Legislature(2015 - 2016)WASILLA LIO
07/13/2016 01:00 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB5001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB5001 | TELECONFERENCED | |
SB 5001-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
1:07:45 PM
CHAIR STOLTZE announced the consideration of SB 5001 and noted
that this is the governor's self-described cornerstone
legislation. He relayed that he cleared the docket to hear this
bill, just as he did with the governor's original bill, and
assumed the committee would hear from Commissioner Hoffbeck, the
attorney general and all of the governor's financial experts.
"Unfortunately, the governor's administration has prioritized
other activities" he said, so the committee will have
teleconference participation from Assistant Attorney General
Pokon and Assistant Attorney General Milks. He stated that the
documents for this hearing include a letter from the
administration outlining the reasons that activities other than
the introduction of the governor's cornerstone bill are being
prioritized. He expressed hope that Ms. Pokon and Mr. Milks
would give a comprehensive review of the bill and respond to the
questions from the committee.
1:11:34 PM
SENATOR HUGGINS commented that if the revenue commissioner is
not slated to testify today, the appearance is that the governor
is not looking for a solution.
CHAIR STOLTZE added that he wanted the committee and the public
to know that "We have a few manacles and handcuffs on us as we
start this process." He noted that the governor does have a
representative from the Mat-Su Valley who is present.
SENATOR COGHILL advised that he was listening via
teleconference.
1:14:19 PM
EMMA POKON, Attorney IV, Special Assistant to the Attorney
General, Office of the Attorney General, Department of Law,
Anchorage, Alaska, speaking via teleconference, introduced
herself and Assistant Attorney General Bill Milks who will be
able to respond to questions on any legal issues that arise
today.
CHAIR STOLTZE asked, in lieu of the Department of Revenue, if
she will be providing information on the fiscal impacts of SB
5001.
MS. POKON replied that Commissioner Hoffbeck asked her to convey
his regrets for not being available this afternoon. She relayed
that he would be happy to meet with people in the Mat-Su Valley
and the delegation as time permits.
CHAIR STOLTZE asked if he characterized SB 5001 correctly when
he called it cornerstone legislation.
MS. POKON replied as follows:
The Alaska Permanent Fund Protection Act, in its
different variations over the course of the last few
sessions, has been an important bill [and] it
continues to be. It does provide the biggest part of
the switching to the fiscal situation today.
CHAIR STOLTZE asked Ms. Pokon to proceed with her presentation.
He reminded Ms. Pokon of the committee's constraints and warned
that deferred questions cause some problems, especially during a
special session.
1:16:32 PM
MS. POKON stated that SB 5001 will look familiar to the
committee as it mirrors the committee substitute for SB 128 that
passed the Senate. The committee heard both SB 128 and Senator
McGuire's SB 114 earlier this year, although the CS that came
out of Senate Finance is a little different from the bills that
this committee heard. She explained that her intention is to
provide a concise, technical overview and a few points on the
purpose of the legislation.
CHAIR STOLTZE asked her to remind the public of the overlying
purpose and philosophy of the bill and then address the
technical aspects.
MS. POKON said that as oil prices have remained low and the
state has drawn down the balance in the CBRF [Constitutional
Budget Reserve Fund], it has become evident that there will be a
need to draw from the Permanent Fund Earnings Reserve. As a
consequence, the administration wants to provide a framework for
doing that in a way that will support public services while
protecting the dividend and the fund; ultimately, that will set
the state on a more positive fiscal path. She stated that is the
purpose and the philosophy behind the bill in its original
formulation and the bill that is before you today; to achieve
this end, the basic provisions in the bill can be broken into
four categories: 1) a formula for calculating how much can be
withdrawn from the earnings reserve on a sustainable basis, 2)
deposits to the corpus of the fund, 3) a new dividend formula,
and 4) management provisions and authority of the Alaska
Permanent Fund Corporation.
1:19:29 PM
She said the formula starts with a sustainable percent-of-
market-value draw (POMV) from the earnings reserve to the
general fund; this is 5.25 percent of the average fund value in
the first 5 of the last 6 years. In the second step of the
formula the POMV calculation is reduced by $1 for each $1 over
$1.2 billion in production taxes and royalties that are
deposited in the general fund. She noted that this is a
provision that appeared in the State Affairs committee
substitute for SB 114 and laid the foundation for a compromise
bill that both the administration and members of the legislature
thought they could support. She said the idea is that as oil
prices recover and there is less need to rely on the permanent
fund, the withdraw would be reduced; this provision also
addresses the volatility issue, which is a key piece of the
legislation.
MS. POKON detailed that the second element of the bill addresses
deposits to the corpus of the permanent fund. First, the
royalties that are deposited to the corpus of the fund are
reduced to the constitutional 25 percent amount rather than the
current 30 percent. There is also a savings rule when oil prices
peak or the state has more money than expected; those peak
revenues would be divided between the corpus of the permanent
fund and the CBRF. If unrestricted revenues exceed the amount
the Legislature appropriates, the excess would be split between
the permanent fund corpus and the CBRF. Finally, the funds in
the earnings reserve that exceed four times the POMV draw will
be transferred back into the corpus.
1:23:19 PM
She said the third element of the bill is the dividend formula;
initially it sets the amount at $1,000 for three years and after
that the formula is based on 20 percent of the POMV draw and 20
percent of the royalties that are deposited in the general fund.
She said she believes the foundation for this provision came out
of CSSB 114 and shows that the committee's work was appreciated
and constructive. The administration believes that the 20/20
formula will produce dividends of about $1,000 into the future.
She said the fourth element relates to the Alaska Permanent Fund
Corporation's (APFC) authority. First, the authority to manage
and invest the CBRF will transfer from the Department of Revenue
to the Alaska Permanent Fund Corporation. Second, the APFC is
added to the list of agencies that are exempt from the
procurement rules. Finally, the corporation is able to adopt its
own regulations regarding procurement.
1:26:03 PM
She presented the following Sectional Analysis for SB 5001:
Section 1: Legislative intent to reevaluate the use of
permanent fund earnings in three years. This matches
with three years of $1,000 dividends, after which the
legislature will revisit the issue.
Section 2: Directs the Alaska Permanent Fund
Corporation (APFC) to adopt regulations similar to the
state's procurement code.
Section 3: Adds the APFC to the list of state agencies
that are exempt from the general state procurement
code.
Section 4: Transfers the authority to manage and
invest the constitutional budget reserve fund (CBRF)
from the Department of Revenue to the APFC.
Section 5: Requires the APFC to report the balance and
returns of the CBRF annually.
CHAIR STOLTZE asked audience members to raise their hand if they
did not understand or had a question about any of the
provisions.
1:27:49 PM
MS. POKON continued the sectional analysis as follows:
Section 6: Dedicated deposits of royalties to the
corpus are reduced from about 30 percent of the total
received to the constitutional minimum of 25 percent.
Currently, 25 percent of royalties from old leases and
50 percent of royalties from new leases are deposited
into the corpus, which comes out to about 30 percent
of total royalties.
Section 7: Requires the APFC to determine the net
income of the earnings reserve account (ERA) and
excludes unrealized gains or losses from the
definition of "net income." This is consistent with
current practice.
Section 8: (b) Provides the first part of the draw
formula - the POMV. Defines the maximum amount
available for distribution each year as 5.25 percent
of the average year-end market value of the Permanent
Fund (including the ERA, but not the Amerada Hess
funds) for the first five of the last six years.
(c) Provides the second part of the draw formula - the
limit. Under the draw limit, for every $1 over $1.2
billion of variable oil and gas revenue (production
taxes and royalties) received in the general fund, $1
is subtracted from the POMV calculation in (b). The
limit does not apply to the 20 percent of the POMV
that goes to dividends.
Section 9: Conforming amendment that clarifies that
the Amerada Hess funds are not included in the draw
calculation in Section 8.
1:29:49 PM
SENATOR WIELECHOWSKI noted that Section 9 amends AS 37.13.145(d)
but it's a point of contention that AS 37.13.145(b) has a
requirement that APFC "Shall transfer from the ERA to the
dividend fund," and the governor vetoed the appropriation. He
asked Ms. Pokon's position whether passing the law would
authorize a future governor to veto the amount of the $900,000
permanent fund.
MS. POKON replied that the attorney general's office believes
that the appropriation for the dividend may be vetoed. She
specified as follows:
It has been the practice of the Legislature to
appropriate those monies from the ERA to the dividend
fund and with many of these provisions being
accomplished through an appropriation-obviously the
power of appropriation rests initially with the
Legislature so if a particular legislature were to
choose to appropriate.
CHAIR STOLTZE interjected that the power of appropriation rests
exclusively with the Legislature.
MS. POKON apologized for the misstatement and restated that
while the administration is setting out a long-term financial
plan for preserving the value of the permanent fund, future
legislatures would have the authority to appropriate a different
amount.
1:32:43 PM
SENATOR WIELECHOWSKI asked how much revenue the statutory change
will generate for the state each year.
MS. POKON replied the total transfer this year will be $2.4
billion, with 20 percent going to the dividend and $1.92 billion
to general fund purposes. The amount of revenue that is
generated on an annual basis continues to be dependent on the
investment earnings of the fund. She reiterated that the
provision establishes the framework for the transfer from the
earnings reserve to the general fund.
1:33:48 PM
SENATOR WIELECHOWSKI asked if it is correct that the Legislature
could take money out of the earning reserve without passage of
SB 5001.
MS. POKON answered yes.
SENATOR WIELECHOWSKI asked if transferring $2.4 billion to the
general fund still leaves a deficit of about $2 billion.
CHAIR STOLTZE commented that it would help to have Pat Pitney or
Commissioner Hoffbeck participate in the hearing.
MS. POKON replied that her understanding is that in addition to
the transfer of funds from the earnings reserve to the general
fund, there is approximately $1.2 billion in other state
revenues; altogether it would be about $3.2 billion so a deficit
remains. She remarked that there will continue to be a need to
have a conversation about how to fill the gap between the
current budget and what revenue we expect to have on an annual
basis.
1:35:11 PM
CHAIR STOLTZE asked if the administration will continue to have
discussions about how to reduce the gap.
MS. POKON responded that the gap can be closed by reducing
expenditures or increasing revenue.
SENATOR WIELECHOWSKI remarked that one of the concerns that
former Governor Jay Hammond had and many Alaskans have is that
you're taking $2 billion out of the earnings reserve, there is
still a $2 billion deficit, and there will continue to be multi-
billion dollar deficits in future years. He asked what is to
stop a future governor from a veto or a future legislature from
taking more out of the dividend.
MS. POKON responded that Senator Wielechowski's question is a
question for future legislatures and future governors to answer.
She specified that the endeavor for the legislation is to set up
a sustainable plan for using the permanent fund.
CHAIR STOLTZE opined that the bill's title was vague. He asked
if the bill's title was a marketing label or attention should
not be paid to the title.
MS. POKON explained that setting up a framework for how to use
the fund is intended to keep it from being used in an arbitrary
or unplanned way. She asserted that setting up a long-term
financial plan around the permanent fund helps ensure that we're
not spending down available funds.
SENATOR WIELECHOWSKI related that he spoke with an economist
recently who expressed concern that cutting the dividend to
$1,000 this year will take about $7 million out of the economy.
He remarked that with declines in oil prices and federal
revenues, more money is coming out of the economy and that
economist expressed that this could tip the state into a severe
recession. He asked if the administration had done any modeling
on the impact of removing $7 million from the economy.
1:38:35 PM
MS. POKON replied that she understands that Gunnar Knapp with
ISER [Institute of Social and Economic Research] conducted an
analysis of the short-term impacts and the report reflects that
other actions also have short-term impacts. She reiterated that
the focus of SB 5001 is to set up a long-term plan that
preserves the fund and ensures a dividend going forward rather
than having a larger dividend for just a few years.
SENATOR WIELECHOWSKI asked if the administration would support a
constitutional amendment guaranteeing the dividend if the bill
were to pass.
MS. POKON answered that she could not speak to the governor's
position.
SENATOR WIELECHOWSKI asked if she had any data on the amount of
money that will be lost due to reduced garnishments as a result
of the reduced dividend.
1:40:26 PM
MS. POKON replied there probably are no solutions to a problem
this large that won't have consequences. She pointed out that
the dividend was roughly $800 just a few years ago and it will
go up and down under the current formula.
SENATOR WIELECHOWSKI restated his question.
MS. POKON answered that she is not aware of any such analysis.
CHAIR STOLTZE reminded members that the Legislature asked the
Office of Management and Budget and the Department of Revenue
for a detailed analysis of the impact the loss of the dividend
has on the economy. He specified that the analysis is part of
the Legislature's due process to help alert folks that are
affected by this, but a response has not been received in about
eight months and that leads to unhealthy suspicion.
1:43:00 PM
SENATOR WIELECHOWSKI asked how long savings will be extended if
SB 5001 were to pass.
MS. POKON replied that she does not know but asserted that SB
5001 will not solve all of Alaska's fiscal problems. She set
forth that more work needs to be done and how long the savings
last will depend on the result of that additional work.
SENATOR HUGGINS stressed that the question regarding savings has
to be answered.
CHAIR STOLTZE concurred with Senator Huggins.
UNIDENTIFIED SPEAKER asked what the governor's definition is for
"sustainability."
MS. POKON first provided more information on the balance of the
CBRF and the rate it would be spent down. She reported that as
of the end of the last fiscal year there was about $6.5 billion
in the CBRF. She added that approximately $200 million in
investment revenue can be expected over the course of FY2017
leaving a balance of $6.7 billion at the end of FY2017; however,
the draw from the CBRF is $3.2 billion, leaving $3.5 billion at
the start of the next fiscal year.
She said the definition of "sustainability" is to withdraw an
amount from the earnings reserve that does not exceed a rate
that degrades the inflation-adjusted value of the fund over
time. She added that some earnings stay in the fund so it grows
at least at the pace of inflation.
1:47:14 PM
CHAIR STOLTZE asked if the administration believes the current
budget spending level is sustainable over time.
MS. POKON answered that additional work needs to be done to
solve the budget gap and whether that ultimately is resolved
through additional cuts or additional revenues, is something
that will depend on the work of the Legislature and the
administration going forward.
CHAIR STOLTZE said the fundamental question is whether spending
sustainable under the models the administration has developed.
MS. POKON stated the governor's full fiscal plan set out the
administration's proposal for reaching sustainability; that
proposal included this bill, but SB 5001 is just part of the
proposal.
1:49:15 PM
CHAIR STOLTZE remarked that talking about the myriad of taxes
and using the permanent fund dividend can occur, but the
discussion is incomplete without talking about spending levels.
He asked if the committee can assume that the governor believes
that the budget he submitted is a sustainable amount.
MS. POKON pointed out that the governor's fiscal plan, taken in
its entirety, would put the state in a sustainable budget
situation. She relayed that the governor has been clear in
saying that the fiscal plan is written in pencil, not pen. She
set forth that the governor's fiscal plan is part of an ongoing
conversation and deliberation with the Legislature and the
people of Alaska. She restated that Commissioner Hoffbeck
offered to meet with the Valley delegation as time permits.
CHAIR STOLTZE clarified that the committee meeting is not a
meeting of the Valley delegation and even if it was, that would
not take care of the concerns of the State Affairs Committee. He
asserted that the committee is doing its legal responsibility
under our Uniform Rules, dealing with the subject matter
assigned by the Senate president on the governor's cornerstone
piece of legislation.
1:53:18 PM
MS. POKON replied that Chair Stoltze's point is well taken and
the exchange she had with the commissioner focused on the fact
that the committee hearing is occurring in Wasilla. She assured
Chair Stoltze that the commissioner would be happy to meet with
the people interested in discussing the bill.
SENATOR WIELECHOWSKI pointed out a finding by the Rasmuson
Foundation that cutting the permanent fund is very regressive
because it takes an equal amount from each person, regardless of
their income. He asked if Ms. Pokon agreed with the Rasmuson
Foundation's finding.
MS. POKON replied that there are multiple elements in the
governor's fiscal plan and the challenge is a multibillion
dollar problem and only one multibillion dollar tool to address
it; other pieces contribute, but not at that level.
UNIDENTIFIED SPEAKER questioned why someone from the governor's
office wasn't either at the hearing or on the phone to answer
questions.
CHAIR STOLTZE said the question is very much on point, but Ms.
Pokon is in a rough position.
UNIDENTIFIED SPEAKER stated that he would like to see Governor
Walker in the witness chair.
CHAIR STOLTZE remarked that he shares that frustration, but his
preference would have been to have Ms. Pitney present the bill.
He added that he hoped that the media would be more interested
in covering the hearing.
1:58:20 PM
MS. POKON continued the sectional analysis as follows:
Section 10: (e) Plans an annual appropriation from the
ERA to the general fund in an amount not to exceed the
amount determined by the draw formula in Section 8.
(f) Plans for funds in the ERA over 21 percent (4
times 5.25 percent) of the fund's value to be
transferred to the corpus.
Section 11: Establishes a new dividend formula.
Dividends are comprised of 20 percent of the full 5.25
percent POMV in Section 8 and 20 percent of prior year
royalties that have gone to the general fund.
Establishes a "savings rule" that plans for excess UGF
revenues (those exceeding UGF appropriations) to be
deposited in the CBRF and the permanent fund corpus.
CHAIR STOLTZE asked Ms. Pokon to describe the sources of the
royalties and the amount this year.
MS. POKON explained that royalties are payments arising out of
leases. SB 5001 lists mineral lease rentals, royalties, royalty
sale proceeds, net profit shares, federal mineral revenue
sharing payments, and bonuses received by the state from oil,
gas, and minerals.
CHAIR STOLTZE asked what the amount of the royalties are for
FY2017.
MS. POKON answered that her recollection is $560 million would
go to the general fund.
CHAIR STOLTZE asked if that calculates to $112 million.
MS. POKON replied that she believes that's correct, then 20
percent of the POMV draw would be an additional $480 million.
She noted that a subsequent section sets the dividend at $1,000
per person for the next three years.
2:01:51 PM
SENATOR WIELECHOWSKI asked if his calculation is correct that
the dividend would be about $800 without the $1,000 provision.
MS. POKON replied yes and added that is why the $1,000 provision
is in the bill. She noted that Department of Revenue modeling
indicates that dividends will be about $1,000 into the future.
She detailed that Section 1 expresses legislative intent to
revisit the topic in three years, which correlates with the
three-year $1,000 dividend provision; that provision came from
the Senate Finance committee substitute.
CHAIR STOLTZE commented that the governor endorsed it by putting
it in the current bill.
MS. POKON agreed.
UNIDENTIFIED SPEAKER referenced Senator Wielechowski's
calculation of an $800 dividend under current revenues and asked
where the other $200 will come from to bring the dividend to
$1,000.
MS. POKON replied that the funds were appropriated from the ERA
this year just as they were for the dividend.
UNIDENTIFIED SPEAKER asked if the bill provides a maximum
dividend of $1,000, but it's not a guaranteed amount.
2:04:57 PM
MS. POKON answered that the language in the bill says the
dividend will be $1,000.
CHAIR STOLTZE commented that it's subject to veto.
MS. POKON confirmed the administration's position is that the
governor has the authority to veto appropriations.
SENATOR WIELECHOWSKI read Section 15 that says the dividend
"shall be $1000" for three years, and asked if Ms. Pokon agrees
that the governor could veto it down to $500 next year and $200
the following year.
MS. POKON replied that the intention is to support the $1000
dividend [for fiscal years 2017, 2018, and 2019].
2:06:54 PM
SENATOR WIELECHOWSKI pointed out that "shall" legally means a
person is required to do something but her position is that
"shall" means "may" in this circumstance.
MS. POKON answered that the framework is set out in statute, but
it is subject to appropriation by the Legislature and the
governor has authority to veto an appropriation.
CHAIR STOLTZE, noting that the dividend is "capped" in the
fourth fiscal year, asked Ms. Pokon to explain the difference
between "guaranteed" and "capped." He asked if the governor's
intent is to hold the dividend down to the capped level if
revenues grow substantially.
MS. POKON clarified that the formula does not cap the dividend;
however, if oil prices spike or production increases through the
royalty component of the formula, dividends would also increase,
potentially well beyond $1,000 per person. Additionally, if the
fund increases due to robust investment revenues, the POMV
portion of the formula would go up, also creating the potential
for dividends of more than $1,000.
SENATOR WIELECHOWSKI asked if the language in Section 15 means
that the $1,000 dividend applies to the upcoming dividend.
MS. POKON answered yes.
2:10:32 PM
SENATOR WIELECHOWSKI asked if she believes that any of the
language in Section 15 is ambiguous and added that someone could
say they are due a full dividend in October 2016.
MS. POKON replied that she did not believe there is any
ambiguity. She specified that the intent is for the dividend
fund to distribute $1,000 to each eligible Alaskan.
CHAIR STOLTZE noted that Representative Gattis, Representative
Tilton and the Executive Director of the Permanent Fund
Corporation, Angela Rodell, are listening online.
SENATOR COGHILL remarked that the audience participation was
instructive.
MS. POKON returned attention to the sectional analysis
explaining that the second part has the "savings rule;" that is
the provision that would plan for excess unrestricted general
fund revenues to be deposited equally between the CBRF and the
permanent fund corpus.
CHAIR STOLTZE asked what the philosophy was for selecting those
accounts.
MS. POKON explained that the provision was added by the Senate
Finance Committee and she was not aware of their reasoning, but
the administration supports it as well as other variations of
the savings rule.
UNIDENTIFIED SPEAKER asked if the 50/50 rule is automatic or if
the excess funds would be available for legislative
appropriation
MS. POKON answered that the bill provides for the transfers to
occur by appropriation.
2:15:14 PM
CHAIR STOLTZE commented that a constitutional provision could
make something automatic.
MS. POKON agreed and added that each year the Legislature has
the authority to decide whether or not to appropriate in that
year.
CHAIR STOLTZE asked if an OMB director and a finance chair could
tag team and figure out how to spend the appropriation.
MS. POKON opined that spending was the judgement of the
Legislature.
She continued the sectional analysis as follows:
Section 12: Conforming language requiring the APFC to
adopt regulations to implement Section 2. She reminded
the members that section directs the corporation to
adopt regulations similar to the state's procurement
code.
Section 13: Is conforming language that excludes
mental health trust fund income from the draw formula
in Section 8. She added that those funds that are part
of a trust will continue in their current framework.
Section 14: Is conforming language that provides that
once the funds are appropriated from the ERA to the
dividend fund, the Department of Revenue will
distribute the dividend checks without further
appropriation.
Section 15: Provides that notwithstanding low oil
prices today, the permanent fund dividends will be
$1,000 for fiscal years 2017, 2018, and 2019.
Section 16: Is a conforming amendment that reflects
that funds are appropriated to the dividend fund.
Section 17: Provides that once the funds are
appropriated from the ERA to the dividend fund, the
Department of Revenue shall pay dividends each year
without a separate appropriation.
2:18:03 PM
SENATOR WIELECHOWSKI requested an explanation of the language in
Section 17, page 8, line 4.
MS. POKON replied the language originated from the CS that came
out of the Senate Finance Committee. She said her understanding
is that it is a clarification in statute that reflects how DOR
has been interpreting the statute.
SENATOR WIELECHOWSKI asked if the current practice is that
payment of the dividend does not require appropriation.
MS. POKON replied that her understanding is that an
appropriation from the ERA to the dividend fund is required. The
language in Section 17 reflects the current practice which is
that after the appropriation, the Department of Revenue follows
the formula and distributes individual dividend checks to
eligible Alaskans.
2:20:15 PM
SENATOR WIELECHOWSKI stated that he found it is interesting that
an appropriation is not needed to disburse $1.5 billion.
SENATOR HUGGINS asked what the process would be if the phrase
"without further appropriation" was not inserted in Section 17.
MS. POKON replied that the process would be the same and pointed
out that the language was for clarification.
CHAIR STOLTZE asked if the language is critical.
MS. POKON answered that the language is not critical, but
provides clarification.
SENATOR WIELECHOWSKI asked if Ms. Pokon would define the annual
payment of the permanent fund dividend checks as an
appropriation under existing law.
MS. POKON answered that the current practice has been to
appropriate the full amount from the ERA to the dividend fund
and then the Department of Revenue distributes the checks.
SENATOR WIELECHOWSKI asked if for 30 years the state has allowed
the automatic transfer of up to $1.5 billion from the dividend
fund to the people of Alaska without an appropriation.
MS. POKON restated that an appropriation from the ERA is
required.
2:22:48 PM
SENATOR WIELECHOWSKI asserted that there is an appropriation
from the ERA to the dividend fund but for more than 30 years
there has been no appropriation from the dividend fund to the
people of Alaska.
MS. POKON replied that her understanding is that that has been
the practice and deferred further comment to Mr. Milks.
SENATOR WIELECHOWSKI expressed interest in hearing from Mr.
Milks.
WILLIAM MILKS, Assistant Attorney General, Civil Division, Labor
and State Affairs Section, Department of Law, Juneau, Alaska,
speaking via teleconference, explained that the practice for the
last 30 years is that the Legislature passes an appropriation
bill that provides the sum of money that will be paid out of the
ERA for the payment of permanent fund dividends.
SENATOR WIELECHOWSKI summarized that there are two
appropriations: an appropriation from the ERA to the dividend
fund and an appropriation from the dividend fund to the people
of Alaska. He asked which appropriation the Legislature has made
for the past 30 years.
MR. MILKS answered that this year, for example, the Legislature
passed HB 256 that provided for an appropriation from the ERA to
the dividend fund for the payment of permanent fund dividends;
that has been the practice for the past 30 years and reflects
the basic constitutional framework of the State of Alaska. He
added as follows:
The Legislature has the appropriation authority.
Spending funds must go through legislative
appropriation, and attached to that is the
constitutional provision that gives the governor
limited role on appropriation, which is the ability to
strike or reduce an appropriation.
SENATOR WIELECHOWSKI asked what is being changed by adding the
language in Section 17, page 8, line 4.
MR. MILKS answered the language was probably added in the Senate
Finance Committee. He agreed with Ms. Pokon that it is not
necessary, but it clarifies the current process.
2:25:48 PM
SENATOR WIELECHOWSKI asked if there would still need to be an
appropriation from the ERA to the dividend fund if the bill
passes, or would it happen automatically.
MR. MILKS answered yes. He specified that there must be an
appropriation and that reflects the constitutional framework of
the State of Alaska.
SENATOR WIELECHOWSKI asked if it is his opinion that the
language really does not change anything.
MR. MILKS answered as follows:
I think we're agnostic on that issue. It's in there,
it's not in there; the process is as it's been
historically.
CHAIR STOLTZE asked if the governor has the legal ability to
pause the distribution of a dividend once it's been appropriated
if the governor has not exercised a veto.
MR. MILKS replied that he was not familiar with the concept of
"pause."
CHAIR STOLTZE specified that "pause" is a new term he's heard
recently. He again asked Mr. Milks if he thinks the governor
could "pause" a portion of a dividend distribution.
MR. MILKS responded that the constitution set up the framework
where the Legislature appropriates and included in the provision
is the authority for the governor to exercise a line-item veto.
2:29:12 PM
CHAIR STOLTZE remarked that he is trying to figure out how new
powers permeate when they get established. He continued as
follows:
Clearly the governor has asserted those powers on
projects. Do you think he has that power on the
dividend if he decides that there's too much money
going to the private sector and government needs it
worse?
MR. MILKS replied that the provision in the constitution speaks
for itself. He pointed out that there is an appropriation for
the dividend and the governor can reduce that.
CHAIR STOLTZE asked if the governor has the constitutional
power, after the dividend has been appropriated, to unilaterally
decide to reduce all or a portion of it. He provided an example
as follows:
Much like he can stop a project that has been duly
appropriated from going forward-after he's signed the
appropriation or another governor has signed it.
MR. MILKS answered that the payment of the dividend requires an
appropriation, and there is a process for a veto and veto
override that results in a sum that is paid pursuant to the
statute.
CHAIR STOLTZE asked if the governor is on wobbly constitutional
ground if he pauses or unilaterally cancels a construction
project that's already been appropriated.
MR. MILKS replied that he explained the process for the dividend
that results in a set sum that is paid to Alaskans pursuant to
the statute.
SENATOR WIELECHOWSKI said AS 37.13.145(b) says, in part:
The corporation shall transfer from the ERA to the
dividend fund.
He asked if there is another section that says someone shall pay
out the permanent fund dividend.
MR. MILKS replied the dividend fund statute.
MS. POKON added that it is AS 43.23.055 and the formula that
determines each individual check is set out in AS 43.23.025(a).
2:32:50 PM
SENATOR WIELECHOWSKI asked if the governor could unilaterally
stop the payment of all or a portion of the dividend to
individual Alaskans if he did not veto the appropriation, and
instead took action after the transfer of funds went into law.
MR. MILKS reiterated that the process set out in the
constitution is that the Legislature has the power of
appropriation and the governor's role includes the right to veto
"either funding or reduction." He further explained that the
constitution governs how appropriations are made and clarifies
that a statute passed by one legislature cannot freeze any
future legislatures. Each legislature has the ability to
exercise its power of appropriation and budgeting needs on a
yearly basis.
2:35:33 PM
CHAIR STOLTZE asked if it is far-fetched to think that a
governor could not cite a fiscal crisis and get an attorney
general opinion saying the governor has the ability to impound
an appropriation after the budget passed into law. He asked if
an attorney general decided not to sign would be far-fetched.
MR. MILKS said he already presented his view on the matter. He
explained that the constitution sets out how the powers work for
spending, appropriations, vetoes, and the statutes. He specified
that the statute is followed once there is authorized spending.
He pointed out that the focus on today's committee meeting is on
the dividend and he has tried to explain how the payment of
dividends, in compliance with the constitution, has historically
been through the appropriation process. He detailed as follows:
The point at which the governor can step in and
influence those dividends is under the constitution's
provision for exercise of the veto in reduction of
spending.
He said the Legislature has made an appropriation for dividends,
there was a veto, and the Legislature has the constitutional
ability to override the veto. He summarized that the sum that
ultimately results for dividends will be distributed according
to the statute.
CHAIR STOLTZE commented, "We've probably run into a brick wall
here."
SENATOR WIELECHOWSKI said his understanding is that an attorney
general opinion in the early years said the transfer was
automatic and a legislative appropriation was not needed.
MR. MILKS agreed that a very early opinion suggested that; but,
quickly after that the Department of Law clarified that an
appropriation would be necessary. He added that Article IV,
Section 16 of the constitution makes reference to appropriations
for Alaska permanent fund dividends.
2:38:44 PM
SENATOR WIELECHOWSKI asked for a copy of the early attorney
general opinion.
MR. MILKS agreed to provide a copy.
CHAIR STOLTZE asked Mr. Milks to describe an attorney general
opinion and the force of law it has.
MR. MILKS explained that it's the best reasoning at the time on
an issue presented to the attorney general. He noted that the
opinion on the issue of the permanent fund dividend has been the
same for several decades.
CHAIR STOLTZE asked where he would place the opinion on the
scale between an advisory mechanism to the chief executive and
being impassible and having the force of law.
MR. MILKS replied that the opinions are advisory to the
executive branch and carry varying weight. At times the Alaska
Supreme Court has given great weight to attorney general
opinions and other times they were considered and not given
great weight.
2:41:05 PM
CHAIR STOLTZE opined that an attorney general opinion can often
forego the constitutional three readings in both bodies and
signing of a bill by the governor. He asked if an attorney
general's opinion can have the same force of repealing or making
law.
MR. MILKS clarified that an attorney general opinion is not a
statute.
CHAIR STOLTZE asked if an attorney general's opinion has a
comparative weight in impact.
MR. MILKS replied that an attorney general's opinion is
typically an interpretation of what a statute means.
CHAIR STOLTZE remarked that Mr. Milks and his department tend to
minimize itself too much.
MS. POKON pointed out that the Department of Law's website has a
description of attorney general opinions and what they do.
CHAIR STOLTZE asked Ms. Pokon how she would describe attorney
general opinions and the impact they have.
MS. POKON answered that she would agree with everything Mr.
Milks stated. She stated that the attorney general is an
advisory opinion that sometimes has weight and sometimes does
not.
2:42:39 PM
MR. MILKS emphasized that an attorney-general opinion is
important. He said the opinion is the attorney general's
consideration of a statute and what it means, but it is the
Alaska Supreme Court that sets a range of what the weight of the
opinion will be, from "very important" to "must be considered."
MS. POKON continued the sectional analysis as follows:
Section 18: Repeals provisions relating to the CBRF
subaccount, the former dividend formula, and the
inflation proofing calculation.
Section 19: Repeals Section 15 ($1,000 dividend) after
three years.
Section 20: Provides transition language authorizing
the Commissioner of Revenue and the APFC to adopt
regulations, policies and procedures to implement this
Act.
Section 21: Retroactive effective date of July 1, 2016
for Sec. 6-11 and 13-18.
Section 22: Immediate effective date for remaining
sections.
UNIDENTIFIED SPEAKER asked about the summary document and
Section 15.
CHAIR STOLTZE summarized that the question asked about the
substantive effect of changing the term "will" to "shall" in
Section 15.
MS. POKON explained that the intent of the summary document is
to reflect the language in the legislation; under this statute,
the dividends will be $1,000 [for fiscal years 2017, 2018, and
2019].
CHAIR STOLTZE, relaying a question from the audience, asked if
there is a substantive difference between the terms "will" and
"shall."
MS. POKON replied not for these purposes.
CHAIR STOLTZE, relaying a question from the audience, asked if
she would describe it as style or substance.
MS. POKON replied that there is a stylistic difference in
producing a summary document versus the exact language in the
legislation.
CHAIR STOLTZE requested that written explanation be provided.
UNIDENTIFIED SPEAKER expressed confusion about how the terms
"constitutional," "statute," "allocation," and "appropriation
blend." She perceives statute overrides constitution at points
and appropriations are not permanent, but flexible.
2:46:50 PM
MS. POKON asked if the audience member asked what the respective
authority is between the constitution and statutes.
CHAIR STOLTZE added as follows:
And how these different approaches compete with
existing constitutional authority.
He acknowledged that none of this legislation changes the
constitution.
MS. POKON explained that the constitution is controlling and
statutes must follow the provisions of the constitution, or be
interpreted such that they do.
SENATOR HUGGINS asked to which department Section 17 refers.
MS. POKON replied that the section refers to the Department of
Revenue.
SENATOR HUGGINS asked if she would characterize SB 5001 as a
revenue bill.
2:48:45 PM
MS. POKON described the bill as a financial plan for how to
rationally use a fund and the investment proceeds from that
fund.
SENATOR HUGGINS suggested it would be worthwhile for Ms. Pokon
to explain why the Department of Law is introducing the bill,
not the Department of Revenue. "Whose brainchild is this? Give
us a little bit of background."
MS. POKON explained that over the course of the last year she
had the opportunity to work with the Department of Revenue on
the technical work as well as developing the legislation. When
Commissioner Hoffbeck was not available, it made sense for her
to provide an overview of the bill and answer questions from the
committee today.
CHAIR STOLTZE asked if the new attorney general will have an
active role in the permanent fund legislation, similar to former
Attorney General Richards.
MS. POKON answered that she does not know what the new attorney
general will want to do or what role she will play.
CHAIR STOLTZE asked if she had briefed the new attorney general
on SB 5001.
MS. POKON replied that she has not had an opportunity to have a
conversation with the new attorney general.
CHAIR STOLTZE asked if she is aware that anyone has briefed the
new attorney general on SB 5001.
MS. POKON responded that the new attorney general will not come
in to the position until next month and she is not aware of any
briefing, but the acting attorney general has been briefed.
SENATOR HUGGINS asked if either Governor Hammond or Governor
Hickel vetoed part of the permanent fund [appropriation].
2:52:25 PM
MS. POKON replied that she has not researched Senator Huggins'
question.
CHAIR STOLTZE reported that Governor Hammond vetoed the original
legislation establishing the permanent fund because it had a
statutory framework, he demanded a constitutional amendment and
that was approved by the voters in 1976.
SENATOR HUGGINS asked who has vetoed part of the permanent fund
or the permanent fund that was allocated to the citizens of the
state by the legislature.
MS. POKON replied that she is unaware of that having happened in
the past.
SENATOR HUGGINS clarified that he is asking for the name of who
has vetoed.
MS. POKON responded that she did not know the answer.
SENATOR HUGGINS asked about within the last 60 days.
MS. POKON apologized that she was thinking about the history of
the fund. She specified that Governor Walker did veto a portion
of the dividend appropriation.
2:54:42 PM
UNIDENTIFIED SPEAKER asked a question that was not audible.
CHAIR STOLTZE asked Senator Wielechowski to provide an
explanation.
SENATOR WIELECHOWSKI summarized that the Legislature passed a
piece of legislation creating a permanent fund and the late
Governor Jay Hammond vetoed it because he wanted the matter to
go before the voters. The voters subsequently enshrined the
Alaska Permanent Fund in Section 9.15 of the Alaska
Constitution. He said the argument comes from the last sentence
of that section:
All income from the permanent fund shall be deposited
in the general fund unless otherwise provided by law.
He said in 1982 the Legislature set up the permanent fund
dividend through a series of statutes. One of the more important
of those is AS 37.13.145(b); that statute says the Alaska
Permanent Fund Corporation shall transfer from the ERA to the
dividend fund. Soon thereafter, an attorney general opinion said
the transfer from the corporation to the dividend fund is
automatic. A side note in the [1994] Alaska Supreme Court
decision, Hickel el al v. Cowper also said the transfer from the
earnings reserve to the dividend fund happens automatically. A
few years later a different attorney general issued an opinion
saying the transfer from the ERA to the dividend fund should be
through legislative appropriations. He added as follows:
For roughly 30 years the legislature has been
appropriating the amount necessary to pay the
[dividend] and no governor in the history has vetoed
this.
SENATOR WIELECHOWSKI argued that the intent was that the
transfer would be automatic so there is nothing for the governor
to veto. He spoke with the people at the Alaska Permanent Fund
Corporation and they said they transferred the amount the
governor suggested, not the full amount of the dividend; when he
asked why, they said it was based on the attorney general's
opinion. He opined that if there was a legal claim at this
point, it would be against the APFC, not the governor, because
the law says the corporation shall transfer the funds, it does
not say the corporation may transfer the funds, "They didn't do
it. They're violating the law."
2:59:12 PM
SENATOR WIELECHOWSKI said his discussions with people who were
there in the early days indicate that their intent was to make
it an automatic transfer. He remarked that he does not know how
a court would rule and added as follows:
I feel that based on the legislative intent that I've
heard, yeah the court would rule in our favor. That
this can be vetoed and the Permanent Fund Corporation
has to transfer it.
He confirmed that he is gathering all the history on the matter.
CHAIR STOLTZE commented that, whichever way this is decided, the
decision will be a footnote in the statutes.
SENATOR WIELECHOWSKI opined that if the Legislature does not
overturn the veto, there is a good chance there will be a
lawsuit.
UNIDENTIFIED SPEAKER asked if the bill is really necessary to
make it so that the legislature can say, 'We're going to use the
earnings reserve.' or is it only the governor that can do it.
CHAIR STOLTZE asked Ms. Pokon to respond by summarizing the
rationale for this mechanism as opposed to a direct
appropriation from the earnings reserve fund.
3:01:29 PM
MS. POKON answered that she believes this is a process, in
partnership with the Legislature, to set out a plan in statute
for the dividend. She added as follows:
We have acknowledged a number of times in committee
hearings, the Legislature has actually been very
disciplined in following the statutory terms about how
we manage the earnings of the permanent fund.
MS. POKON said SB 5001 recognizes the imminent point:
Where the Legislature and the administration wouldn't
have any choice but to be looking to the earnings
reserve for UGF [unrestricted general fund].
She summarized that the intent was to prepare for that in
partnership with the Legislature.
3:03:13 PM
SENATOR HUGGINS thanked Ms. Pokon and Mr. Milks for their work
on the bill and emphasized the importance of resurrecting the
philosophy of "partnering" between the administration and the
Legislature because it has diminished over the last couple of
years. He asserted that the only group of people that suffer
without partnering are the people of Alaska.
UNIDENTIFIED SPEAKER stated that she believes the Legislature
has bent over backwards to partner.
3:05:00 PM
At ease
3:19:29 PM
CHAIR STOLTZE reconvened the meeting and announced the committee
would hear from Angela Rodell, the Executive Director of the
Alaska Permanent Fund Corporation. He noted that Ms. Rodell is a
former commissioner of the Department of Revenue and also did
consulting work for the Senate Finance Committee.
ANGELA RODELL, Executive Director and Chief Executive Officer
(CEO), Alaska Permanent Fund Corporation (APFC), Juneau, Alaska,
stated that SB 5001 does change some things for the corporation,
but does not change or affect the mission of the fund that was
set out 40 years ago. She explained as follows:
We will still manage the permanent fund core
investments and we will do that using a prudent
investor rule to maximize the value and protect the
fund for this and all future generations of Alaskans.
She set forth that the first change for the corporation is to
provide increased flexibility to manage some investments by
creating an exemption to the state procurement code. She said
the corporation currently is allowed to hire investment managers
without having to go through the procurement code, but it must
go through the procurement code to make direct investments and
to get certain types of expertise that is unrelated to the
investment but provides insight into the investment itself. She
cited the investment in Juno Therapeutics as an example. She
detailed that APFC wanted to hear from scientists and doctors
about the validity of the science or medicine, but that would
have to go through the lengthy state procurement process, which
works at odds with making timely investment decisions. She said
the new process would be similar to the state procurement code
with the proposals passing the Board of Trustees, going through
a regulatory procedure, passing regulations, and taking public
comment.
MS. RODELL detailed that the second change affecting the
corporation is to transfer management of the Constitutional
Budget Reserve Fund (CBRF) from the Treasury Division of the
Department of Revenue to the Alaska Permanent Fund Corporation;
this would allow the corporation to invest the CBRF in the same
investment strategy and asset allocation as the permanent fund
itself.
CHAIR STOLTZE asked Ms. Rodell to discuss how the CBRF is
managed long term versus short term and how the APFC and the
Senate Finance Committee jointly agreed on this provision.
3:23:40 PM
MS. RODELL explained that under current statute most of the CBRF
must be invested in short-term assets, although the commissioner
of revenue does have the ability to invest in longer-term
investments, such as more stocks, if the fund is not expected to
be used in the next five years. She detailed that the limitation
with the current statute is that there is an expectation that
the reserve fund will be used inside of five years due to the
state's current fiscal picture. She asserted that the
expectation under SB 5001 is that the ability to use some of the
ERA will allow the CBRF to be invested a little longer term. She
reiterated that the CBRF would be managed alongside the
permanent fund and in the same assets, generating funds to
transfer out of the ERA to assist with the state fiscal plan
along with funding the dividend in the future.
SENATOR WIELECHOWSKI asked if the corpus, the earnings reserve
fund, and the permanent fund dividend fund are invested
differently or in the same pool.
MS. RODELL answered that the corpus and the ERA are invested by
the corporation as one pool; through accounting procedures, they
are allocated a portion of the principal and investment
earnings. The dividend fund is held, managed, and invested by
the Department of Revenue.
CHAIR STOLTZE cited the constitutional amendment former Governor
Frank Murkowski introduced for a percent of market value payout
that many people thought was aggressive at 5 percent. He cited
an article in the April 6, 2016 issue of the Journal of Commerce
that said some of the retirement management funds were not
meeting expected goals; conceding this was not an apples-to-
apples comparison, he asked Ms. Rodell to discuss her
professional opinion about the proposed [5.25 percent] payout.
3:27:48 PM
MS. RODELL replied that the Department of Revenue has taken the
lead on modeling sustainability and the 5.25 payout amount came
out of a number of conversations and positions, as opposed to
sustainability. She said it is obvious that the more you take
the less sustainable the fund will be over time. The unaudited
estimate for FY2016 is 1.4 percent, but given all of the turmoil
over the course of the fiscal year from the significant impact
on the stock market in December through February and the Brexit
issues that roiled the markets the last week of the fiscal year,
she was pleased with finishing the fiscal year in positive
territory; however, the percentage is nowhere near expectations
to earn 7 or 7.25 percent to sustain a 5.25 percent draw each
year.
She said there are two things in the bill that are worth noting
that are relative to the 5.25 percent. First, the corporation
will determine what amount is available for distribution. She
detailed that there is a straight calculation based on 5.25
percent of five of the preceding six fiscal years to determine
the amount of market value. She said it is important to note is
that Section 10, line 23 and line 24 of the proposed bill says
the Legislature may appropriate up to that amount. She pointed
out that if the Legislature is concerned, it could draw less and
leave amounts behind. Second, there are caps in Section 8 with
the $1.2 billion if production taxes start to increase. Finally,
there is a review provision every three years to make sure the
ERA is not being depleted too quickly, amounts are continuing to
accrue, and the fund is continuing to grow. What SB 5001 has
done is try to balance some of the measures with the higher 5.25
percent draw by countering that with some of these options for
future legislators to use.
CHAIR STOLTZE asked if it is dangerous to enshrine the
percentage Ms. Rodell would like to produce for the budget as
opposed to what is sustainable. He asked Ms. Rodell to candidly
discuss the importance of sustainability.
3:32:55 PM
MS. RODELL replied that without wading into the policy decision
of should or shouldn't you draw on the ERA, the one thing that
the committee may want to think about regarding spending versus
revenue is that Alaska has always found itself in a different
position than other states. One of the plusses of a bill like SB
5001, if you choose to draw out of the earnings reserve, is
knowing a portion of the revenue, which is really unusual. She
pointed out that after payment of a dividend, about $1.9 billion
to $2 billion would be generated for the state budget; that is
not sufficient revenue to fund the budget at this point, given
where the unrestricted general fund budget is.
CHAIR STOLTZE asked if it is not inadequate if only revenues and
not reductions is looked at.
MS. RODELL agreed with Chair Stoltze but pointed out that in
January legislators will start with a known revenue number and
then have a discussion about unknown revenues, which are tax
revenues that have yet to come in. She summarized as follows:
You're not as reliant as in the past on forecasted
revenues for determining a sustainable or appropriate
budget.
CHAIR STOLTZE asked what Ms. Rodell believes is a sustainable
amount.
3:35:06 PM
MS. RODELL answered that everybody's definition of
"sustainability" is different and her personal priority is not
relevant. She added as follows:
We will do what we can to continue to increase the
value and to make as much money as we can for the
State of Alaska.
CHAIR STOLTZE asked what general cautions she would give.
MS. RODELL cautioned that 5.25 percent is high in today's
environment. She said if markets continue to perform as they did
over the last year and returns over the next five years are one
to two percent per year and ten-year treasury yields are as low
as they have been since World War II, 5.25 percent needs to be
recognized as possibly depleting the ERA faster than intended.
3:38:43 PM
CHAIR STOLTZE asked if Ms. Rodell agrees that that ultimately
erodes the value of the fund itself.
MS. RODELL answered correct.
CHAIR STOLTZE asked if he is going too far out on a limb to say
that an overly aggressive payout could erode the principle just
as much as an appropriation.
MS. RODELL opined that Chair Stoltze was going a little too far
because the three-year lookback will give a sense that the ERA
is eroding to the point that it is not sustaining itself. She
summarized as follows:
Personally, I don't think we will ever actually reach
that point because there will be alarm bells going off
first, that everyone is going to be very aware of and
concerned about.
SENATOR WIELECHOWSKI noted that in 2010 there was an issue about
not having enough in the ERA to pay the dividend. He asked if SB
5001 fixes that problem so there will always be a dividend, even
if it is reduced.
MS. RODELL answered that she would defer to the Department of
Law, but her understanding is that under SB 5001 there will
always be a dividend. She noted that 20 percent of the dividend
comes directly from royalties.
3:42:06 PM
SENATOR WIELECHOWSKI stated that he would like clarification
from the Department of Law. He pointed out that this year the
amount from royalties was $112 million and the amount from the
earnings was $480 million and his calculation is that would have
resulted in a $100 dividend.
MS. RODELL replied that she had not looked at the numbers
Senator Wielechowski noted.
CHAIR STOLTZE said his historical observation is that the Alaska
Permanent Fund Corporation is not intricately involved in the
dividend.
UNIDENTIFIED SPEAKER asked if the governor could collateralize
the corpus of the fund under the existing permanent fund versus
SB 5001.
MS. RODELL clarified that the Board of Trustees has that
authority, not the governor.
CHAIR STOLTZE commented that they all serve at the will of the
governor and can be replaced without cause.
MS. RODELL clarified that trustees can only be removed for
cause.
CHAIR STOLTZE asked Ms. Rodell to describe the makeup of the
board.
3:44:33 PM
MS. RODELL explained that the Board of Trustees is made up of
six members: four public members, preferably with a background
in finance, the commissioner of the Department of Revenue, and a
head of department of the governor's cabinet. Members serve
staggered, four-year terms so one seat expires each year.
Governor Walker appointed Marty Rutherford to a public seat this
year and reappointed Carl Brady to a public seat last year. Bill
Moran is the chair of the board and has been serving since 2007,
his term will expire in 2018. Larry Cash is the fourth public
member and his term will expire in 2017. Revenue Commissioner
Hoffbeck serves on the board and Governor Walker appointed
former Attorney General Richards to the head of department
position. She disclosed that there has been no notice as to who
will replace Mr. Richards.
3:46:46 PM
UNIDENTIFIED SPEAKER asked if the APFC would benefit from a seat
on the stock exchange, using index funds with extreme wide
diversification, and something near a 4 percent draw.
MS. RODELL explained that about 40 percent of the permanent fund
is invested in public equities, using a number of passive index
funds along with some active strategies; because, it is
important to the corporation to have a very diverse array of
investments to maximize returns and not be overly affected by
things that happen worldwide, they created an "all-weather
portfolio" that has about 55 percent invested in publicly-traded
markets and 45 percent in private market type securities. She
detailed that fees are important and they have worked hard to
reduce them by taking on more internal management. She pointed
out that for 35 years APFC have managed their bond portfolio in-
house. She noted that APFC also manages real estate and small
pieces of asset classes in-house, thereby reducing fees
significantly. She said an important note with regard to the 4
percent payout suggestion, the percent of market value
resolution in 2003-2004 was a constitutional amendment that
would have drawn on the full value of the fund and would have
eliminated the ERA.
MS. RODELL stated that what SB 5001 proposes is a distribution
rule on just the ERA. She summarized as follows:
Whatever the percentage is, that amount is only coming
out of the ERA, even though it will be calculated on
the full amount of the fund plus the ERA.
3:50:33 PM
CHAIR STOLTZE asked if the ERA is included in the $53 billion
estimated total of the permanent fund.
MS. RODELL answered yes. She specified that the end of the
fiscal year, and before any distribution for dividends, the ERA
was about $8.5 billion, and about $45 billion was in the corpus
or principal of the fund.
CHAIR STOLTZE asked what happened to the funds that were
appropriated from the ERA and the governor vetoed.
MS. RODELL replied that the corporation has been advised to
transfer the amount of the appropriation and hold the remaining
amount in the ERA where it will continue to earn a return.
3:52:19 PM
SENATOR WIELECHOWSKI asked what the interaction is between APFC
and the executive branch because there seems to be competing
views and perspectives. He asked how independent is the
Permanent Fund Corporation when taking legal advice from the
Department of Law.
MS. RODELL explained that for administrative purposes, APFC is
an executive branch entity that resides within the Department of
Revenue. She said the corporation has had in-house general
counsel since 2008-2009, and before then was required to use an
assistant attorney general from the Department of Law. The Board
of Trustees prepares the budget and it goes through the same
hurtles as other department budgets but it is ultimately part of
the governor's budget bill. While the corporation has an
exemption from the state Personnel Act, it is subject to state
procurement, state travel and other requirements so the lines
get blurry at times. APFC is a quasi-corporation and an entity
belonging to the State of Alaska.
SENATOR WIELECHOWSKI said he contacted the permanent fund office
and was told that on the advice of the Department of Law, the
transfer from the earnings reserve to the dividend fund was made
in the amount that the governor had vetoed. He asked Ms. Rodell
if her understanding of what happened is the same.
3:55:51 PM
MS. RODELL answered that the funds have not been transferred.
She specified that the corporation requested guidance from the
Department of Law and was told to transfer the vetoed amount in
the appropriation bill using the customary process. She added
that the corporation typically does not transfer any dividend
amount to the Department of Revenue until the books are
completely closed for the month of June, generally occurring in
August. She said the corporation is pursuing on the same
timetable.
SENATOR WIELECHOWSKI asked if she will seek independent legal
advice or follow the guidance of the Department of Law.
MS. RODELL answered that the corporation will transfer the
appropriated amount, whether it is the amount the governor
vetoed or a new amount if the Legislature overrides that veto.
She said the corporation is waiting to see what the final amount
in an appropriation bill is for transfer.
SENATOR WIELECHOWSKI asked what she expects the payout to be if
the Legislature overrides the veto.
MS. RODELL replied that the dividend is calculated by the
Department of Revenue.
SENATOR WIELECHOWSKI asked if Ms. Rodell has told what the
amount would be.
MS. RODELL answered that she has no idea. She reiterated that
APFC has nothing to do with the administration of the dividend.
She detailed that the corporation is finished with the dividend
once the lump sum has been transferred. The Permanent Fund
Dividend Division within the Department of Revenue administers
who gets a dividend and how much.
3:58:22 PM
UNIDENTIFIED SPEAKER asked a question related to the veto.
MS. RODELL replied that the corporation looked at their cash
positions and was planning for a $1.4 billion transfer that was
in the original appropriation bill. The corporation was making
plans for liquidity for the transfer when the governor exercised
his veto. The corporation asked Department of Law for guidance
as to which to look at and were told the appropriation bill. She
added as follows:
We looked to the [Office of the] Attorney General for
his guidance and we are now in a holding pattern to
see what will happen in terms of liquidity and
reinvestment opportunities.
She clarified that she spoke with Assistant Attorney General
Bill Milks and not Attorney General Richards.
4:00:07 PM
SENATOR WIELECHOWSKI asked if the trustees discussed
transferring the amount that is required under statute instead
of taking the advice from the Department of Law.
MS. RODELL answered that the trustees have not had that
conversation.
SENATOR WIELECHOWSKI asked if she expects that to happen.
MS. RODELL replied that there has not been a board meeting since
the governor's veto, but she believes the board will have the
same inclination she has, which is to follow the guidance from
the Department of Law and their interpretation of the state law.
SENATOR WIELECHOWSKI opined that Ms. Rodell's reply gets to the
question of independence. He specified that the statute is very
clear about APFC's obligation. He continued as follows:
Your obligation is that you shall transfer the amount
necessary to pay the full dividend from the earnings
reserve to the dividend fund.
SENATOR WIELECHOWSKI suggested that it would be prudent to take
an independent review of the statute.
MS. RODELL replied that Senator Wielechowski's advice is duly
noted.
SENATOR WIELECHOWSKI asked when the Board of Trustees meets
next.
MS. RODELL replied there will be a work session on September 2.
UNIDENTIFIED SPEAKER suggested there would be considerable legal
savings if SB 5001 were ruled out when the Legislature meets on
Friday. The benefits in the bill should be crafted as new
legislation to benefit "the exercise and profit possibilities of
the Permanent Fund Corporation."
CHAIR STOLTZE said the Finance Committee will probably continue
to pursue those things.
4:04:01 PM
UNIDENTIFIED SPEAKER asked what would happen if APFC didn't take
the guidance from Department of Law and transferred the full
amount.
MS. RODELL specified that it is important to respect the
legislative appropriation process and the governor's veto
process; while this is sorted out, the money will earn better
returns if it stays in the ERA. She detailed that the dividend
account the funds earn 30-day Treasury bill cash rates.
SENATOR WIELECHOWSKI stated that the Department of Law keeps
saying that an appropriation has to occur. He explained what AS
37.13.145(b) tells APFC to do:
At the end of each fiscal year, the corporation shall
transfer from the ERA to the dividend fund the amount
that is necessary to pay the dividend. It says 'you
shall transfer from the ERA to the dividend fund.'
He said there is money in the ERA, $8 billion, so there is
nothing to appropriate because the money is already sitting
there. The statute clearly gives APFC guidance on what to do
regardless of whether the governor appropriated $1.5 billion or
$695 million, it does not matter, because there is still $8
billion in the ERA.
MS. RODELL agreed that there are plenty of funds available for
transfer.
SENATOR WIELECHOWSKI asked Ms. Rodell and the trustees to take
an independent look because the statute is crystal clear on what
needs to happen. He asserted that the money is there and an
appropriation is not needed.
4:07:39 PM
UNIDENTIFIED SPEAKER asked what happens two years from now if
there is a successful lawsuit and Alaskans are owed unpaid
dividends.
MS. RODELL replied, hypothetically, the corporation would
transfer funds to the dividend fund for distribution, similar to
the second distribution that Governor Palin made several years
ago. She said APFC would comply with the law and the Permanent
Fund Dividend Division would too.
UNIDENTIFIED SPEAKER asked if the 1.4 percent includes all
expenses.
MS. RODELL replied that the 1.43 percent is the total return on
the fund for FY2016, net of all fees and expenses.
CHAIR STOLTZE asked Ms. Pokon if she had further comments.
MS. POKON answered no.
SENATOR WIELECHOWSKI asked if SB 5001 fixes the problem that has
come close to happening in the past, which is that there is no
dividend if the earnings reserve drops and there are
insufficient funds to pay the dividend.
4:11:28 PM
MS. POKON explained that with the new dividend formula, there
would be paid a transfer from the general fund to the dividend
fund. She said the source of the money in the general fund would
be 20 percent of the POMV transfer from the earnings reserve and
20 percent of royalties that go into the unrestricted general
fund. Under SB 5001 the royalties do not go through the ERA,
whereas current procedure is for all the funds for the dividend
to transfer from the ERA to the dividend fund.
CHAIR STOLTZE asked if making the payout will be easier because
of the smaller dividend.
MS. POKON replied that the dividend will go up if royalties and
the value of the fund go up and if they both go down it will be
the opposite situation.
SENATOR WIELECHOWSKI asked if there would still be money from
royalties, as long as oil flows through the pipeline, even if no
money was coming in due to a few consecutive years of a down
market.
MS. POKON answered yes.
CHAIR STOLTZE thanked the participants.
[SB 5001 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB5001 ver A.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 Sponsor Statement - Governor's Transmittal Letter.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 (APFPA) presentation for SSTA 7.13.2016.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 summary 7.12.2016.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 sectional analysis 7.12.2016.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 flow chart 7.13.2016.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001-Fund Cap-Dup-CVCF-07-07-16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001-DOR-TRS-07-07-16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001-DOR-TAX-07-07-16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001-DOR-PFD-07-07-16.pdf |
SSTA 7/13/2016 1:00:00 PM |
SB5001 |
| SB 5001-DOR-APFC-07-07-16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001-DOC-PHC-07-06-16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB 5001 Support Document - Ltr to Senator MacKinnon re CSSB 128(FIN) - 5.12.16.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB 128 SB5001 |
| SB 5001 - Supporting Document - News-Miner Article 7.12.2016.pdf |
SSTA 7/13/2016 1:00:00 PM SSTA 7/13/2016 5:30:00 PM SSTA 7/14/2016 10:00:00 AM |
SB5001 |
| SB5001 Administration Letter to Senate State Affairs Regarding Participation - 7.12.2016.pdf |
SSTA 7/13/2016 1:00:00 PM |
SB5001 |