Legislature(2015 - 2016)BUTROVICH 205

02/16/2016 09:00 AM Senate STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Continuing Presentation & Discussion TELECONFERENCED
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled: TELECONFERENCED
Moved SB 127 Out of Committee
Moved SB 123 Out of Committee
         SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS                                                                     
9:23:13 AM                                                                                                                    
CHAIR STOLTZE  announced the  consideration of  SB 114.  He noted                                                               
that the bill has been previously heard.                                                                                        
9:23:38 AM                                                                                                                    
SENATOR LESIL MCGUIRE,  sponsor of SB 114,  reviewed the previous                                                               
presentation of the  bill. She began by reading  the following e-                                                               
     As an  Alaskan resident,  I've watched for  decades how                                                                    
     the Alaska  government has  mismanaged our  economy and                                                                    
     budget. With  the current chaos  on world  oil markets,                                                                    
     things  have reached  a  fever  pitch. Before  everyone                                                                    
     follows  through on  knee-jerk reactions,  I'd like  to                                                                    
     add  my voice  to the  din. First,  ignore the  idiotic                                                                    
     notions  by the  GCI lobby.  None of  it addresses  the                                                                    
     most fundamental  problem - your spending.  I had lunch                                                                    
     with then-Governor Parnell several  years back and told                                                                    
     him  that   excessive  capital  investment   is  stupid                                                                    
     because it not only  doesn't guarantee your growth, but                                                                    
     it guarantees  greater carrying cost at  the expense of                                                                    
     the budget. Math is simple.  At some point, some of you                                                                    
     will have to  learn how to do it.  Stop spending. Leave                                                                    
     the  Permanent Fund  Dividend  (PFD)  alone. Find  more                                                                    
     ways to  siphon funds.  Raiding the CBR  and the  PFD -                                                                    
     whatever - don't  do anything to solve the  root of the                                                                    
     problem,  and that  root  is undeniably  undisciplined,                                                                    
     unsustainable spending by the Alaska government.                                                                           
9:25:30 AM                                                                                                                    
She said she likes that email.  She stated she would prefer to be                                                               
anywhere talking about anything  but this particular subject. She                                                               
maintained that  she is a  messenger of the legislative  body who                                                               
decided last April  that a restructure of the  permanent fund was                                                               
necessary in order to stabilize  a basic level of government. She                                                               
said she considered many options and decided on SB 114.                                                                         
She  noted  that there  has  been  ongoing discussion  about  the                                                               
unsustainable size  and cost of government  by the administration                                                               
and the  legislature. She used  an example  of a family  that had                                                               
overspent  as   an  example.  She  stressed   the  importance  of                                                               
addressing this topic  now. She pointed out that SB  114 does not                                                               
attempt  to  address the  entire  deficit,  it only  attempts  to                                                               
stabilize the  volatility of the  commodity of oil and  to manage                                                               
the large, single asset of the Permanent Fund into perpetuity.                                                                  
9:28:27 AM                                                                                                                    
SENATOR  MCGUIRE addressed  the  GCI/Alaska's  Future lobby.  She                                                               
related the  history behind  sponsoring SB  114. She  pointed out                                                               
that  the budget  grew and  retracted depending  on the  price of                                                               
oil, times  the volume of oil.  She took into account  all of the                                                               
plans designed to  address the budget crisis and  decided that SB
114  was the  best  set of  tools to  address  that problem.  She                                                               
stated that SB 114 was drafted  in her office in conjunction with                                                               
economists, but with no one from the private sector.                                                                            
She said  that about 30 people  began to be interested  in SB 114                                                               
in August of 2015. One of the  people was Ron Duncan, CEO of GCI,                                                               
one   of  the   largest  private   sector  employers.   Those  30                                                               
individuals  formed a  group  made  up of  unions  and others  in                                                               
support  of  the bill.  She  emphasized  that  SB  114 is  not  a                                                               
private-sector driven  bill. She acknowledged  that it is  a good                                                               
sign when the private sector becomes interested in your bill.                                                                   
9:33:04 AM                                                                                                                    
She stated that she wants a PFD  and agrees with those who say to                                                               
leave it alone.  She addressed the history of  the Permanent Fund                                                               
and the  PFD and  commented on the  genius of  Governor Hammond's                                                               
plan, which created an enduring  source of revenue that converted                                                               
non-renewable  resources into  renewable resources  to be  shared                                                               
across future generations.                                                                                                      
9:35:11 AM                                                                                                                    
She  reported how  in 1977  the legislature  created a  Permanent                                                               
Fund designed  to reward longevity  and would have  paid dividend                                                               
checks to  pioneers of  Alaska. In 1982,  the U.S.  Supreme Court                                                               
determined that  the 1981 Zobel  v. Williams case was  correct in                                                               
that dividends  must be paid to  all, not just a  select group of                                                               
Alaskans. This  resulted in  the current PFD  from an  asset that                                                               
was originally $50 billion.                                                                                                     
9:38:50 AM                                                                                                                    
She said  her office analyzed  whether it was appropriate  to use                                                               
the Permanent Fund to help solve the deficit.                                                                                   
CHAIR  STOLTZE   added  that  the  Legislature   first  passed  a                                                               
statutory framework  for the Permanent Fund  and Governor Hammond                                                               
vetoed  it  in  deference  to  a  more  permanent  constitutional                                                               
9:40:58 AM                                                                                                                    
SENATOR MCGUIRE  clarified that the  statutory proposal  ended up                                                               
being  exactly what  the constitutional  amendment proposed.  She                                                               
emphasized  that   it  is  the   corpus  of  the  fund   that  is                                                               
constitutionally created  and protected and  it is  the statutory                                                               
overlay  that  created  the  current   method  of  paying  out  a                                                               
dividend. She opined  that she could propose a new  law to change                                                               
how the  dividend is paid out  in an attempt to  solve the budget                                                               
She said she first determined that  there was a problem of a $3.5                                                               
billion to  $4 billion  deficit. She  noted that  the Legislature                                                               
has enacted heavy  spending cuts over the last two  years and the                                                               
state has several savings accounts,  such as the Statutory Budget                                                               
Reserve, but  they will be  gone in  about two years.  She opined                                                               
that the  state cannot  wait and  hope for  high oil  prices. She                                                               
concluded that the price of  inaction now could be disastrous for                                                               
the state's future.                                                                                                             
9:43:58 AM                                                                                                                    
She  addressed "Alaska's  Fiscal Situation  This Year  (FY16)" by                                                               
showing a graph  of what Alaska is spending on  and how the state                                                               
is paying for it.                                                                                                               
CHAIR STOLTZE clarified his previous point.                                                                                     
SENATOR MCGUIRE said  there isn't a lawmaker that  will not agree                                                               
that the  corpus is constitutionally  protected and  the dividend                                                               
itself is the  basis of discussion by the  legislature, which has                                                               
the right  to determine if  and how  the dividend should  be paid                                                               
out and if an appropriate use of the corpus is necessary.                                                                       
She continued  to say  that a  restructure is  in order,  but the                                                               
process is not  going to be easy. She highlighted  the fact there                                                               
is only $1.06 billion coming in  from oil revenues to pay for the                                                               
$5.20 billion the state is spending.  She emphasized that it is a                                                               
revenue problem.                                                                                                                
9:46:50 AM                                                                                                                    
She  addressed the  cost  of doing  nothing.  She showed  another                                                               
graph  of  revenue  vs.  spending   under  the  status  quo.  She                                                               
highlighted the  fact that the PFD  would end in FY22  if nothing                                                               
is done and in the three  years proceeding FY22, the savings will                                                               
be able to  pay the dividend, but  it won't be able  to cover the                                                               
fiscal gap. When the  CBR and the ERA are gone,  there will be no                                                               
reserves left by FY20.                                                                                                          
9:50:23 AM                                                                                                                    
SENATOR  MCGUIRE shared  the principles  she  had in  mind in  SB
114's path  forward by retaining a  dividend, reducing volatility                                                               
in  the  budget, expose  the  size  and  cost of  government,  be                                                               
enduring, and be simple and easy to implement.                                                                                  
9:55:31 AM                                                                                                                    
She emphasized that  reducing the volatility of  the state budget                                                               
is an  important principle. She  maintained that SB 114  does not                                                               
purport to close the  budget gap; it is a part  of a fiscal plan.                                                               
The  most  important   principle  is  that  the   plan  last  for                                                               
9:57:31 AM                                                                                                                    
She explained  that SB 114  is not a  raid on the  Permanent Fund                                                               
because it cannot be touched  without a constitutional amendment.                                                               
SB 114 would  only draw funds from  the ERA. It is not  a way for                                                               
government to increase the budget and is not a dividend killer.                                                                 
She related that SB 114 is  a way to connect Alaskans directly to                                                               
their  share  of the  state's  natural  resources  and a  way  to                                                               
protect the  dividend in the future.  It is also a  way to ensure                                                               
that services people enjoy continue. She provided examples.                                                                     
10:00:20 AM                                                                                                                   
She addressed  the impacts of  selected options for  reducing the                                                               
deficit  by $100  million; they  show how  difficult budget  cuts                                                               
will be and their impacts.                                                                                                      
She  said  without  oil-tax  revenue  flowing  through  the  ERA,                                                               
available  general funds  will continue  to swing  with commodity                                                               
prices  and some  volatility will  remain unless  limitations are                                                               
put in place.                                                                                                                   
She  commented   that  she  expects  the   Senate  State  Affairs                                                               
Committee to pass the bill with  a spending cap or some method of                                                               
constraining  the  growth  of government  into  the  future.  She                                                               
suggested that  the appropriation not  exceed 120 percent  of the                                                               
previous year's draw.                                                                                                           
10:02:00 AM                                                                                                                   
She pointed  out that the reason  behind SB 114 is  because there                                                               
is a  revenue problem due  to basing the  budget on the  price of                                                               
oil per  barrel, times the  volume; it is volatile  and unstable.                                                               
SENATOR MCGUIRE questioned the probability  that oil prices would                                                               
rebound. She showed  graphs to reinforce how difficult  it is for                                                               
the Legislature to  balance the budget base on  oil forecast. She                                                               
noted that  she has data  on the  analysis of future  oil prices,                                                               
but   maintained   that   even  the   U.S.   Energy   Information                                                               
Administration has been far off  on its predictions. She spoke of                                                               
China's impact  on oil  prices, OPEC's loss  of power,  and shale                                                               
oil's impacts.                                                                                                                  
10:04:34 AM                                                                                                                   
She summarized  that oil price  projections have  been inaccurate                                                               
and the international oil market  is fundamentally different. The                                                               
state should not bet its future on oil prices.                                                                                  
She  addressed  what has  been  done  with  savings at  high  oil                                                               
prices. She dispelled the myths that  the state has not made cuts                                                               
nor saved,  but she agreed that  the state has not  saved as much                                                               
as it could have and therefore should include a spending cap.                                                                   
She showed a  graph of how the Legislature saved  during high oil                                                               
prices  - the  Statutory  Budget Reserve  and the  Constitutional                                                               
Budget Reserve - but those savings have now been depleted.                                                                      
10:06:49 AM                                                                                                                   
She turned  to how  the Legislature is  spending in  FY16, noting                                                               
that  the  capital  budget  was bare  bones  and  reflected  only                                                               
federal  matches. She  described how  bond rating  is determined.                                                               
She pointed out that the two  largest parts of government are the                                                               
Department  of   Health  and  Social  Services   (DHSS)  and  the                                                               
Department of Education and  Early Development (DEED), predicting                                                               
that some changes will be  needed; however, if every employee was                                                               
cut  in those  two departments,  it  would not  solve the  budget                                                               
CHAIR STOLTZE noted  that there was one large  capital expense, a                                                               
school in Kivalina.                                                                                                             
10:09:14 AM                                                                                                                   
SENATOR MCGUIRE addressed  the potential of new  revenue from the                                                               
sustainable  Alaska plan.  Even together,  all new  revenues will                                                               
not  close the  fiscal  gap. She  maintained  that Alaska  cannot                                                               
close the gap  with cuts alone or new  broad-based revenue alone,                                                               
and a  sound fiscal  solution will be  necessary -  involving the                                                               
Permanent Fund.                                                                                                                 
10:11:10 AM                                                                                                                   
SENATOR  MCGUIRE highlighted  the spending  impact from  the PFD,                                                               
noting it is the single largest budget item.                                                                                    
She listed  the important advantages  of SB 114, noting  that the                                                               
bill is  simple. She set forth  that the bill leaves  the general                                                               
fund, CBR,  the public  school trust fund,  exactly as  they are;                                                               
the Permanent Fund remains enshrined  in the constitution and its                                                               
corpus is protected;  the ERA is left exactly as  it is; and only                                                               
the payout is changed.                                                                                                          
She described  the change  to the royalty  percentage in  SB 114.                                                               
Currently,  roughly  75  percent  of  royalties  from  rents  and                                                               
royalties from  future oil  and gas  development goes  to general                                                               
fund  and 25  percent goes  to the  Permanent Fund.  SB 114  will                                                               
change that to  25 percent to GF and 75  percent to the Permanent                                                               
Fund, and the PFD will come out of a statutorily created fund.                                                                  
10:14:47 AM                                                                                                                   
CHAIR STOLTZE  pointed out that it  is the central feature  of SB
SENATOR MCGUIRE agreed. She asserted that  the bill is a shift in                                                               
the way  Alaskans will understand  and appreciate their  share of                                                               
the  non-renewable  resources of  the  state.  She stressed  that                                                               
Alaskans will  become involved  in the debate  about oil  and gas                                                               
10:16:20 AM                                                                                                                   
She discussed the  percentage of market value  (POMV) payout that                                                               
will be  included in SB  114. She detailed  that the payout  is a                                                               
draw of 5  percent from the ERA to the  general fund to stabilize                                                               
the cost of basic government services.  The amount of the draw is                                                               
negotiable by the Legislature.                                                                                                  
She  explained that  the removal  of the  general fund  inflation                                                               
proofing that would take place under SB 114.                                                                                    
10:18:43 AM                                                                                                                   
CHAIR  STOLTZE noted  that Ms.  Rodell could  provide information                                                               
related to that.                                                                                                                
SENATOR  MCGUIRE said  other changes  made by  SB 114  related to                                                               
dividend  source calculations.  She offered  two scenarios  as to                                                               
the dividend and GF amounts and timing.                                                                                         
10:20:26 AM                                                                                                                   
CHAIR STOLTZE  said the intent  of the  committee is to  move the                                                               
bills  forward   and  let  other  committees   make  changes.  He                                                               
questioned some of the constitutional assumptions.                                                                              
SENATOR  MCGUIRE questioned  whether new  fund sources  that have                                                               
been  created  can   be  removed  at  a  later   date.  She  said                                                               
"retrievability" and "sweepability" are untested points.                                                                        
CHAIR  STOLTZE  questioned the  legality  of  de facto  dedicated                                                               
funds.  He  said the  bills  are  complicated, but  deserving  of                                                               
10:23:47 AM                                                                                                                   
ANGELA   RODELL,  Executive   Director,  Alaska   Permanent  Fund                                                               
Corporation,  Juneau,   Alaska,  provided  an  overview   of  the                                                               
Permanent Fund.                                                                                                                 
CHAIR  STOLTZE   asked  what  the  corporation's   philosophy  on                                                               
inflation proofing is.                                                                                                          
MS. RODELL explained  that inflation proofing came  into being in                                                               
1982-1983  and  was  designed  when   the  corporation  was  only                                                               
investing  in fixed-income  assets, it  was designed  to preserve                                                               
the purchasing  power of the corpus  of the fund. Over  the years                                                               
the  legislative approved  list  of investments  changed, and  in                                                               
2005  the   Legislature  recognized   the  need  to   remove  the                                                               
legislative  list altogether  and to  give the  authority to  the                                                               
Board of  Trustees. The current  Permanent Fund  asset allocation                                                               
consists  of  80  percent self-inflation  proofing  funds;  their                                                               
market value  already incorporates the concept  of inflation. She                                                               
detailed that inflation  proofing as designed forty  years ago is                                                               
not as necessary today.                                                                                                         
10:25:55 AM                                                                                                                   
She noted  that the constitution  is very  simple and clear  - to                                                               
invest the income,  of which, will be moved to  the general fund.                                                               
After that  the ERA was  created, the  only way the  corpus gains                                                               
wealth is  through the receipt  of minerals and  royalty revenues                                                               
it is  entitled to and  any other appropriations  the Legislature                                                               
and the governor  move back into it. She  said inflation proofing                                                               
has  become the  only way  for  the corpus  to build  up its  own                                                               
wealth, although  it is  no longer  necessary for  preserving the                                                               
purchasing power. She offered to provide an example.                                                                            
SENATOR  MCGUIRE added  that the  Legislature  has deposited  new                                                               
wealth of  about $1  billion every  year over  the last  20 years                                                               
into the Permanent Fund to help it grow.                                                                                        
CHAIR  STOLTZE  asked how  much  has  been both  constitutionally                                                               
appropriated and statutorily appropriated.                                                                                      
10:27:55 AM                                                                                                                   
MS. RODELL reported that the  constitutionally mandated amount is                                                               
roughly $25  billion to $26  billion and the amount  of inflation                                                               
proofing and extra deposits is slightly over $16 billion.                                                                       
She used  an example of a  blueberry pie to explain  how money is                                                               
moved in and out of the ERA. She detailed as follows:                                                                           
     When we buy  that pie, we take a portion  of the corpus                                                                    
     and a portion  of ERA to buy that pie,  it is roughly a                                                                    
     75 percent/25 percent  split. If the pie is  $20 we are                                                                    
     going to take $5 from the  ERA and $15 from the corpus.                                                                    
     Ten  years later  it is  an old  pie, but  it is  still                                                                    
     worth something and  we want to sell it  and it's worth                                                                    
     $40.  We sell  it at  $40,  putting $15  back into  the                                                                    
     corpus because  that's what the corpus  contributed and                                                                    
     the  balance of  $25  would all  go  into the  earnings                                                                    
She said if you  want to buy another pie, but  now they cost $25,                                                               
it will cost $17 dollars  from the corpus. Inflation proofing has                                                               
built up the wealth and allowed  a mechanism for the fund to keep                                                               
buying investments and participating to  the same degree. The ERA                                                               
continues to  build. She specified that  the distribution formula                                                               
determines the  size of  the dividend and  50 percent  remains in                                                               
the account.                                                                                                                    
10:30:47 AM                                                                                                                   
SENATOR  WIELECHOWSKI   requested  a   chart  of  how   much  the                                                               
legislature appropriated  for inflation proofing and  how much it                                                               
has  impacted the  dividend over  the  years. He  asked what  the                                                               
impacts  would be  if the  legislature  stops inflation  proofing                                                               
over the next ten years.                                                                                                        
MS. RODELL  explained that  the dividend is  paid first  and then                                                               
the inflation  proofing is done  and the  balance is left  in the                                                               
SENATOR MCGUIRE  did not  think the  Legislature intends  to stop                                                               
the inflation  proofing of  the corpus. She  asked Ms.  Rodell to                                                               
comment on POMV and what a  sustainable amount would be and if it                                                               
could help inflation proof the corpus.                                                                                          
10:33:17 AM                                                                                                                   
MS.  RODELL  said  at  this   point  her  intent  is  to  provide                                                               
information as the debate continues  because the board has a very                                                               
simple mission to  manage the corpus of the fund.  She noted that                                                               
there were  many good discussions  and it will be  interesting to                                                               
see  the outcome  at  the  end. She  said  accounting rules  have                                                               
changed over the years since  the fund was created. She explained                                                               
the challenges  of moving unrealized  gains and losses  and their                                                               
decision to  stick with  statutory net income.  Back in  2004 the                                                               
board  passed  a  resolution  in   support  of  a  constitutional                                                               
amendment for POMV in order  to simplify it. The board recognizes                                                               
the value of  the entire fund and moves over  an available amount                                                               
by a  POMV percentage.  The Legislature then  has that  amount to                                                               
appropriate as  it sees fit,  including whether  or not to  pay a                                                               
dividend. The  POMV has advantages because  it allows recognition                                                               
of a  number of different  types of asset classes.  The challenge                                                               
of not having a constitutional  amendment is recognizing that you                                                               
only can  spend what is in  the reserve earnings account  and the                                                               
corpus cannot be touched. Under  a constitutional amendment there                                                               
would be an easier recognition of all the earnings.                                                                             
10:36:59 AM                                                                                                                   
CHAIR STOLTZE countered  that there could be  more limitations on                                                               
how the other funds were spent.  He did not think the Legislature                                                               
was ready to push a constitutional amendment.                                                                                   
MS. RODELL  clarified that she  was speaking of a  resolution the                                                               
board passed twelve years ago. She said it is a tough question.                                                                 
CHAIR STOLTZE  appreciated the information  and the value  of the                                                               
depoliticized trustees.                                                                                                         
MS. RODELL  noted that  the trustees are  very interested  in the                                                               
discussions and how they will affect their management decisions.                                                                
SENATOR WIELECHOWSKI said he has  never seen the board testify in                                                               
support of  a policy change. He  stated that he did  not want the                                                               
board to  become politicized,  but to  manage the  Permanent Fund                                                               
for the maximum  value for Alaskans. He asserted  that having the                                                               
board take part in the debates would be dangerous.                                                                              
10:40:14 AM                                                                                                                   
SENATOR MCGUIRE  clarified that  she asked  Ms. Rodell  to attend                                                               
the meeting as a resource for  the committee. She said Ms. Rodell                                                               
was clear  in that she  does not  endorse a particular  plan, but                                                               
would  provide data.  She  concluded that  the  fund is  Alaska's                                                               
single largest  asset and how it  is managed is a  matter for all                                                               
Alaskans. She  said she is open  to finding out that  best way to                                                               
inflation proof the fund.                                                                                                       
CHAIR STOLTZE recalled when Representative  Red Boucher chaired a                                                               
special  committee called  the  Committee on  the  Future of  the                                                               
Permanent Fund.  He said Representative  Boucher had a  vision of                                                               
increasing the fund to $50 billion without touching it.                                                                         
10:43:35 AM                                                                                                                   
CHAIR STOLTZE held SB 114 in committee.