Legislature(2019 - 2020)ADAMS ROOM 519

07/11/2019 01:00 PM FINANCE

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Audio Topic
02:35:58 PM Start
02:36:31 PM HB2001
02:37:32 PM Presentation by Larry Persily Given to Alaskan Business Leaders
03:27:55 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 2:30 p.m. Today --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB2001 APPROP: ERA FOR PERMANENT FUND DIVIDENDS TELECONFERENCED
Heard & Held
Presentation: July 9th Presentation for Alaskan
Business Leaders by Larry Persily
HOUSE BILL NO. 2001                                                                                                           
                                                                                                                                
     "An Act making a special appropriation from the                                                                            
     earnings reserve account for the payment of permanent                                                                      
     fund dividends; and providing for an effective date."                                                                      
                                                                                                                                
2:37:21 PM                                                                                                                    
                                                                                                                                
^PRESENTATION  BY LARRY  PERSILY GIVEN  TO ALASKAN  BUSINESS                                                                  
LEADERS                                                                                                                       
                                                                                                                                
2:37:32 PM                                                                                                                    
                                                                                                                                
LARRY  PERSILY, SELF,  JUNEAU, shared  that he  had recently                                                                    
given  a  presentation  to  a   group  of  Alaskan  business                                                                    
leaders. He began  with a slide showing an  open letter from                                                                    
Alaska business leaders (copy on  file). The letter included                                                                    
four beliefs pertaining to  pertinent issues surrounding the                                                                    
Permanent  Fund Dividend.  He believed  businesses that  had                                                                    
signed the  letter were concerned  about the effects  on the                                                                    
economy due to budget cuts  and the long-term effects on the                                                                    
Permanent Fund from overdrawing  the percent of market value                                                                    
(POMV) adopted by the legislature  on 2018. Discussions that                                                                    
had led  to the writing of  the letter had not  included the                                                                    
legality of  whether the current  special session  should be                                                                    
held in Juneau or Wasilla.                                                                                                      
                                                                                                                                
Vice-Chair Ortiz  understood that  the business  leaders had                                                                    
come  together specifically  to  discuss the  points of  the                                                                    
letter.                                                                                                                         
                                                                                                                                
Mr.  Persily  replied  that  the  Rasmussen  Foundation  had                                                                    
contacted as  many business leaders  as possible  to discuss                                                                    
the  urgent  issue  of  the   state  budget.  He  said  that                                                                    
participants had agreed on four points:                                                                                         
                                                                                                                                
     1. Legislators need to convene in a single location so                                                                   
        that all 60 members can vote Gov. Mike Dunleavys                                                                        
        budget vetoes up or  down. Every legislator  owes it                                                                    
        to the public to go on the  record on this important                                                                    
        vote.                                                                                                                   
     2.  Lawmakers need to adopt and adhere to a new                                                                          
        Permanent Fund dividend  formula that will  not draw                                                                    
        down unsustainable amounts from  the funds  earnings                                                                    
        reserve this year, next year or in any future year.                                                                     
     3. The governors more than $400 million in budget                                                                        
        vetoes, when combined with the  $190 million already                                                                    
        cut out of the budget by  the Legislature this year,                                                                    
        go too  far,  too  fast.  Cuts  of  that  size  will                                                                    
        eliminate critical public services and result in the                                                                    
        loss of  thousands of  jobs,  likely pushing  Alaska                                                                    
        into recession.  The  public  wants  a  responsible,                                                                    
        sustainable budget for years to come.                                                                                   
     4. The current stalemate is bad for business and for a                                                                   
        healthy Alaska where Alaskans want to live and work.                                                                    
        The public needs  decisions now,  not later.  and we                                                                    
        need decisions  that  look  long  term,  overlooking                                                                    
        short-term politics. Nobody benefits  from repeating                                                                    
        this debate a year from now.                                                                                            
                                                                                                                                
Mr.  Persily explained  that when  he  gave presentation  or                                                                    
wrote  opinion columns,  he used  the word   we  because  he                                                                    
believed that  the state's  condition was  the fault  of the                                                                    
collective. He  found it unfortunate  that for the  past two                                                                    
generations   the  dividend   had  become   political,  with                                                                    
candidates  promising  large  dividends and  no  taxes.  The                                                                    
public had  asked for,  and depended  on, programs  paid for                                                                    
out of the  General Fund. He added that the  state had drawn                                                                    
from the  Constitutional Budget Reserve (CBR)  for over half                                                                    
of  its  existence.  He lamented  that  failed  attempts  at                                                                    
economic  diversification  had  contributed to  the  current                                                                    
fiscal crisis.                                                                                                                  
                                                                                                                                
2:43:41 PM                                                                                                                    
                                                                                                                                
Mr.  Persily  turned  to  slide  2: "How  did  we  get  here                                                                    
today?":                                                                                                                        
                                                                                                                                
        • After cutting hundreds of millions from the state                                                                   
          operating budget over his four years, Gov. Walker                                                                     
          said 'enough' and proposed an essentially flat                                                                        
          FY2020 budget for his successor                                                                                       
        • Gov. Dunleavy took office, promising to restore a                                                                   
          full dividend of $3,000, and then proposed                                                                            
          cutting public services and taking over $400                                                                          
          million  from   municipalities  to  make   it  all                                                                    
          balance                                                                                                               
        • Legislators rejected the governor's plan, but cut                                                                   
          $190 million                                                                                                          
        • The Legislature has been  unable to  agree on  a                                                                    
          dividend amount                                                                                                       
        • Gov. Dunleavy vetoed more than $400 million from                                                                    
          the budget                                                                                                            
        • The Legislature is back in special session   the                                                                    
          second this year                                                                                                      
                                                                                                                                
Mr. Persily shared that the group brought together by the                                                                       
foundation had reviewed the mitigating factors on the                                                                           
slide.                                                                                                                          
                                                                                                                                
2:45:18 PM                                                                                                                    
                                                                                                                                
Mr. Persily addressed slide 3: "Examples of budget vetoes":                                                                     
                                                                                                                                
     Homeless                                                                                                                   
        • Homeless Services - $11 million     over 80%  of                                                                    
          funding  cut.  Hits  to RurAL  CAP  $1.6  million,                                                                    
          Catholic Social Services  $1.4 million for Brother                                                                    
          Francis  Shelter and  Clare  House, $700,000  from                                                                    
          Covenant House,  $500,000 from the  AWAIC shelter.                                                                    
          At least  500 vulnerable adults and  children will                                                                    
          lose shelter.                                                                                                         
                                                                                                                                
     HEALTH CARE                                                                                                                
        • Behavioral Health - $6 million on top of  the $6                                                                    
          million cut last fiscal year.  Deep cuts to mental                                                                    
          health and substance abuse treatment programs.                                                                        
        • Medicaid -   $50   million,  on   top   of   the                                                                    
          Legislature's  $75  million cut,  totaling  almost                                                                    
          25% of state funding.                                                                                                 
                                                                                                                                
Mr.  Persily  shared  that  one of  the  executives  of  the                                                                    
business  owner group  had lamented  that she  would not  be                                                                    
able  to  donate  enough  to nonprofits  to  fill  the  gaps                                                                    
created by the cuts. He turned to slide 4:                                                                                      
                                                                                                                                
     EDUCATION                                                                                                                  
        • Early Childhood - $8.6 million - ELIMINATED. Head                                                                   
          Start,  early  childhood   education,  Parents  as                                                                    
          Teachers.                                                                                                             
        • Local school debt reimbursement  - $49  million.                                                                    
          Pushing  the   debt  to   municipalities,  hitting                                                                    
          property taxes.                                                                                                       
        • University of Alaska  -   $130  million.  A  41%                                                                    
          reduction   in  state   funding.  The   university                                                                    
          already  has   sent  furlough  notices   to  2,500                                                                    
          employees. The  cut in state funding  means a loss                                                                    
          of $44 million in federal grants.                                                                                     
                                                                                                                                
Mr. Persily said that he had educated the group on the                                                                          
legislative process for considering the vetoes listed on                                                                        
slide 5, What's the process this week:                                                                                          
                                                                                                                                
        • Legislature convened in special session  Monday,                                                                    
          in  Juneau (almost  two-thirds  of lawmakers  were                                                                    
          there)                                                                                                                
        • In calling the  special  session,  the  governor                                                                    
          said,  'Work  in  Wasilla,' but  most  legislators                                                                    
          said no thanks                                                                                                        
        • Legal arguments both   ways,  not  an  immediate                                                                    
          concern                                                                                                               
        • Legislature has through the fifth day of special                                                                    
          session  to   override  budget   vetoes  (requires                                                                    
          three-quarters majority)                                                                                              
        • Is it five  calendar days  (ending  at  midnight                                                                    
          Friday)  or  is  it  five  24-hour  days  (1  p.m.                                                                    
          Saturday)  never been tested                                                                                          
        • End game likely will include vetoes, PFD, capital                                                                   
          budget                                                                                                                
                                                                                                                                
Mr. Persily  felt that the  group had an  understanding that                                                                    
the  financial   crisis  was  not  comprised   of  distinct,                                                                    
unconnected problems. He  reiterated the four determinations                                                                    
the group had reached, as written in the letter.                                                                                
                                                                                                                                
Mr. Persily moved to slide 6, "How much PFD can we                                                                              
afford.":                                                                                                                       
                                                                                                                                
        • About $1,000 under the Legislature's budget, with                                                                   
          no excess draw on Permanent Fund earnings reserve                                                                     
        • $1,600 with an additional $400 million in budget                                                                    
          cuts on  top of  the $190 million  already adopted                                                                    
          by legislators, or break  the 5.25% Permanent Fund                                                                    
          draw and go to 6%                                                                                                     
        • $3,000 would leave a $1.3 billion budget gap,                                                                       
          requiring all  of the governor's  operating budget                                                                    
          vetoes, a  minimal statewide capital  budget, plus                                                                    
          taking an  almost 7%  percent-of-market-value draw                                                                    
          on the Permanent Fund                                                                                                 
                                                                                                                                
Mr.  Persily elaborated  that a  shortfall  of $400  million                                                                    
would  need to  be  covered through  budget  cuts, a  three-                                                                    
quarter vote to access money in  the CBR, or by breaking the                                                                    
5.25 percent  structured POMV draw. He  addressed a scenario                                                                    
with a $3,000  PFD. He reported that the balance  of the CBR                                                                    
was approximately  $2.1 billion.  He relayed that  the group                                                                    
of business leaders  felt the that a POMV draw  of 7 percent                                                                    
or more was  irresponsible. He stated that at  some point in                                                                    
the relatively  near future there would  be trouble managing                                                                    
the Permanent  Fund. He  stressed that if  the PFD  was over                                                                    
$1,000 it  would be necessary  to determine where  the funds                                                                    
were coming from.                                                                                                               
                                                                                                                                
2:49:21 PM                                                                                                                    
                                                                                                                                
Co-Chair  Foster recognized  Representatives Louise  Stutes,                                                                    
Adam Wool, and Zach Fields in the audience.                                                                                     
                                                                                                                                
Mr. Persily advanced to a bar  chart on slide 7 titled "Real                                                                    
general  fund  revenue/budget   history  (2018  dollars  per                                                                    
person)," showing FY 76 to  FY 18 and adjusted for inflation                                                                    
(generated by the Legislative  Finance Division). The bright                                                                    
green portion of  the chart reflected revenue  with peaks in                                                                    
the 1980s (with 2 million barrels  per day or four times the                                                                    
current production); and under  the Palin administration era                                                                    
oil taxes  [FY 08], which had  coincidentally coincided with                                                                    
oil  prices  of  $100  per barrel.  He  explained  that  the                                                                    
numbers would not  have been as high if oil  prices had been                                                                    
$40 to $50  per barrel. He pointed to  agency operations and                                                                    
operating capital and pointed out  that the FY 18 per capita                                                                    
spending level was close to the 1976 level.                                                                                     
                                                                                                                                
2:51:00 PM                                                                                                                    
                                                                                                                                
Mr. Persily turned to a bar chart on slide 8 titled "End-                                                                       
of-year reserve  balances." He discussed that  balancing the                                                                    
current  budget would  require drawing  from state  reserves                                                                    
regardless of  the dividend  size. He  noted that  the state                                                                    
was using  Permanent Fund earnings  to help pay  for schools                                                                    
and other  public services  for the first  time in  the past                                                                    
fiscal  year. He  reviewed that  the CBR  had been  a ballot                                                                    
proposition approved by voters almost  30 years earlier as a                                                                    
way to  save some  money. He noted  it took  a three-quarter                                                                    
vote [by  the legislature] to  access CBR funds.  The actual                                                                    
CBR fund had been a  political compromise. He explained that                                                                    
the Senate  had wanted  a spending limit  and the  House had                                                                    
not;  therefore, the  settlements had  been invested  in the                                                                    
CBR  and a  three-quarter vote  had been  implemented, which                                                                    
effectively  worked  as  a  spending  limit.  The  Statutory                                                                    
Budget   Reserve  (SBR)   had   been   implemented  by   the                                                                    
legislature  about 10  years back  and was  accessible by  a                                                                    
simple majority.  He reported  the SBR was  near the  end of                                                                    
its life, with a current balance of about $170 million.                                                                         
                                                                                                                                
Mr.  Persily  referenced  the Department  of  Revenue  (DOR)                                                                    
website  that showed  a CBR  balance of  $2.1 billion  as of                                                                    
July  1.  According  to  the  Permanent  Fund  website,  the                                                                    
Earnings Reserve Account (ERA) was  $16 billion as of June 1                                                                    
(before  any  transfers  to the  principal  in  the  current                                                                    
budget). He reported that the  group of business leaders had                                                                    
been very  concerned and was  aware of the spending  down of                                                                    
the  SBR  and   CBR  over  recent  years.   There  had  been                                                                    
discussion about the  need to maintain a  decent CBR balance                                                                    
to deal  with fluctuation in  oil prices. He noted  that oil                                                                    
prices  were  currently around  $69  per  barrel and  fairly                                                                    
recently prices  had been  closer to  $60 per  barrel. There                                                                    
was a purpose  to maintaining a balance  and not overdrawing                                                                    
the Permanent Fund in order  to help pay for public services                                                                    
and dividends wanted by Alaskans.                                                                                               
                                                                                                                                
Mr. Persily  clarified the meeting  of business  leaders had                                                                    
not been partisan  and had not included  accusations or name                                                                    
calling.  The  purpose had  been  to  meet and  discuss  the                                                                    
problems  facing   the  legislature  as  investors   and  as                                                                    
business  owners.  Discussion  had also  included  how  they                                                                    
would  be  affected as  employers  and  how their  employees                                                                    
would be affected. Additionally,  they had discussed how the                                                                    
budget situation  impacted their  ability to  make long-term                                                                    
decisions. He  highlighted that  the legislature  had talked                                                                    
for  years  about the  importance  of  fiscal certainty  and                                                                    
stability for the oil and  gas industry to make multibillion                                                                    
dollar  investments. He  pointed  out that  non-oil and  gas                                                                    
businesses  needed   the  same  fiscal  stability   to  make                                                                    
investment decisions.                                                                                                           
                                                                                                                                
2:54:31 PM                                                                                                                    
                                                                                                                                
Co-Chair  Foster recognized  Representative Sarah  Hannan in                                                                    
the audience.                                                                                                                   
                                                                                                                                
Vice-Chair  Johnston  asked  if  additional  businesses  had                                                                    
signed onto the  original letter that had  been published in                                                                    
the paper.                                                                                                                      
                                                                                                                                
Mr.  Persily replied  in the  affirmative. He  detailed that                                                                    
the meeting had been on a  Tuesday and there had been a fast                                                                    
turnaround  to   get  the  advertisement   produced,  gather                                                                    
signatures, and publish  the list in the  paper on Thursday.                                                                    
He was aware of at least one additional signature.                                                                              
                                                                                                                                
Vice-Chair Johnston  noted Mr. Persily  had been in  and out                                                                    
of the building for years.                                                                                                      
                                                                                                                                
Mr. Persily affirmed he had been  in and out of the building                                                                    
for decades.                                                                                                                    
                                                                                                                                
Vice-Chair Johnston stated  that a promise had  been made on                                                                    
the  House  floor   in  the  past  several   days  that  the                                                                    
legislature  was  not  finished.   She  continued  that  the                                                                    
legislature had not been able  to get veto overrides, but it                                                                    
was working to  come up with an agreement  with the Minority                                                                    
and governor on a budget  that had a reduced economic impact                                                                    
in comparison to  the current budget. She  stated the budget                                                                    
contained over $600  million in cuts to  services. She asked                                                                    
where Mr. Persily saw the legislature getting the funds.                                                                        
                                                                                                                                
Mr. Persily  took an  oil price increase  off the  table and                                                                    
relayed there were three options.  There was currently about                                                                    
$170 million  remaining in the  SBR, which if used  to boost                                                                    
the dividend  could add about  $275 per person  depending on                                                                    
the number  of applicants.  He considered  whether it  was a                                                                    
good use  of the money  from a policy standpoint.  There was                                                                    
$2.1  billion in  the CBR,  which  required a  three-quarter                                                                    
vote. He  cautioned that if  too much  was taken out  of the                                                                    
CBR it would  jeopardize cash flow for the  state. The third                                                                    
option  was  to  break  the   5.25  percent  POMV  draw.  He                                                                    
concluded that none of the options were great.                                                                                  
                                                                                                                                
Representative  Knopp asked  if Mr.  Persily was  indicating                                                                    
the  state needed  to spend  within its  means. He  observed                                                                    
that none of the options sounded good.                                                                                          
                                                                                                                                
Mr.  Persily agreed,  but  clarified  his recommendation  to                                                                    
spend  within the  state's means  included  spending on  the                                                                    
PFD.                                                                                                                            
                                                                                                                                
Representative Knopp  pointed to slide 6  that addressed how                                                                    
much PFD  the state  could afford. He  looked at  the second                                                                    
bullet point  and asked if  the state could afford  a $1,600                                                                    
PFD  if  the legislature  let  the  $400 million  in  vetoed                                                                    
funding  stand,  combined  with the  $190  million  in  cuts                                                                    
adopted  by the  legislature.  He wondered  if the  scenario                                                                    
would still involve a draw over 5.25 percent.                                                                                   
                                                                                                                                
Mr. Persily  answered that maintaining  the $190  million in                                                                    
cuts  adopted  by the  legislature  combined  with the  $400                                                                    
million  in  vetoed  funds,  would   mean  the  state  could                                                                    
withstand roughly a $1,600 PFD  without having to exceed the                                                                    
5.25 percent  draw. He  clarified that it  was an  either or                                                                    
scenario  -  the  $400  million  in  budget  cuts  could  be                                                                    
maintained or the  5.25 percent POMV draw  could be exceeded                                                                    
or go into the CBR.                                                                                                             
                                                                                                                                
2:59:33 PM                                                                                                                    
                                                                                                                                
Representative Knopp  surmised that  if the  legislature was                                                                    
not  willing to  let the  vetoes  stand at  $400 million  or                                                                    
exceed  the  5.25  percent  draw,  it  would  mean  spending                                                                    
residual cash, which would govern the size of the dividend.                                                                     
                                                                                                                                
Mr. Persily  answered in the  affirmative. He  elaborated it                                                                    
was the  money on the table.  The decision was about  how to                                                                    
best spend the money for the collective future of Alaska.                                                                       
                                                                                                                                
Representative Knopp  stated that  the legislature  had been                                                                    
beat up for a number of  years for spending down savings. He                                                                    
heard  it daily  from the  public that  the legislature  had                                                                    
spent down $15 billion over  four years. The legislature had                                                                    
announced  in  the beginning  of  session  that it  was  not                                                                    
spending any more  savings. He noted that  the previous year                                                                    
the  legislature had  passed  the  POMV draw  in  SB 26.  He                                                                    
stressed that the House Majority  coalition had announced at                                                                    
the beginning of session that  it would not exceed the [5.25                                                                    
percent] draw. He underscored that  exceeding the draw would                                                                    
decimate the ERA over time if  it was not reigned in. He did                                                                    
not  see  the options.  He  stated  that services  could  be                                                                    
sacrificed  larger dividends.  He  asked if  that route  was                                                                    
smart and considered  it may be to a small  degree. He asked                                                                    
for Mr. Persily's thoughts.                                                                                                     
                                                                                                                                
Mr.  Persily agreed  it was  the dilemma.  There could  be a                                                                    
bigger dividend  if there were  cuts to grants  for homeless                                                                    
programs, student  scholarships (where students  had already                                                                    
enrolled   and  made   plans),   University  programs   that                                                                    
attracted  federal  dollars  for  research  grants,  Village                                                                    
Public Safety Officers (VPSOs),  and other programs that may                                                                    
not  be covered  by the  reverse  sweep such  as Power  Cost                                                                    
Equalization (PCE). The  question was about the  best way to                                                                    
spend the  limited dollars for the  collective or individual                                                                    
good. He  agreed the  legislature was getting  beat up  by a                                                                    
segment of  the public  over the issue.  He remarked  it was                                                                    
unfortunate the situation had come down to that.                                                                                
                                                                                                                                
3:02:13 PM                                                                                                                    
                                                                                                                                
Representative Knopp used a  hypothetical scenario where the                                                                    
PCE sweep was not reversed  and the fund no longer generated                                                                    
$60 million that the state  could spend. He remarked that it                                                                    
would either leave  rural Alaska "high and  dry" without any                                                                    
support for  high energy  costs or the  state would  pay the                                                                    
price somewhere  in the future. He  asked if it was  fair to                                                                    
say  that the  state was  in a  terrible predicament  in the                                                                    
outyears if  it tried  make the  funds up  or assist  in any                                                                    
way.                                                                                                                            
                                                                                                                                
Mr. Persily  predicted that  if PCE  was not  funded, people                                                                    
would  be delinquent  on utility  bills; utilities  that may                                                                    
have  bond debts  to  cover or  maintenance  costs to  cover                                                                    
would not have money to do  the work; and some villagers may                                                                    
move  to  Anchorage  or Fairbanks,  which  would  exacerbate                                                                    
needs for social problems if  there was no available housing                                                                    
or jobs. He explained that  the situation would create major                                                                    
problems  in peoples'  lives, for  utilities, for  investors                                                                    
who had loaned  money to utilities, and  for communities. He                                                                    
noted that people would receive a dividend.                                                                                     
                                                                                                                                
Co-Chair  Foster   highlighted  that  PCE  and   the  Higher                                                                    
Education Fund (scholarships  due to go out  to thousands of                                                                    
students going  to college) were  tied together. He  cited a                                                                    
recent tweet  posted by the  governor stating  that rhetoric                                                                    
on   the  reverse   sweep  is   incorrect,   the  power   of                                                                    
appropriation resided  solely with the legislature,  and the                                                                    
legislature had  failed to  adequately fund  these programs.                                                                    
He  agreed the  legislature had  the power  of appropriation                                                                    
and  that   it  needed  to  adequately   fund  programs.  He                                                                    
elaborated it was true when  talking about the reverse sweep                                                                    
and the  18 funds  and programs  that historically  had been                                                                    
considered  sweepable. In  that  situation, a  three-quarter                                                                    
vote was  required to appropriate  the money  into programs.                                                                    
He  highlighted  four  of the  programs  including  Railbelt                                                                    
energy,  the  Alaska  Marine Highway  System  (AMHS)  vessel                                                                    
replacement,  educational  facilities maintenance,  and  the                                                                    
civil legal  services fund.  He stated  that the  funds were                                                                    
considered by  prior governors to be  sweepable. The current                                                                    
administration  was looking  to  expand the  list  of 18  to                                                                    
sweep funds from an additional  12 or so funds including PCE                                                                    
and the Higher Education Fund.                                                                                                  
                                                                                                                                
Co-Chair Foster  continued that former Governor  Parnell had                                                                    
championed the  Higher Education  Fund and did  not consider                                                                    
it   to   be  sweepable.   He   stated   that  the   current                                                                    
administration considered the fund to  be sweepable and as a                                                                    
result  12,000 emails  had been  sent to  students statewide                                                                    
informing   them  that   they   would   not  receive   their                                                                    
scholarship funds.  His understanding was that  one-third of                                                                    
the  tuition  received  by the  University  system  went  to                                                                    
helping young students go to  college. He stated that if the                                                                    
fund  was  not swept  (as  had  been  the case  with  former                                                                    
Governors  Walker  and  Parnell), a  three-quarter  vote  to                                                                    
appropriate  the  funds  was   unnecessary.  He  noted  that                                                                    
appropriation  would still  require a  majority vote  as was                                                                    
normal; however, swept funds required a three-quarter vote.                                                                     
                                                                                                                                
Co-Chair  Foster stressed  that the  PCE Fund  had not  been                                                                    
swept by governors going back  to the 1980s when the program                                                                    
had first been created -  meaning the three-quarter vote had                                                                    
not been needed.  He disputed the governor's  claim that the                                                                    
legislature  had  failed  to adequately  fund  programs.  He                                                                    
underscored  there was  more  to the  story;  the funds  had                                                                    
historically not been  swept and the governor  had created a                                                                    
new situation  where a higher  bar was required to  fund the                                                                    
programs. He explained that the  governor was sweeping funds                                                                    
that were  normally not swept.  He asked for comment  by Mr.                                                                    
Persily.                                                                                                                        
                                                                                                                                
3:07:39 PM                                                                                                                    
                                                                                                                                
Mr.  Persily agreed  there was  more to  the story  that the                                                                    
public was not  getting. He shared it was the  reason he had                                                                    
purchased a newspaper in 2019  (and was considering buying a                                                                    
couple more) and would be  teaching journalism at University                                                                    
of Alaska-Anchorage  in the fall  if there was  a journalism                                                                    
department  in the  fall.  He reported  that  at the  recent                                                                    
meeting, the  business community  had discussed that  all of                                                                    
the impacts [of  the governor's vetoes] were  not known. For                                                                    
example, if scholarships were not  paid, which accounted for                                                                    
one-third  of tuition  would it  mean more  than the  budget                                                                    
vetoes  would  be  lost because  students  would  leave  the                                                                    
University because  they could  not afford  it. The  CBR was                                                                    
set up  alone -  technically, when money  was taken  out, it                                                                    
had to be  put back in. The legislature/state  had paid back                                                                    
some  of the  draws over  the  years, not  the current  last                                                                    
several  years. The  way the  law had  been interpreted  was                                                                    
that at  the end  of the fiscal  year certain  accounts were                                                                    
swept back  into the CBR  because it was necessary  to repay                                                                    
the loan.                                                                                                                       
                                                                                                                                
Mr. Persily elaborated it was  not possible to tell the bank                                                                    
that there  was money  in the  bank, but  the state  did not                                                                    
want to  pay its loan  payment. He explained that  the money                                                                    
was swept up and as part  of a three-quarter vote at the end                                                                    
of every  session and  was restored at  12:01 a.m.  [on July                                                                    
1]. The legislature  did not vote against funding  PCE or to                                                                    
drain  the account.  The problem  was that  PCE and  perhaps                                                                    
other  accounts   had  been  caught  up   in  the  political                                                                    
inability to get a three-quarter vote on the CBR.                                                                               
                                                                                                                                
Co-Chair  Foster acknowledged  Representative Andi  Story in                                                                    
the audience.                                                                                                                   
                                                                                                                                
3:10:00 PM                                                                                                                    
                                                                                                                                
Representative LeBon highlighted an  earlier reference to SB
26.   He  discussed   that  in   the  preceding   year,  the                                                                    
legislature had identified  SB 26 as a POMV  product to move                                                                    
the state forward  on funding for the general  cost of doing                                                                    
business  and  the PFD.  He  asked  if  Mr. Persily  had  an                                                                    
opinion about the using the  POMV approach. Additionally, he                                                                    
wondered  if Mr.  Persily  had an  opinion  about a  formula                                                                    
within a  formula. He stated  that the formula took  a five-                                                                    
year  average  on  the  value  of  the  Permanent  Fund  and                                                                    
reasoned that the actual draw was less than 5.25 percent.                                                                       
                                                                                                                                
Mr.  Persily replied  that the  legislature had  debated for                                                                    
years about how to deal  with Permanent Fund earnings, which                                                                    
people  knew eventually  would have  to go  to help  pay for                                                                    
public  services. He  agreed  that SB  26  looked back  five                                                                    
years  at  the  fund's   realized  earnings,  determined  an                                                                    
average and took  5.25 percent of the average.  He stated it                                                                    
was 5.25 percent of the  average, but less than 5.25 percent                                                                    
of  the  current balance.  The  rationality  for taking  the                                                                    
five-year average  was to account for  volatility. He stated                                                                    
there would be  some great [earnings] years, but  it was not                                                                    
that  long ago  that the  Permanent Fund  had lost  about $6                                                                    
billion in one year. The  state did not want the uncertainty                                                                    
of  basing  the   draw  -  which  would   pay  for  schools,                                                                    
dividends,  VPSOs,   homeless  programs,  Pre-K  -   on  the                                                                    
fluctuations of Wall Street.                                                                                                    
                                                                                                                                
Mr.   Persily  continued   that   the   previous  year   the                                                                    
legislature  had   discussed  putting  in  statute   or  the                                                                    
constitution a hard and fast  allocation of the 5.25 percent                                                                    
divided  between services  and PFDs  (e.g. 50/50  for public                                                                    
services  and  PFDs,  80 percent  for  public  services,  80                                                                    
percent for dividends). He explained  it was a finite amount                                                                    
of money -  the more that went to dividends,  the less there                                                                    
was for public services and  vice versa. The preceding year,                                                                    
the legislature  had agreed  it was  good fiscal  policy for                                                                    
the  endowment to  limit how  much was  taken out;  however,                                                                    
politically there had  been no agreement on how  to split it                                                                    
between  public   services,  community  services,   and  the                                                                    
dividend.  He   clarified  he  was  not   placing  blame  on                                                                    
legislators from the past year - it was not an easy task.                                                                       
                                                                                                                                
3:13:23 PM                                                                                                                    
                                                                                                                                
Representative  Josephson  referenced the  governor's  tweet                                                                    
highlighted by Co-Chair  Foster. He stated it  was true that                                                                    
the  delivery  of  30  votes   for  the  CBR  was  sometimes                                                                    
bargained for and he had been  part of the minority that had                                                                    
participated.  He  understood it  was  a  social compact  of                                                                    
sorts. He provided a social  compact scenario where a person                                                                    
driving  pulled over  when hearing  an ambulance  because at                                                                    
some  point  the ambulance  could  be  coming for  them.  He                                                                    
understood the  need to make  the accounts work and  that at                                                                    
some point  the three-quarter vote  had to be  delivered. He                                                                    
stated that  he had  not been given  a concrete  request for                                                                    
the  delivery of  a three-quarter  vote. He  referenced that                                                                    
Senator  Lyman  Hoffman  had mentioned  that  in  Hickel  v.                                                                    
Cowper there  was reference to  the Alaska  Energy Authority                                                                    
as being an independent authority  linked to PCE that may be                                                                    
exempt from  the sweep. He  stated it reminded him  that the                                                                    
legislature  may end  up in  court  with the  administration                                                                    
over three or four different matters.                                                                                           
                                                                                                                                
Representative  Josephson looked  at the  slide titled  "How                                                                    
much PFD can  we afford." He stated that it  struck him that                                                                    
to honor the 5.25 percent  draw but to sweeten the dividend,                                                                    
the  CBR  could be  used  (the  treasury office  noted  $1.2                                                                    
billion to  $1.4 billion  was needed  and the  CBR contained                                                                    
$2.1   billion).   He   remarked  that   some   constituents                                                                    
supporting the large  dividend only wanted the  PFD funds to                                                                    
come from the ERA (resource  dollars), not the CBR. He asked                                                                    
for  verification   that  Mr.  Persily  was   reminding  the                                                                    
committee -  even though  there was  a tendency  to consider                                                                    
going beyond  a 5.25 percent draw  in order to cut  a deal -                                                                    
that  people   were  watching  the   legislature,  including                                                                    
lenders, banks, and bond issuers.                                                                                               
                                                                                                                                
3:16:21 PM                                                                                                                    
                                                                                                                                
Mr. Persily answered  that he did not believe  anyone at the                                                                    
table  of  business  leaders  would  be  apoplectic  if  the                                                                    
legislature  drew 5.3  percent instead  of 5.25  percent, in                                                                    
order  to   have  peace  in   the  current   time.  However,                                                                    
discussion   of  draws   of  6   to  7   percent  (and   the                                                                    
understanding the same problem  would occur in the following                                                                    
year)  made people  very nervous.  He discussed  the reverse                                                                    
sweep and  three-quarter vote and  noted that in  past years                                                                    
there had been end of  session negotiations (some would call                                                                    
political blackmail)  between the  Majority and  Minority to                                                                    
get  the three-quarter  vote. For  example,  there had  been                                                                    
funds in  the capital budget  or programs that  the Minority                                                                    
would agree to  a three-quarter vote for.  He explained that                                                                    
the negotiations had always been  over budget items, not the                                                                    
reverse  sweep  language.  He  stated   there  had  been  an                                                                    
understanding  that legislators  could  fight over  specific                                                                    
projects  (e.g.  a  road), but  they  would  not  jeopardize                                                                    
programs with the reverse sweep.                                                                                                
                                                                                                                                
Mr. Persily addressed  the CBR and agreed  there was nothing                                                                    
magical about  $2.1 [billion] and  that taking a bit  of the                                                                    
balance to  preserve the sanctity of  Alaska's fiscal future                                                                    
would not destroy  the economy. He recalled  working for DOR                                                                    
from 1997  to 2003 when  the state had been  running billion                                                                    
dollar  deficits on  a budget  that was  about $2.4  billion                                                                    
(about 40  percent of  the funds  came from  budget reserves                                                                    
and it was before many  cases had settled). He reported that                                                                    
the CBR  had dipped below  $2 billion;  at the time  DOR had                                                                    
determined that $1.5 billion was  the red line. He explained                                                                    
that  if  the  number  dipped  below  that  amount,  statute                                                                    
allowed the state  to issue revenue anticipation  notes - it                                                                    
was like  a paycheck loan  where money was borrowed  for the                                                                    
short-term. He relayed  that the budget had  been smaller at                                                                    
the time. He advised looking at  a red line a bit above $1.5                                                                    
billion, but he  agreed there was a bit of  headroom if that                                                                    
was  what it  would take  to get  through the  situation and                                                                    
come up  with a lasting plan  in the future. A  lasting plan                                                                    
would  include  an  allocation   of  the  POMV  between  the                                                                    
individual and the community.                                                                                                   
                                                                                                                                
3:19:14 PM                                                                                                                    
                                                                                                                                
Representative Josephson referred back  to the "How much PFD                                                                    
can  we afford"  slide.  He was  concerned  with the  second                                                                    
bullet point  because he strongly believed  the $400 million                                                                    
in  vetoed   funds  belonged  to  public   safety  officers,                                                                    
professors,  domestic violence  shelters, public  radio, and                                                                    
more. He  explained it was  the reason he would  have joined                                                                    
in  Senator Chris  Birch's amendment  for a  $900 or  $1,000                                                                    
PFD. He thought there must be  a deal at hand, otherwise the                                                                    
proposition  of  vetoes  and no  dividend  was  a  lose-lose                                                                    
scenario. The goal was a win-win scenario.                                                                                      
                                                                                                                                
Mr. Persily answered  that the point he had tried  to get at                                                                    
with the business  leader group had been that  even if there                                                                    
was no veto  override, the PFD was only  at $1,600. Whereas,                                                                    
if the  PFD was  $3,000, the $400  million [in  vetoes] only                                                                    
amounted to less  than one-third of the  funds needed; there                                                                    
would be serious problems to pay down a $3,000 dividend.                                                                        
                                                                                                                                
Vice-Chair Johnston  thanked Mr. Persily for  speaking about                                                                    
revenue  anticipation  notes   (or  tax  anticipation  notes                                                                    
(TANs) if the  state had taxes), which was a  common way for                                                                    
governments to  carry their cash management.  She considered                                                                    
that if  the legislature drew down  the SBR and CBR  and got                                                                    
to a point where it did not  have the cash, it would have to                                                                    
go with TANs.  Her experience had been that  you hoped there                                                                    
was a spread - that a  little money could be earned when the                                                                    
money came  in if the  interest rate  was low enough  on the                                                                    
tax or revenue anticipation notes.                                                                                              
                                                                                                                                
Vice-Chair   Johnston  considered   the  option   where  the                                                                    
legislature exceeded  the structured draw from  the ERA. She                                                                    
stated  there   were  a  number   of  things  done   by  the                                                                    
legislature over  the past  four years  that would  give her                                                                    
pause  and could  have an  impact on  the state's  financial                                                                    
standing and  bond rating. She  noted it appeared  the state                                                                    
had been able to protect  its bond rating because Alaska was                                                                    
very fortunate  with its $65  billion [Permanent  Fund] fund                                                                    
balance. She wondered what would  happen to the state's bond                                                                    
rating  if   it  started   making  unstructured   draws  and                                                                    
potentially revenue anticipation notes.                                                                                         
                                                                                                                                
3:22:53 PM                                                                                                                    
                                                                                                                                
Mr. Persily  answered that when  the legislature  had passed                                                                    
SB 26 that  established the draw limit of  5.25 percent, the                                                                    
rating  agencies  had taken  the  state  off their  negative                                                                    
watch list  and indicated the action  was encouraging. Based                                                                    
on his conversations with individuals  in public finance, he                                                                    
expected that  if the  legislature drew 6  or 7  percent, he                                                                    
believed  rating agencies  would  have a  reversal of  their                                                                    
encouraging news from the previous  year. The agencies would                                                                    
be worried  about cash  flow. He  agreed that  some interest                                                                    
would  have  to  be  paid when  using  revenue  anticipation                                                                    
notes;  if too  much was  paid, the  state would  be digging                                                                    
itself into a deeper hole like a payday loan.                                                                                   
                                                                                                                                
Vice-Chair  Johnston  referenced  discussion  on  the  House                                                                    
floor earlier  in the  day and  noted they  had not  had the                                                                    
votes to override  the vetoes in terms of  a capital budget.                                                                    
She remarked it was not possible  to know where the price of                                                                    
oil would be or what markets  would be doing. She added that                                                                    
many times  the two went  in opposite directions.  She noted                                                                    
that  Alaska  was lucky  as  a  state  because it  had  that                                                                    
balance. She  reasoned that  at some  point the  state would                                                                    
need a  capital budget. She  thought that at some  point the                                                                    
legislature would  need to talk  about bonding  again, which                                                                    
was something the state had done  for a long period of time.                                                                    
She considered  what the  cost would  be if  the legislature                                                                    
broke  the  structured draw  and  the  state was  docked  by                                                                    
rating agencies.                                                                                                                
                                                                                                                                
Mr.  Persily agreed.  He  elaborated that  the  state had  a                                                                    
backlog  of  public   works  needs  including  construction,                                                                    
maintenance, and repairs. The state  could use a bond issue,                                                                    
which  meant  the  creditors would  determine  the  interest                                                                    
figure based on  the risk. He relayed that if  the state was                                                                    
financially  irresponsible, it  would  have to  pay more  to                                                                    
borrow the  money. It  was currently a  good time  to borrow                                                                    
money as  rates were  very low.  Legislators and  others had                                                                    
talked  in the  past couple  of years  about putting  a bond                                                                    
issue package  together. He  pointed out that  it had  to be                                                                    
factored into  the state's  budget - if  the state  sold the                                                                    
bonds, it  would have an  annual payment on the  debt, which                                                                    
would increase  the state's spending.  He noted  there would                                                                    
be significant benefit  upfront, but the debt  would have to                                                                    
be paid over time.                                                                                                              
                                                                                                                                
Vice-Chair Johnston remarked  that former Representative and                                                                    
Senator Anna  MacKinnon was  currently studying  the state's                                                                    
debt  and debt  limits in  a Commonwealth  North study.  She                                                                    
found the  information available  on the  Commonwealth North                                                                    
website to be very informative.                                                                                                 
                                                                                                                                
Mr. Persily  agreed the  state had the  capacity to  take on                                                                    
additional debt,  but there  was a  question about  what the                                                                    
debt would  fund how the state  would pay for it.  He stated                                                                    
there  was capacity  to  meet  some of  the  needs that  had                                                                    
accumulated  over   the  years  of   essentially  negligible                                                                    
capital  budgets consisting  of  the federal  match and  not                                                                    
much else.                                                                                                                      
                                                                                                                                
HB  2001  was  HEARD  and  HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
Co-Chair  Foster noted  the next  meeting was  scheduled for                                                                    
the following day.                                                                                                              
                                                                                                                                

Document Name Date/Time Subjects
HFIN Perlily Rasmuson slides for business leaders group (002).pdf HFIN 7/11/2019 1:00:00 PM
HFIN HB 2001 presentation
HB 2001 Business Leaders signatories.pdf HFIN 7/11/2019 1:00:00 PM
HB2001