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F I S C A L I M P A C T R E P O R T

SPONSOR Saavedra

ORIGINAL DATE

LAST UPDATED

1/21/06

1/23/06 HB 41

SHORT TITLE Severance Tax Permanent Fund Transfer

SB

ANALYST Schardin

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

125,000

Non-Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

1,175 Recurring General Fund

125,000

Non-Recurring Severance Tax

Permanent Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to HB47 and SB66.

SOURCES OF INFORMATION

LFC Files

Responses Received From

State Investment Council (SIC)

Department of Finance and Administration (DFA)

SUMMARY

Synopsis of Bill

House Bill 41 would transfer $125 million from the general fund to the severance tax permanent

fund (STPF) at the end of FY06.

House Bill 41 – Page 2

FISCAL IMPLICATIONS

Transferring $125 million from the general fund to the STPF would reduce the FY07 transfer to

general fund reserves by $125 million. The LFC currently projects general fund reserves to total

$1.044 billion at the end of FY06. This amount includes $352.5 million in the general fund oper-

ating reserve, $137.1 million in the appropriation contingency fund, $83.9 million in the tobacco

permanent fund, and $470.3 million in the tax stabilization reserve. Both the LFC and the gover-

nor have adopted a target of keeping general reserves at 10 percent of recurring appropriations,

which equals $471 million in FY06. Transferring $125 million to the STPF would reduce general

fund reserves to a level of $918.8 million, or 19.5 percent of recurring appropriations.

Transferring $125 million from the general fund to the STPF would increase the STPF corpus by

$125 million. The average market value of the STPF at the end of the last five calendar year’s is

the base for 4.7 percent distributions to the general fund, so it will take five years for general

fund distributions from the STPF to fully reflect the injection to the STPF corpus. Increasing the

market value by $125 million during CY2006 would increase STPF distributions by $1.2 million

in FY08, $2.4 million in FY09, $3.8 million in FY10, $5.2 million in FY11, and $6.7 million in

FY12.

SIGNIFICANT ISSUES

Preservation of the STPF corpus depends on contributions to the fund from the severance tax

bonding fund (STBF) and earnings to the fund exceeding distributions from the STPF to the gen-

eral fund that are constitutionally mandated. Although contributions to the STPF exceeded $100

million in CY2000 and CY2001, contributions were only $32 million in CY02 and $1.3 million

in CY03. This decline in contributions to the STPF is due to proliferation of the severance tax

sponge bonds, which are used to prevent transfer of STBF balances to the STPF. By boosting

STPF contributions, House Bill 41 would help ensure preservation of the STPF corpus.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 41 relates to House Bill 47, which would transfer $200 million from the general fund

to the STPF. It also relates to Senate Bill 66, which would transfer $1 billion from the general

fund to the LGPF.

SS/yr