Legislature(2015 - 2016)BUTROVICH 205
02/23/2016 09:00 AM Senate STATE AFFAIRS
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SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS 9:31:15 AM CHAIR STOLTZE announced the consideration of SB 114. SENATOR LESIL MCGUIRE, sponsor of SB 114, related that the chair wishes to have a new committee substitute (CS) and she would talk about the points she would like to be included in that CS. She began by revisiting the five principles she had in mind when crafting SB 114: the solution should retain a dividend, reduce the volatility in the state budget, clearly expose the size and cost of government, create an enduring solution, and be simple and easy to implement. She noted that SB 114 is the only bill that guarantees a $1,000 dividend. It strikes a balance between the amount that goes into the general fund versus the amount that goes into dividends and benefits the people the most. She said SB 128 reduces volatility and does not purport to fill the $5.3 budget gap. She concluded that the bill is understandable. 9:36:13 AM She showed a graph depicting Alaska's fiscal situation comparing spending with how the state is paying for government. Most of the $5.2 billion in government costs is being paid for by savings. She highlighted the fiscal gap, noting that only $1.8 in revenue is being earned. 9:38:08 AM She listed the three proposals that have been introduced to the legislature, all of which use Permanent Fund earnings. CHAIR STOLTZE asked about a House version of SB 114. SENATOR MCGUIRE replied that HB 303 was introduced in the House. She noted that another option to access the corpus of the Permanent Fund is to offer a Constitutional Amendment, but it requires a vote in the next general election. Other options are to reduce spending and size and cost of government or to raise new revenue. She cautioned that the people will be angry if it comes to this process. 9:41:40 AM CHAIR STOLTZE commented that a Constitutional Amendment would be putting a legal structure on the process. SENATOR MCGUIRE concurred with Senator Stoltze. She said the discussion about the constitutionally-provided Permanent Fund and the statutorily-enacted ERA has been on-going for two decades. The legislature has declined to go into the ERA, however, there are differences about whether the fund and the ERA should be enshrined together in the constitution. She emphasized that there are only a few ways to reach a government above the size of $1.8 billion and the state cannot wait until the CBR and ERA are depleted to decide which ways to use. CHAIR STOLTZE said voters might be more inclined to vote for something after budget cuts are made first. SENATOR MCGUIRE emphasized the consequences of waiting. 9:45:12 AM She discussed other methods of reducing spending, size, and cost of government to match current revenues and raise new revenue, comparing current revenues and those raised under SB 128. She pointed out that there are limits to the amount raised and costs in setting up new taxes. She summarized that $3 billion in cuts would still be needed. She shared that all three proposals have been vetted in the Callen Report to the APFC Board, which analyzed the impact of the proposals to the Permanent Fund. Callen does not recommend needing major asset reallocations for the Permanent Fund for any of the three proposals and they predict that the fund should remain viable. CHAIR STOLTZE noted that the information was provided at the request of Senator McGuire. SENATOR MCGUIRE said the information lets everyone know that the plans do not erode the value of the fund. 9:47:51 AM She reviewed graphs of cash flow regarding how government is funded currently and how it would be funded under SB 114. She emphasized the simplicity of SB 114. CHAIR STOLTZE asked if SB 114 has had legal questions. SENATOR MCGUIRE noted no legal concerns with SB 114. She emphasized that every plan has pros and cons. She reiterated that SB 114 guarantees a $1,000 dividend, contains the potential upside of 75 percent of royalties, and is simple. 9:50:06 AM CHAIR STOLTZE pointed out that SB 128 requires a 3/4 vote to drain the CBR to protect it. SENATOR MCGUIRE agreed. She added that it also purports to create a new general fund, which is untested and has "sweep ability" and "retrieve ability" issues. She noted the legislature has generously inflation-proofed the corpus a total of $16 million. 9:52:10 AM She addressed how SB 114 guarantees the $1,000 dividend. She showed a graph of the history of PFDs. She highlighted what happens to the dividend if none of the Permanent Fund bills are adopted. She explained how the Percentage of Market Value (POMV) approach reduces the amount of volatility in the commodity of oil. She suggested including a spending cap of 120 percent and said she will offer it as an amendment. 9:54:33 AM She showed how the legislature has addressed inflation proofing by transferring a total of $16,235.5 million. She said under SB 114 there would be an additional 1.9 percent and it is a policy call whether or not to divide it between dividends and the cost of government or transfer it back to the corpus. She said she will propose an amendment such that when the total value of the ERA exceeds the target amount of four times the current year's transfer, the excess shall be transferred to the principle of the fund for inflation proofing. 9:56:01 AM She summarized the cost of doing nothing and how the PFD would be affected and what the budget reserves would look like. In FY19 - FY21 the legislature would have to make the decision whether to continue to pay a dividend or fund government. She opined that the legislature will act with a combination of budget cuts, changes to oil tax credits, and new revenues, as well as with a bill such as SB 114. SENATOR MCGUIRE concluded that SB 114 will add up to $2 billion to the general fund. It guarantees an annual $1,000 dividend, reduces volatility in the budget, grows the Permanent Fund, maintains buying power in the corpus of the fund, and maintains downward pressure on state spending. 9:59:20 AM CHAIR STOLTZE stated that the budget reduction should happen first before any of the plans are adopted. [SB 114 was held in committee.]