Legislature(2021 - 2022)DAVIS 106
04/13/2021 11:30 AM House WAYS & MEANS
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| HB165 | |
| HJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 165 | TELECONFERENCED | |
| *+ | HJR 1 | TELECONFERENCED | |
HJR 1-CONST AM: PERMANENT FUND; POMV;EARNINGS
12:14:32 PM
CHAIR SPOHNHOLZ announced that the final order of business would
be SPONSOR SUBSTITUTE FOR HOUSE JOINT RESOLUTION NO. 1,
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund and to appropriations from
the Alaska permanent fund.
12:15:09 PM
The committee took a brief at-ease.
12:15:30 PM
REPRESENTATIVE JONATHAN KREISS-TOMKINS, Alaska State
Legislature, prime sponsor, introduced SSHJR 1. He explained
that the joint resolution would constitutionally protect the
real value of the Alaska Permanent Fund by "hardening" the
percent of market value (POMV) structure. Essentially, it would
convert the permanent fund into a traditional endowment, which
most sovereign wealth funds abide by. Under a traditional
endowment, a set amount of the market value would be taken out
each year making it impossible to "dip in and take extra." He
stated that another policy benefit of this approach would be the
elimination of the division between ERA and principal, which
would remove the risk of the ERA "bottoming out" in the event of
a market correction. He continued to explain that there would
be a steady and certain availability of cash for appropriation
by the legislature each year. The structure, he said, was
informed by trustee resolutions that had been passed through the
years. He believed that adopting this structure would remove
the permanent fund from the fracas of budget debates in the
legislature. Additionally, it would force the legislature to
balance the budget and make the hard decisions between more cuts
and more taxes, he said.
12:18:59 PM
REPRESENTATIVE JOSEPHSON pointed out that typically, there was
no discussion in committee of the strategy associated with the
legislation. Nonetheless, he sought to confirm that the
proposed join resolution would not dissolve the PFD formula.
REPRESENTATIVE KREISS-TOMKINS confirmed [that the PFD formula
would remain in statute.]
12:19:38 PM
REPRESENTATIVE JOSEPHSON asked for verification that under SSHJR
1, the ERA would no longer exist.
REPRESENTATIVE KREISS-TOMKINS confirmed. However, he emphasized
that each year, money from the permanent fund would still be
available for appropriation, which could then be used for
dividends.
12:20:33 PM
REPRESENTATIVE JOSEPHSON surmised that supporters of the PFD
formula would want to ride this resolution to its culmination.
He asked whether the bill sponsor had considered that.
REPRESENTATIVE KREISS-TOMKINS sought to clarify the meaning of
Representative Josephson's question.
12:21:25 PM
REPRESENTATIVE JOSEPHSON speculated that supporters of the
dividend formula would feel some insecurities about the
proposal. He asked how the bill sponsor would assuage those
concerns.
CHAIR SPOHNHOLZ interjected to ensure that the invited
testifiers had time to present. She noted that she had a
particular interest in this topic of discussion, which would be
addressed in further detail after the invited testimony.
12:22:52 PM
IAN LANG, Executive Director, Institute of the North, informed
the committee that the Institute of the North was a nonpartisan
thinktank founded by Governor Walter J. Hickel. Its mission, he
said, was to ensure maximum public benefit from Alaska's shared
resources. He stated that he was testifying today because the
Alaska permanent fund, one of the state's common resources, was
at risk. Further, he shared his belief that the approach
proposed in SSHJR 1 was the most important step towards ensuring
a prosperous future for Alaska. He pointed out that no other
state in the history of the United States has ever had what
Alaska has, adding that the state's public sector could be
endowed forever if legislature so chooses.
12:25:11 PM
MR. LANG directed attention to a PowerPoint presentation, titled
"HJR 1" [hard copy included in the committee packet]. He began
on slide 2, noting that the concept of a constitutional POMV was
an old concept and one that, although unimplemented, was the
most well studied, fully vetted, and widely supported idea in
Alaska public policy. He added that it had always been the
cornerstone of the state's future. In addition to good policy,
he argued that SSHJR 1 was the single best strategy for
resolving the larger fiscal challenge. He stressed that today's
choices would have incalculable impacts on the state's future.
He reported that [state] spending had been cut by 40 percent and
$17 billion had been spent in non-permanent fund savings to
backfill the budget.
12:26:41 PM
MR. LANG continued to slide 3, emphasizing that continued
failure to resolve Alaska's budget imbalance remained the single
greatest threat to Alaska's future. He believed that [the
legislature] needed to ask itself, "How does this end?" He
urged committee members to reflected on lessons from the last
seven years to help anticipate the most likely outcome. Slide 4
reiterated that so far, it had proved difficult for the
legislature to broker a grand bargain to close the gap;
consequently, year after year, they defaulted to the path of
least resistance: use savings. He argued that as long as
savings were accessible, savings would be used.
12:28:04 PM
MR. LANG advanced to slide 5, which highlighted that spending
down the permanent fund was Alaska's default fiscal plan. He
believed that the state was hurdling towards an unwanted outcome
that people felt powerless to prevent because there had not been
an effective vehicle for driving compromise. He continued to
slide 6 and recalled the adoption of the statutory POMV formula
several years ago, which marked a significant shift from a heavy
reliance on oil revenue to effectively becoming an endowment
state, as 70 percent of the general fund revenue was coming from
the permanent fund. Nonetheless, protections were not in place
to ensure that the endowment functioned properly.
12:29:32 PM
MR. LANG turned to slide 7 and highlighted three problems with
the status quo: technical, financial, and philosophical.
Firstly, in regard to the technical challenges, he explained
that the risk of being unable to make the POMV draw in one or
more of the next 20 years was 50 percent under the current
structure (slide 8). Secondly, he discussed the imprudence of
unsustainable spending from the permanent fund. He reported
that $50 million in annual earnings was lost for every $1
billion spent today. Accordingly, if the $16 billion in the ERA
were to be spent today, it would cost the fund $800 million in
earnings making the deficit that much greater. The third issue,
he said, was what inspired the Institute of the North to get
involved in this discussion. He opined that the permanent fund
was an asset for all generations of Alaskans. It was conceived
to be a vehicle for converting nonrenewable resources into
renewable wealth for the state's residents, he said. Since the
fund's creation, he reported that $149 billion in oil revenue
had been accrued, of which 87 percent was spent on
infrastructure and other needs. He believed that spending down
the permanent fund would be fundamentally unfair to Alaskans and
a "tragic legacy."
12:33:29 PM
MR. LANG moved to slide 11 and conveyed that regardless of one's
values or beliefs - be it maintaining public services, lower
taxes, or protecting the dividend - everyone would benefit in
the long-term from protecting the real value of the fund. Slide
12, which reiterated that the concept behind SSHJR 1 was an old
idea, read as follows [original punctuation provided]:
• '80 - Recommended by Trustee Malone 9co-sponsor
of PF legislation)
• '95 - Recommended by Long-Range Financial
Planning Commission
• '96 - Recommended by PF Board of Trustees
• '99 - Approved by House of Representatives
• '00 - Trustees Resolution
• '03 - Trustees Resolution
• '04 - Trustees Resolution
• Resolutions of support from countless
organizations
MR. LANG noted that the window for implementing this change was
narrowing considerably.
12:34:39 PM
MR. LANG advanced to slide 13, reiterating the SSHJR 1 was good
strategy in addition to good policy. He reminded committee
members that the gap would close one way or another; further, he
stressed that any deal made now would be better than a deal made
in five or six years. He explained that this constitutional
amendment would act as a deadline, after which overdraws from
the ERA would no longer be allowed. Furthermore, the deadline
would drive negotiations, he said. Slide 14 addressed timing,
emphasizing that the future would become less bright every time
this plan was delayed. He noted that the legislature could
continue to work on a comprehensive fix; however, regardless of
what else were to happen, he argued that the fund needed to be
treated sustainably. Accordingly, he urged the passage of SSHJR
1.
12:37:17 PM
MR. LANG concluded by addressing constitutional changes on slide
15. He opined that some make the mistake of treating
constitutional amendments similar to the conventional law-making
process; however, he argued that it was different because a
higher bar of consensus must be sought. He stated that the
constitution was a sacred document that spoke to the values that
constitute all Alaskans. In the context of the permanent fund,
he challenged legislators to ask themselves whether they
believed in sustaining the future of this state and whether they
would deal with their own problems or pass them along to future
generations. He believed that everyone would like to answer
those questions the same way; nonetheless, they would be
answered one way or another, either through action or inaction.
12:38:57 PM
ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund
Corporation (APFC), stated that SSHJR 1 was incredibly important
to the Board of Trustees. She reiterated that the idea was not
a new one, as highlighted by Mr. Lang. She explained that a
constitutional POMV would allow the fund to benefit all
generations of Alaskans; provide a predictable payout; and
protect the fund's opportunity for real growth. Additionally,
the payout would be compatible with the investment strategy and
policies adopted by the Board of Trustees. She recalled that
significant changes were made to accounting rules in 1997, which
spurred the efforts by the trustees in the early 2000s. She
said implementing a constitutional POMV, as contemplated in
SSHJR 1, was something that the trustees supported and had
supported for many years.
12:41:33 PM
REPRESENTATIVE WOOL inquired about the form of the prior
resolutions that pertained to constitutionalizing the POMV.
12:42:36 PM
MS. RODELL said all the resolutions recommended a 5-year
"smoothing," or average, of the market value and a 5 percent
draw on the average market value. Therefore, SB 26 was
consistent with the trustee's constitutional recommendation.
12:43:03 PM
REPRESENTATIVE WOOL believed that many legislators supported the
statutory POMV in SB 26. He pointed out that presently, the
state was in a unique position wherein the incoming revenue was
paying for the budget; therefore, absent a PFD, budget and
revenues were aligned. He said the issue was that the amount of
the dividend had been determined by the legislature, as opposed
to formula. He surmised that if a resolution were to
constitutionalize a 5 percent draw, some people would also want
to constitutionalize a dividend amount. He referenced one of
the governor's proposed constitutional amendments, which would
constitutionalize the 5 percent POMV draw, as well as a 50/50
split. He argued that such a distribution would leave the
budget "short." He questioned how the dividend would fit in to
this resolution and what the proposed solution might be.
12:45:45 PM
MR. LANG agreed that the dividend was at the heart of the
politics surrounding this issue. He stated that the Institute
of the North's coalition, which was composed of many significant
organizations, had taken an agnostic stance on the dividend. He
said he would support anything that two-thirds of the House
would support. He reasoned that the agnostic stance was to
avoid alienating people with different philosophies on the
dividend. He believed that no matter the outcome, some version
of this proposal needed to move forward, as any version would be
better than the alternative.
12:47:16 PM
REPRESENTATIVE EASTMAN referred to the language "designated by
law" on page 1, line 9, of SSHJR 1. He remarked:
I'm seeing that under the current language, that that
would apply to the principal. Now under this
amendment, it seems like it would apply to the entire
fund, which, if I'm looking at the verbiage, seems to
be limiting decisions that the corporation might make
that don't involve the principal.
REPRESENTATIVE EASTMAN asked Ms. Rodell to speak to that.
12:47:52 PM
MS. RODELL explained that under this construct, there would be
no need to identify the principal, as everything would stay in a
common fund. She stated that should SSHJR 1 pass, the permanent
fund would become one fund without a principal or ERA.
12:48:59 PM
REPRESENTATIVE EASTMAN asked whether APFC would benefit from the
language "designated by law" applying only to the principal.
12:49:12 PM
MS. RODELL said she did not understand the question. She
explained that the existing constitutional amendment made the
income available for spending. Initially, she said, the income
flowed straight to the general fund unless otherwise provided by
law. Later, legislation was implemented that created the ERA,
which became the new receptacle. She added that if the ERA
statutes were repealed, the income would be transferred in its
entirety to the general fund, per the constitutional provisions.
MS. RODELL, in response to the same question from Representative
Eastman, stated that the language continued to benefit APFC
because current law allowed for investment under the prudent
investor rule. She believed that there was value to retaining
[the legislature's] capacity to direct the investment of the
fund should it ever be necessary.
12:52:15 PM
CHAIR SPOHNHOLZ addressed the issue of the dividend and whether
it needed to be referenced in the constitutional amendment. She
asked whether the Institute of the North had conducted any
polling to consider different strategies for passing a
constitutional amendment. She emphasized the importance of
viability in passing a constitutional amendment.
12:54:25 PM
MR. LANG answered no. He noted that the last polling conducted
[by the Institute of the North] was in 2018. He stressed that
regardless of someone's thoughts on the dividend or the
structure of the constitutional amendment, preserving the
dividend meant protecting the fund's real value. He reiterated
that even if the dividend was not constitutionalized, the asset
value that created the dividend would be protected.
12:55:42 PM
CHAIR SPOHNHOLZ asked whether the 2018 polling included testing
with regard to constitutionalizing the dividend.
12:55:54 PM
MR. LANG stated that the 2018 polling was not specific to a
constitutional amendment.
CHAIR SPOHNHOLZ asked whether the polling included any reference
to the dividend.
MR. LANG answered yes; however, he pointed out that the
conversation had shifted since then.
12:56:21 PM
REPRESENTATIVE EASTMAN directed attention to page 2, line 8,
which specified that the unencumbered balance of the ERA would
be deposited in the permanent fund and become part of the
principal. He asked what would happen to the encumbered
balance.
12:56:56 PM
REPRESENTATIVE KREISS-TOMKINS deferred to Mr. Painter.
12:57:29 PM
ALEXEI PAINTER, Director, Legislative Finance Division, said the
encumbered balance would be the POMV draw and the amount for the
Alaska Capital Income Fund from the Amerada Hess settlement
[Alaska v. Amerada Hess]. He explained that those amounts would
be transferred according to the existing schedule. He said that
on June 30, there should be no encumbered funds left; however,
if something failed to be transferred on its effective date,
this language would ensure that the appropriation could still
take place.
12:58:16 PM
REPRESENTATIVE EASTMAN referred to page 2, line 12, and asked
when, historically, the legislature made decisions on
appropriations for the fiscal year ending June 30, 2023.
12:58:40 PM
MR. PAINTER said it would typically be part of the budgeting
process in calendar year 2022. He noted that supplemental
budgets could be made through the end of the fiscal year in
calendar 2023.
12:59:05 PM
REPRESENTATIVE EASTMAN pointed out that the constitutional
amendment proposed by SSHJR 1 would not be placed before the
voters until the November election in 2022, per Section 4 of the
resolution; consequently, he asked how the outcome of that vote
could be applied to the appropriation process in 2022.
12:59:39 PM
REPRESENTATIVE KREISS-TOMKINS acknowledged that he had
contemplated that question personally. He believed it was a
fundamentally solvable problem; however, it would be an exercise
in conditional planning. He expressed his hope that
organizations, such as the Institute of the North, would conduct
polling to indicate the likelihood of ratification. He noted
that if the legislature committed itself to a constitutional
POMV, there could be a compromise made in which a certain amount
of money in excess of the draw was taken out and set aside to
provide a fiscal buffer for the legislature. Essentially, the
buffer would act as "transition money" to help the legislature
ease into the new budgeting reality, he suggested.
1:01:38 PM
REPRESENTATIVE EASTMAN observed that the first five of the
preceding six fiscal years were being considered in the
calculation. He sought to clarify whether the present fiscal,
which had not yet ended, should be included in that calculation.
Additionally, he remarked:
Obviously, the first five of the six means you're not
including the sixth, so if you have a down year, we
don't include that until next year, but then if we
have an up year following the down year, we include
the down year, but we don't include the most recent up
year, which is going to limit our ability to draw.
1:02:29 PM
REPRESENTATIVE KREISS-TOMKINS offered his understanding that the
smoothing mechanism was relatively standard. Further, he
believed that a five-year window was broad enough to
sufficiently smooth any year-to-year budgeting volatility.
Regarding the exclusion of the current fiscal year, he deferred
to Ms. Rodell or Mr. Painter.
1:03:46 PM
MS. RODELL explained that the language in question was currently
used in the POMV calculation under SB 26. She explained that it
generated a smoothing effect in addition to removing uncertainty
from the appropriation process with the use of the POMV. She
indicated that it allowed the legislature to enter budget
debates knowing exactly how much revenue was available to spend
with regard to the POMV.
1:05:38 PM
REPRESENTATIVE WOOL referring to slide 11, recalled that Mr.
Lang had stated that he was "agnostic" when it came to the
dividend, as long as the POMV was constitutionalized. However,
he expressed concern that the governor's proposed 50/50 split
could not feasibly protect against higher taxes, protect the
dividend, and protect services, as indicated on slide 11, while
protecting the permanent fund. He worried that if 50 percent of
the POMV were to go to dividends, it would create a larger
"hole" in state services, which would require a high tax
compensate. He believed that at some point, the Institute of
the North may have to take a stance on the dividend.
1:08:01 PM
MR. LANG acknowledged that the institute may need to take a
position on the dividend eventually. In the meantime, he said,
the goal was to make this a higher priority for the legislature
and the public.
1:08:21 PM
REPRESENTATIVE PRAX opined that presently, there was less
optimism about economic growth in Alaska and more concern about
federal default. He questioned whether the Institute of the
North had considered that.
1:09:49 PM
MR. LANG asked Representative Prax to clarify the meaning of
"federal default."
REPRESENTATIVE PRAX suggested that there was increased concern
about the federal government defaulting on its debt or
hyperinflation, which had not been as concerning in 1976.
MR LANG answered no, the Institute of the North did not consider
that in its analysis.
1:10:27 PM
REPRESENTATIVE PRAX shared his belief that if the fund was
looked at as an endowment for government services, it would
result in a substantial wealth transfer to the beneficiaries of
those services at the expense of the people who were not
availing themselves of those services.
CHAIR SPOHNHOLZ clarified that the proposed resolution was
"silent" on the issue of the dividend.
REPRESENTATIVE PRAX agreed; however, he opined that [the issue
of the dividend] would have to be resolved as part of this
decision. He recalled that the dividend was not an "outright"
part of the law that created it. Nonetheless, he believed that
the dividend was the primary reason that the permanent fund was
established.
CHAIR SPOHNHOLZ contended that the permanent fund was created in
1976 for the purpose of making a finite resource renewable. The
dividend, she recalled, was added to statute in 1980. She
emphasized that the dividend had not been part of the original
constitutional amendment.
1:13:20 PM
REPRESENTATIVE KREISS, in response to Representative Prax,
reiterated that the language in SSHJR 1 was agnostic on the
dividend. He stated that if it were the wisdom of future
legislators to spend 100 percent of the POMV draw on dividends,
so be it, adding that in no way was the resolution meant to
preclude the dynamic balance between legislative appropriation
decisions and the voters who hold the legislators accountable.
He expressed his concern that the legislature's default plan was
to spend down state savings, which would result in a losing
situation for everyone regardless of their different priorities.
1:15:29 PM
REPRESENTATIVE EASTMAN referred to page 1, line 6, and inquired
about the sponsor's thoughts on expanding the annual resource
revenues.
1:16:18 PM
REPRESENTATIVE KREISS-TOMKINS said he had never considered
annexing a royalty expansion into the resolution.
Philosophically, he said he was supportive of setting more
short-term revenue aside for the long-term benefit. However,
was unaware of any additional revenue streams of significance
that could be annexed into the language on page 1, line 6. He
further noted that the biggest lever for "short-term pain/long-
term gain" was the annual draw. He said he would not be opposed
to a more conservative annual draw, which according to
literature on the subject, would be more responsible and make
the long-term future of the state objectively brighter.
1:18:02 PM
REPRESENTATIVE SCHRAGE asked whether anything would preclude
future legislators from making an additional contribution to the
fund.
1:18:11 PM
REPRESENTATIVE KREISS-TOMKINS answered no. Additionally, there
was nothing to preclude future legislators from spending a value
less than 5 percent of the market value.
1:18:27 PM
CHAIR SPOHNHOLZ announced that SSHJR 1 was held over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB 165 Sectional Analysis 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HB 165 Sponsor Statement 4.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HB 165 |
| HJR 1 Background - APFC Resolution POMV 2003-05.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2004-09.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Resolution POMV 2020-01.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - APFC Trustees’ Paper Volume 9 1.15.2020.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Background - Institute of the North Position Paper.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Presentation by Institute of North 4.13.2021.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sponsor Statement 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| SSHJR 1 Sectional Analysis 3.12.21.pdf |
HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |
| HJR 1 Additional Document - APFC POMV Statement.pdf |
HJUD 4/26/2021 1:00:00 PM HJUD 4/30/2021 1:00:00 PM HW&M 4/13/2021 11:30:00 AM HW&M 4/20/2021 11:30:00 AM |
HJR 1 |