Legislature(2015 - 2016)BUTROVICH 205
02/23/2016 09:00 AM Senate STATE AFFAIRS
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SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS 9:02:34 AM CHAIR STOLTZE announced the consideration of SB 128. 9:02:49 AM CRAIG RICHARDS, Attorney General, Office of the Attorney General, Department of Law, presented information on SB 128. CHAIR STOLTZE asked Attorney General Richards to address the title of bill, "The Dividend Protection Act." 9:04:14 AM ATTORNEY GENERAL RICHARDS stated that the governor's bill, SB 128, is not the only bill that aims to protect the Permanent Fund Dividend (PFD), but a bill like it is critical. He pointed out that by FY24 the Department of Revenue (DOR) predicts that there will be insufficient funds in the Constitutional Budget Reserve (CBR) and the Earnings Reserve Account (ERA) to pay for continued payments of dividends. It could happen as soon as FY 21 if there is no change to having to spend the state's savings to balance the budget. The bill will protect the PFD, as well as change the way that it is paid. ATTORNEY GENERAL RICHARDS said that was the logic behind the title of SB 128. He added that FY22 is when the ERA is expected to be depleted if the state spends at the current rate through the CBR, however, it could be even sooner. There is not exact certainty about the date that would occur. CHAIR STOLTZE inquired how budget cuts are figured in the formula. He noted concerns by Alaskans regarding budget cuts. 9:07:22 AM ATTORNEY GENERAL RICHARDS replied that he does not have DOR's revenue calculations under different scenarios. He concluded that the more the state closes the budget gap, through additional revenues or through additional budget cuts, the longer it will take to spend out the CBR and the ERA. He stressed that the Governor is looking forward to working with the House and the Senate on a budget package, including budget cuts, and is available to have that discussion with the legislature and individual legislators. He began a presentation in direct response to a request from the State Affairs Committee about how the PFD would look under different scenarios. The presentation is DOR's view of what it looks like under the status quo dividend and under SB 128, and potentially what it looks like under SB 114. He said they did not model Representative Hawker's bill. 9:09:20 AM He explained how to read the box plots in the charts in his presentation. He showed how the PFD is calculated under the status quo and as proposed in SB 128 and SB 114. Both bills allow calculations of dividends where, if the amount of the dividend is increased, the amount from a fixed payment or percent of market value (POMV) to the general fund is decreased. The goal is to figure out the balance between what should be paid as PFD's and what should stay in the Permanent Fund and be paid out to government operation year to year. 9:11:48 AM ATTORNEY GENERAL RICHARDS explained that under SB 128, this year's PFD would be a flat $1,000 paid out of the $1.4 billion appropriated last year. In the future, all royalties would be deposited in the Permanent Fund and 50 percent of that amount would pay the PFD every year. He understood that under SB 114, 75 percent of royalties collected by the state each year would go to the PFD, but there would be a floor of $1,000. If the floor is not met, the additional amounts needed would come out of the ERA. SENATOR MCGUIRE said that was correct. ATTORNEY GENERAL RICHARDS related that under the status quo, the PFD is based upon 21 percent of half of the earnings over a five-year average. It amounts to 21 percent of last year's realized earnings. He noted the importance of understanding that the formula uses realized earnings, not 50 percent of the Permanent Fund every year. 9:13:53 AM He showed a slide of projected dividend appropriations over the next eleven years. In about FY22 - FY24 it is likely there will not be sufficient funds under the status quo to pay dividends. He offered several low probability scenarios where this would happen. He added that the dividend is projected to grow on a real basis because the fund grows under the current formulation. It is slightly higher than actual inflation, but it will also experience volatility. 9:16:31 AM He showed a slide depicting projected dividends per person based on the current status quo. There will be limited funds available after using the ERA to cover the deficit once the CBR is depleted. He highlighted the projected dividend appropriation and projected PFDs per person under SB 128. The PFD would stay at about $1,000 for the next decade and then decrease to under $500 by 2040. He noted dividends would increase or decrease with the success or failure of resource development. The graph does not capture future production of oil and is conservative in nature. 9:20:57 AM ATTORNEY GENERAL RICHARDS showed the projected dividend appropriation and dividend per person under SB 114. This formula results in dividends that are 50 percent higher than those in SB 128. SB 114 also has a $1,000 floor, so additional funds needed will come out of the ERA. SENATOR MCGUIRE said that was correct. 9:22:37 AM ATTORNEY GENERAL RICHARDS explained more about the consequence of the dividend floor in SB 114. He predicted that additional funds will be needed from the ERA given the oil production forecast. He addressed consequences with having a floor and giving up the "upside" to guarantee the "downside." 9:24:45 AM CHAIR STOLTZE asked if SB 114 protects the PFD too much. ATTORNEY GENERAL RICHARDS replied it is a policy decision. The Governor thought having a dividend cap was a decent approach and tying it to royalties was a good approach, but combining the two was not a way the Governor wanted to go. He highlighted graphs that included projected dividends per person with a gas line - under SB 128 and SB 114. If there was a gas line there would be higher royalties under both scenarios. 9:26:54 AM He showed an analysis of potential increases in North Slope production in rate-comparable pools, using the 50 percent royalty dividend, under SB 128, and the impact per person. CHAIR STOLTZE thanked Attorney General Richards. 9:29:22 AM SENATOR MCGUIRE agreed with Attorney General Richards' assumptions. [SB 128 was held in committee.]