  of  the                                                               
Permanent Fund. In "Hickel vs.  Cowper," the Alaska Supreme Court                                                               
identified  that  the  earnings   reserve  account  is  open  for                                                               
appropriation, so the Legislature can do so.                                                                                    
9:31:04 AM                                                                                                                    
SENATOR   WIELECHOWSKI  stated   that  he   thought  Mr.   Milks'                                                               
interpretation  was  a  fair;  however, it  is  the  opposite  of                                                               
legislative  counsel's  interpretation.  He   said  it  is  about                                                               
balancing  risk going  forward.  He voiced  concern  that SB  128                                                               
could be  found unconstitutional  at a  later date  after budgets                                                               
have been passed  and suggested that a  government shutdown could                                                               
MR. MILKS surmised that the outcome  of such a challenge would be                                                               
to have  the additional funds paid  back to the CBR.  He asserted                                                               
that the whole budget would not be deemed unconstitutional.                                                                     
SENATOR WIELECHOWSKI stated that there  are two points: the issue                                                               
of the  "sweep," and  the issue of  irretrievable funds  from the                                                               
Permanent Fund.                                                                                                                 
MR.  MILKS  reiterated that  the  reference  is talking  about  a                                                               
period  in  time  when  there was  no  earnings  reserve  account                                                               
established by  statute. He added  that the Alaska  Supreme Court                                                               
has already  said the earnings  reserve account is  available for                                                               
appropriation.  He  asserted  that  the plan  does  not  envision                                                               
placing money into  the corpus or the principal  of the Permanent                                                               
Fund and then removing it.                                                                                                      
SENATOR WIELECHOWSKI restated that he  is asking what impacts the                                                               
state would incur if the Department  of Law is not correct in its                                                               
interpretation.  He opined  that  all  appropriations made  under                                                               
this method are unconstitutional.                                                                                               
9:34:49 AM                                                                                                                    
MR. MILKS  repeated that if  the court  were to change  its mind,                                                               
all  additional  monies put  into  the  earnings reserve  account                                                               
would have to be returned to the CBR.                                                                                           
COMMISSIONER HOFFBECK  opined that having the  monies "swept" and                                                               
put back into the  CBR is not a fatal flaw  to the plan; however,                                                               
it does  mean that part  of the revenues  on an annual  basis are                                                               
going  to  have  to  come   from  the  CBR,  which  creates  some                                                               
uncertainty and  volatility in the  $3.3 billion draw  because it                                                               
will require a three-quarters vote.                                                                                             
CHAIR STOLTZE opined that the court system can be political.                                                                    
9:37:05 AM                                                                                                                    
SENATOR COGHILL stated  that he thought there  was agreement that                                                               
money going  into the corpus  of the Permanent Fund  stays there.                                                               
He said the  CBR is available with a three-quarters  vote and the                                                               
earnings  stay  within  the  CBR.  He  believed  that  using  the                                                               
earnings reserve was  appropriate, but adding the CBR  to it will                                                               
probably require an annual  three-quarters vote appropriation. He                                                               
said the  political pressure of  this policy matter is  great and                                                               
it comes down to a policy call.                                                                                                 
CHAIR STOLTZE  pointed out that part  D says a loan  is taken and                                                               
not an appropriation.                                                                                                           
SENATOR COGHILL added  that the approaches to  the Permanent Fund                                                               
versus the CBR are very different.                                                                                              
9:39:16 AM                                                                                                                    
SENATOR  WIELECHOWSKI noted  that from  a policy  perspective, SB
128 is a  huge change with constitutional issues.  He opined that                                                               
a  simpler method  would be  to  appropriate the  money from  the                                                               
earnings reserve every  time it is needed. He  questioned why not                                                               
use the simple route.                                                                                                           
COMMISSIONER  HOFFBECK  answered  that  the  change  creates  the                                                               
greatest amount of stability in  the draw. He reiterated that not                                                               
being able to move the CBR is not  a fatal flaw and have to do it                                                               
just out of the earnings reserve.                                                                                               
CHAIR STOLTZE  commented that misunderstanding or  confusion just                                                               
fuels skepticism.                                                                                                               
9:41:44 AM                                                                                                                    
COMMISSIONER  HOFFBECK  specified that  the  goal  is to  have  a                                                               
rules-based systematic  approach for using earnings  and not just                                                               
have a  random appropriation on  an annual  basis to fill  a void                                                               
from other incomes.                                                                                                             
SENATOR  MCGUIRE asked  for clarification  that  new monies  from                                                               
royalties placed in the CBR would not be subject to the "sweep."                                                                
9:43:18 AM                                                                                                                    
COMMISSIONER  HOFFBECK   replied  that  based  on   the  attorney                                                               
general's opinion, they are not subject to the "sweep."                                                                         
SENATOR MCGUIRE asked Commissioner  Hoffbeck to confirm that only                                                               
the CBR portion itself is subject to the "sweep."                                                                               
COMMISSIONER  HOFFBECK replied  that the  administration did  not                                                               
think the CBR portion was subject to the "sweep," either.                                                                       
SENATOR  MCGUIRE voiced  concern  about an  attempt  to grow  the                                                               
corpus  in  order  to  create stability  for  the  government  by                                                               
putting in  new royalties, etc.  She maintained that SB  128 sets                                                               
up a potential  problem for instability of the  state budget. She                                                               
opined  that "the  entire thing  is  potentially sweepable."  She                                                               
said  the  goal  is  to  look  for  stability  and  to  eliminate                                                               
volatility, so the differing opinions need to be resolved.                                                                      
COMMISSIONER  HOFFBECK answered  that  the administration  agrees                                                               
and is willing to continue the conversation.                                                                                    
9:45:50 AM                                                                                                                    
He turned to the subject of  the new dividend process and how the                                                               
concerns of volatility and value relate  to it. He showed a graph                                                               
of  the historic  value  of  dividends and  said  that they  have                                                               
always  been   volatile.  He  point   out  that   dividends  have                                                               
fluctuated between $300 and $2100  based on stock market returns.                                                               
He  suggested that  the  governor's plan  will  not increase  the                                                               
volatility of the dividend, but  will decrease it to some extent.                                                               
He noted that the graph also shows  that there is no set value or                                                               
base value of the dividend.                                                                                                     
SENATOR  MCGUIRE  noted  the   importance  of  understanding  the                                                               
variation in  value of  the dividend. She  said lawmakers  have a                                                               
political challenge in that the  dividend has recently been high.                                                               
She agreed that there is  volatility built into the structure and                                                               
there would  be volatility  in a percent  of market  value (POMV)                                                               
plan and in plans that are royalty based.                                                                                       
9:49:51 AM                                                                                                                    
COMMISSIONER HOFFBECK reviewed the  formula the dividend is based                                                               
on. He said  the formula was a political negotiation  at the time                                                               
it was  established. He  detailed that  the dividend  consists of                                                               
the annualized  average of the  last five years of  statutory net                                                               
income, divided  in half,  and transferred  to the  dividend fund                                                               
where, after  adjustments, the fund  is divided by the  number of                                                               
COMMISSIONER   HOFFBECK   shared   the  Alaska   Permanent   Fund                                                               
Corporation's resolution in 2003 as follows:                                                                                    
        The Board recognizes that a POMV spending limit                                                                         
      methodology may necessitate changes to the Permanent                                                                      
     Fund Dividends.                                                                                                            
He pointed  out that  the formula will  change when  the earnings                                                               
are  used  for  anything  other than  paying  for  dividends  and                                                               
inflation proofing, as proposed by several bills.                                                                               
9:51:43 AM                                                                                                                    
SENATOR WIELECHOWSKI stated that  the governor's proposal assumes                                                               
the return on the Permanent Fund  will be between 6.5 percent and                                                               
7.5 percent. He  asked if the present dividend  formula was kept,                                                               
would the dividend's value be closer to $1,000 or $2,000.                                                                       
COMMISSIONER HOFFBECK  replied that if  there was a  flat return,                                                               
the dividend  would stay  closer to $2,000.  He pointed  out that                                                               
the reality was in 2016 the  6.5 percent return will be missed by                                                               
about  10  percent  in  addition to  the  Permanent  Fund  having                                                               
negative earnings  for the year.  He said there will  be downward                                                               
pressure on the dividend.                                                                                                       
SENATOR  WIELECHOWSKI asked  if the  earnings reserve  ever loses                                                               
money. He noted  that the earnings reserve is  invested just like                                                               
the regular corpuses.                                                                                                           
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR WIELECHOWSKI  provided an  example of  $7 billion  in the                                                               
earnings reserve  with a  loss of  10 percent  in the  corpus and                                                               
inquired if  that meant a  loss of  $700 million in  the earnings                                                               
COMMISSIONER HOFFBECK answered yes.                                                                                             
SENATOR WIELECHOWSKI  asked whether  about $1  billion of  the $7                                                               
billion is spent for inflation proofing.                                                                                        
COMMISSIONER HOFFBECK said yes.                                                                                                 
SENATOR WIELECHOWSKI asked if there  is inflation proofing in the                                                               
governor's plan.                                                                                                                
COMMISSIONER HOFFBECK answered that  the inflation proofing is in                                                               
the modeling and  varies by year. He said the  fund would grow at                                                               
the rate of inflation over time.                                                                                                
9:53:59 AM                                                                                                                    
SENATOR WIELECHOWSKI addressed the governor's plan as follows:                                                                  
     If we  were just to look  at the actual plan  today. So                                                                    
     you've got $7 billion in  the earnings reserve, you are                                                                    
     taking   $3.3  billion   draw,  you've   got  inflation                                                                    
     proofing of  roughly $1  billion, that's  $4.3 billion,                                                                    
     you've  got another  $1 billion  for dividends,  that's                                                                    
     $5.3  billion, and  you've just  lost $700  million. So                                                                    
     you've  got a  $1  billion cushion  and  you've got  $1                                                                    
     billion in the earnings reserve?                                                                                           
COMMISSIONER HOFFBECK replied as follows:                                                                                       
     Because under  this plan  there would  not be  a direct                                                                    
     inflation-proofing  payment, that  $1 billion  would go                                                                    
     away.  Certainly  under  our   plan,  the  governor  is                                                                    
     guaranteeing  a $1,000  dividend, so  that's more  like                                                                    
     $700  million  for  the dividend.  So  essentially  you                                                                    
     would be  drawing out  the $3.3  billion draw  plus the                                                                    
     $700 million  dividend, so about  $4 billion  from that                                                                    
     $7  billion,  plus  you  would  have  whatever  inflows                                                                    
     occur; because it is  under statutory net-income, there                                                                    
     will  still be  inflows  into the  fund  even in  years                                                                    
     where we lose.                                                                                                             
SENATOR WIELECHOWSKI asked if inflows are things like dividends.                                                                
COMMISSIONER HOFFBECK  answered yes and added  that inflows would                                                               
include "rents and royalties."                                                                                                  
SENATOR  WIELECHOWSKI reviewed  his calculations  and asked  what                                                               
would happen  if the stock  market had a  bad year and  there was                                                               
nothing left in the earnings reserve.                                                                                           
9:55:50 AM                                                                                                                    
COMMMISSIONER  HOFFBECK explained  that under  the plan  when the                                                               
balance  is  below  a  four-times  draw,  all  of  the  petroleum                                                               
production tax  and royalties would  also flow into  the earnings                                                               
reserve, as well as the Permanent Fund statutory income.                                                                        
SENATOR  WIELECHOWSKI   asked  if  there  was   $150  million  in                                                               
production taxes this year.                                                                                                     
COMMISSIONER HOFFBECK  replied that there was  more in royalties.                                                               
He stressed  the need  to make the  initial $3.3  billion deposit                                                               
into the CBR to provide stability in the early years.                                                                           
CHAIR STOLTZE  expressed that he  would be interested to  see the                                                               
governor's CBR strategy.                                                                                                        
9:57:17 AM                                                                                                                    
SENATOR  HUGGINS commented  that his  constituents are  concerned                                                               
about spending state money on budget consultants.                                                                               
COMMISSIONER  HOFFBECK replied  that Senator  Huggins' point  was                                                               
CHAIR  STOLTZE pointed  out that  the committee's  discussion was                                                               
friendly and in good faith.                                                                                                     
9:59:22 AM                                                                                                                    
SENATOR  WIELECHOWSKI asked  if  the dividend  calculation is  50                                                               
percent of the  net royalties and is not based  on the production                                                               
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR WIELECHOWSKI  calculated that the 2016  fall forecast was                                                               
$650 million  in royalties,  divided by  two equals  $325 million                                                               
being available.                                                                                                                
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR  WIELECHOWSKI  continued  that  the  $325  million  would                                                               
equate to a $500 dividend.                                                                                                      
COMMISSIONER HOFFBECK answered correct.                                                                                         
SENATOR WIELECHOWSKI  said moving  forward to 2017,  the dividend                                                               
would be approximately $550.                                                                                                    
COMMISSIONER  HOFFBECK  answered  that   the  dividend  would  be                                                               
approximately $600.                                                                                                             
SENATOR  WIELECHOWSKI  asked  if  the plan  is  to  increase  the                                                               
dividend to $1,000 every year or just in the first year or two.                                                                 
COMMISSIONER HOFFBECK answered just the first year.                                                                             
SENATOR WIELECHOWSKI noted that  he was referring to calculations                                                               
on page 29 of the Revenue Sources book.                                                                                         
10:01:05 AM                                                                                                                   
COMMISSIONER  HOFFBECK clarified  that  Senator Wielechowski  was                                                               
referring to a table on the  unrestricted part of the royalty, so                                                               
an additional 25 percent or 30 percent would have to be added.                                                                  
SENATOR WIELECHOWSKI asked if the  table was net calculations. He                                                               
requested a chart of PFD projections under the governor's plan.                                                                 
COMMISSIONER HOFFBECK agreed to provide the chart he requested.                                                                 
CHAIR STOLTZE  stated that he appreciated  Senator Wielechowski's                                                               
request and agreed that the public should be informed.                                                                          
SENATOR WIELECHOWSKI asked for a chart  with a 6.5 percent to 7.5                                                               
percent return versus the current dividend calculations.                                                                        
COMMISSIONER HOFFBECK agreed to provide the chart.                                                                              
He explained  that the  Governor's plan is  one way  to calculate                                                               
the  dividend   and  is   "written  in   pencil."  He   said  the                                                               
administration was open to other  ways to calculate the dividend.                                                               
He  pointed  out  that the  administration's  original  plan  was                                                               
adopted  from Senator  McGuire's plan,  which they  believed tied                                                               
the dividend to the economic health  of the state and made sense.                                                               
He  reviewed  a  variety  of  methods  and  reiterated  that  the                                                               
administration  was  open to  suggestions.  He  concluded that  a                                                               
dividend that  is pro-cyclical  with the  economic health  of the                                                               
state is the goal.                                                                                                              
10:04:53 AM                                                                                                                   
SENATOR   MCGUIRE   thanked   Commissioner   Hoffbeck   for   the                                                               
presentation  and noted  that her  version  of the  bill will  be                                                               
presented  on   Thursday.  She  echoed   Commissioner  Hoffbeck's                                                               
sentiments and  said the point is  to get to a  structure that is                                                               
less  volatile,  more predictable,  and  more  reflective of  the                                                               
state's  true economic  health.  She stressed  the importance  of                                                               
linking the PFD to the royalties.                                                                                               
CHAIR STOLTZE asked Mr. Milks to respond to the legal opinions.                                                                 
10:07:31 AM                                                                                                                   
MR. MILKS related  that there are over 200-legal  opinions on the                                                               
Permanent Fund.  He said the  department would pare them  down to                                                               
ones that are relevant to the direct issues.                                                                                    
CHAIR  STOLTZE noted  that he  was especially  interested in  the                                                               
ones that Attorney General Botelho  was involved with because Mr.                                                               
Botelho continues  to be  an advisor  with the  administration in                                                               
some capacity and sometimes more transparent than others.                                                                       
SENATOR  MCGUIRE  stated  that  the  intent was  to  look  for  a                                                               
thorough analysis that leads the  committee as to why elements of                                                               
past  attorney general  opinions are  debunked or  supported. She                                                               
specified  that  her focus  related  to  the "sweep  issue,"  the                                                               
viability of the  new fund structure and  its susceptibility from                                                               
a legal challenge that destabilizes the government.                                                                             
10:09:40 AM                                                                                                                   
SENATOR WIELECHOWSKI  did not know  if dueling  attorney opinions                                                               
could be  resolved at  the legislative level.  He set  forth that                                                               
the court  would ultimately  have the  final say.  He said  he is                                                               
more concerned about the impacts to  the state if the court finds                                                               
the bill unconstitutional.                                                                                                      
CHAIR STOLTZE suspected  that there was not a legal  opinion on a                                                               
scenario  that addressed  the radical  departure  proposed in  SB
128. He  stated that the committee  needs all of the  guidance in                                                               
making a  decision. He  noted that  the public  will weigh  in as                                                               
[SB 128 was held in committee.]                                                                                                 

Document Name Date/Time Subjects