Legislature(2019 - 2020)SENATE FINANCE 532

04/10/2019 09:00 AM FINANCE

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Heard & Held
Heard & Held
SENATE BILL NO. 103                                                                                                           
     "An  Act relating  to deposits  into the  dividend fund                                                                    
     and appropriations  from the earnings  reserve account;                                                                    
     and providing for an effective date."                                                                                      
10:08:15 AM                                                                                                                   
Senator  Micciche MOVED  to ADOPT  the committee  substitute                                                                    
for SB 103, Work Draft 31-LS0654\U (Nauman, 4/9/19).                                                                            
Co-Chair von Imhof OBJECTED for discussion.                                                                                     
10:08:35 AM                                                                                                                   
CO-CHAIR  BERT  STEDMAN,  SPONSOR, explained  the  committee                                                                    
Co-Chair von  Imhof WITHDREW the  OBJECTION. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
10:10:23 AM                                                                                                                   
Co-Chair Stedman said  that the bill would  take the percent                                                                    
of market value and adjust  the split, or which portion went                                                                    
to the PFD, and which  portion went to other expenditures or                                                                    
was reinvested back in the fund.                                                                                                
Co-Chair Stedman  explained the Sectional Analysis  (copy on                                                                    
     Sec. 1 & 2:    Removes  from AS  37.13.140(a) the  1982                                                                  
     formula  for  calculating   the  amount  available  for                                                                    
     distribution  and leaves  the Net  Income language  for                                                                    
     accounting purposes.                                                                                                       
          Adds language  to AS 37.13.140(b), the  Percent of                                                                    
     Market Value (POMV) calculation  for the Permanent Fund                                                                    
     draw, stating that the  amount for appropriation cannot                                                                    
     exceed  the balance  of  the  Earnings Reserve  Account                                                                    
     Section 1  inserts the  language into  current statute;                                                                    
     Section  2  is  necessary to  accommodate  the  delayed                                                                    
     effective date of  the same statute when  the POMV draw                                                                    
     rate "steps  down" effective July 1,  2021 (Fiscal Year                                                                    
     Sec. 3:   Amends AS  37.13.145(b) to enact  the "split"                                                                  
     of  the  POMV draw:  50  percent  to dividends  and  50                                                                    
     percent to the general fund.                                                                                               
     Sec.  4:     Conforming:  AS  37.13.145(c) states  that                                                                  
     inflation  proofing   payments  may  not  be   used  to                                                                    
     increase the  value of Amerada Hess  subaccount. Sec. 4                                                                    
     makes  technical changes  in  this  statute to  conform                                                                    
     with changes made by this bill.                                                                                            
     Sec. 5:   Conforming:   AS  37.13.145(d)   states  that                                                                  
     funds from  the Amerada Hess settlement  cannot be used                                                                    
     for  dividends. Section  5 makes  technical changes  in                                                                    
     this statute to conform to changes made by this bill.                                                                      
     Sec. 6:   Conforming: AS  37.13.300(c) states  that net                                                                  
     income  from  the  Mental  Health  Trust  Fund  is  not                                                                    
     included  in  calculations   for  the  Permanent  Fund.                                                                    
     Section 6  makes technical changes  in this  statute to                                                                    
     conform to changes made by this bill.                                                                                      
     Sec. 7:   Conforming: AS  37.14.031(c) states  that the                                                                  
     computation of  net income of  the Mental  Health Trust                                                                    
     Fund  shall  be  computed  in   the  same  way  as  the                                                                    
     Permanent  Fund. Since  the POMV  split  makes the  net                                                                    
     income  calculation for  the  Permanent Fund  obsolete,                                                                    
     section  7 replaces  the reference  with  a net  income                                                                    
     Sec. 8:   Conforming:   AS  43.23.025(a)   defines  the                                                                  
     formula for  calculating individual dividends  once the                                                                    
     amount available for appropriation  is known. Section 8                                                                    
     makes technical  changes to conform to  changes made by                                                                    
     section 3 of this bill.                                                                                                    
     Sec. 9:   Conforming:  Repeals  statutes  that  are  no                                                                  
     longer needed:  AS 37.13.145(e) & (f),  which limit the                                                                    
     draw to  the net  income calculation being  repealed in                                                                    
     this bill.                                                                                                                 
     Sec. 10:  Effective date for Section 2 of this bill.                                                                     
10:15:29 AM                                                                                                                   
Senator Wilson asked about the language in Section 3, and                                                                       
the use of the work may rather than shall.                                                                                      
10:16:03 AM                                                                                                                   
Co-Chair  Stedman replied  that the  language was  suggested                                                                    
language,  and that  the  committee could  weigh  in on  how                                                                    
restrictive or broad the language should be.                                                                                    
10:16:30 AM                                                                                                                   
Senator  Wilson felt  that  stronger  language would  assure                                                                    
that the rules were followed.                                                                                                   
10:17:13 AM                                                                                                                   
Co-Chair von  Imhof interjected that the  work  shall  could                                                                    
connotate   a   dedicated   fund,  which   was   potentially                                                                    
10:17:25 AM                                                                                                                   
Senator Wielechowski  was curious  about the  2018 effective                                                                    
10:17:39 AM                                                                                                                   
Co-Chair  Stedman  said  that  the  effective  date  concept                                                                    
considered budget  cycles. He  relayed that  he was  open to                                                                    
all discussions and possible committee changes.                                                                                 
10:18:40 AM                                                                                                                   
Co-Chair  Stedman discussed  the presentation,  "Senate Bill                                                                    
103;  Senate Finance  Committee;  April 10,  2019" (copy  on                                                                    
file). He looked at Slide 2:                                                                                                    
     The Permanent  Fund was established  in 1976 by  a vote                                                                    
     of the  people to  save a  portion of  Alaska's mineral                                                                    
     wealth  for future  generations and  limit overspending                                                                    
     by the legislature.                                                                                                        
10:19:14 AM                                                                                                                   
Co-Chair Stedman highlighted Slide 3:                                                                                           
     The Permanent Fund is an Alaska success: current value                                                                     
     of $64 billion from a total contribution of $40.4                                                                          
Co-Chair Stedman  said that  chart sowed  the growth  of the                                                                    
permanent fund  overtime. The top  bar represented  the ERA.                                                                    
He  shared that  the state  has a  formula driven  dividend,                                                                    
established when  the portfolio  was smaller.  The portfolio                                                                    
had grown  overtime to  over $60  billion. The  formula took                                                                    
the 5-year  average of  gains and losses  and net  income to                                                                    
pay out a  dividend to every resident of the  state. He said                                                                    
that  the passage  of SB  26 had  created a  linking problem                                                                    
between how  the dividend  was calculated  and how  the POMV                                                                    
was  drawn.   A  Strong  bull  market   resulted  in  bigger                                                                    
dividends  and  currently  the   formula  targeted  a  $3000                                                                    
dividend, which  took a substantial  percentage of  the POMV                                                                    
draw. He said  that the dividend today, after  a decade long                                                                    
bull market,  took a bigger  portion. He  directed committee                                                                    
attention to  2008, 2009,  2010, and  recalled conversations                                                                    
then over concern about the  declining financial markets and                                                                    
possible politics involved  in the management of  the PFD at                                                                    
that time. He  noted that in 2003 the gold  bar on the chart                                                                    
nearly  disappeared. He  stated that  looking over  the past                                                                    
several years,  a historical distortion  could be seen  of a                                                                    
massive ERA  driving a  large dividend.  He shared  that the                                                                    
hope was  to create a   smoothing  of the dividends  and the                                                                    
cash flow to  the general fund, when it was  needed. He said                                                                    
that the  smoothing mechanism  looked back  over the  past 5                                                                    
years, averaged the market value,  then took 5.25 percent to                                                                    
pay out dividends  and or state core services.  He said that                                                                    
stretching out 5 years helped  reduce volatility in the cash                                                                    
flow.  He said  that the  smoothing made  the dividend  more                                                                    
10:25:17 AM                                                                                                                   
Co-Chair  Stedman addressed  Slide 5,  "The ERA  is variable                                                                    
and uncertain.  By its nature  it lacks the stability  to be                                                                    
relied upon for budget stabilization."                                                                                          
Co-Chair  Stedman  pointed  to  2009, when  there  was  $420                                                                    
million in  the ERA,  $29.5 constitutionally  prote4cted. He                                                                    
lamented  that  $420  million would  not  meet  the  states                                                                     
current obligations. He  noted that under POMV,  in 2003 the                                                                    
entire  ERA would  have  to  be used  to  pay dividends.  He                                                                    
stressed  that   the  dividend  calculation  needed   to  be                                                                    
modified to coincide  with the POMV structure.  He noted the                                                                    
targeted numbers  for 2019 and  warned that  the legislature                                                                    
needed  to deal  with  the  massive growth  in  the ERA.  He                                                                    
warned  that  the ERA  should  not  be  relied on  for  both                                                                    
dividends  to residents  and any  operational assistance  to                                                                    
the  state. He  said that  even  if there  was no  operation                                                                    
assistance to the  state the dividend was in  peril by being                                                                    
focused in the ERA.                                                                                                             
10:27:23 AM                                                                                                                   
Co-Chair  Stedman discussed  Slide 4,  "SB 103  Protects the                                                                    
Permanent Fund." The  slide offered the basic  layout of the                                                                    
draw and  the split. He hoped  that the final bill  would be                                                                    
transparent  and  understandable  by  the  citizens  of  the                                                                    
state; the  people of  Alaska are  the collective  owners of                                                                    
the  entire portfolio.  The slide  reflected a  50/50 split,                                                                    
which Co-Chair Stedman  said was a proposal  for the purpose                                                                    
of discussion only.                                                                                                             
10:30:19 AM                                                                                                                   
Co-Chair Stedman  discussed Slide  6, "SB 103  Doesn't Alter                                                                    
the Fund's Principles; Save and Grow":                                                                                          
     SB 103 limits any draw from the Fund to a maximum 5                                                                        
     percent of its 5-year average value.                                                                                       
          This draw limit is conservative and sustainable.                                                                      
          5 percent is comfortably under the Fund's growth                                                                      
Co-Chair Stedman shared  that the 5 percent  long-term was a                                                                    
reasonable target  and was set  in statute.  This percentage                                                                    
could be higher  or lower and would be  under discussion. He                                                                    
said that  when the distribution  rate was set at  5 percent                                                                    
it was  driven by  the asset  allocation and  performance of                                                                    
the  PFD  and a  deliberate  effort  had  been made  not  to                                                                    
distort and  push the  PFD asset  allocation; the  draw rate                                                                    
should not  be so high that  APFC had to chase  risky assets                                                                    
to produce  the return, or  so low  that the sharing  of the                                                                    
wealth was inequitable for future  generations. He said that                                                                    
SB 26  recognized APFC was  a separate entity that  knew the                                                                    
cashflow  that needed  to  be produced  to  the treasury  in                                                                    
advance and prepare their portfolio prepared accordingly.                                                                       
10:32:45 AM                                                                                                                   
Co-Chair von Imhof  noted that the bill did  not address the                                                                    
draw  rate in  SB  26  but reiterated  the  draw  rate as  5                                                                    
percent starting in  2021 and addressed the split  of that 5                                                                    
10:33:12 AM                                                                                                                   
Co-Chair Stedman agreed.                                                                                                        
10:33:31 AM                                                                                                                   
Co-Chair Stedman  looked at  Slide 7,  "SB 103  Protects the                                                                    
Permanent Fund; Let's Talk Dividends":                                                                                          
     The dividend (est. 1982) has disbursed $22b to                                                                           
          It is an equitable distribution of resource                                                                           
          wealth to those who own the resources.                                                                                
          SB 103 provides a predictable and transparent                                                                         
          dividend via a 50/50 formula.                                                                                         
          Dividends will once again be reliable and linked                                                                      
          to the value of the fund.                                                                                             
10:34:12 AM                                                                                                                   
Co-Chair  Stedman addressed  Slide  8,  "Comparison of  1982                                                                    
Formula and SB 103."                                                                                                            
Co-Chair  Stedman  noted that  the  chart  offered a  linear                                                                    
interpretation  and  reminded  committee  members  that  the                                                                    
market was anything  but linear. He said that  the draw rate                                                                    
on the  first row and  relayed that the  long-term objective                                                                    
was to get  to 5 percent. He spoke to  the second row, which                                                                    
showed  the total  POMV draw  and  was the  total amount  of                                                                    
money that  could be drawn from  the PFD in any  given year.                                                                    
He  moved  to  the  1982  formula,  which  was  the  current                                                                    
dividend  calculation, $3332  per  resident in  FY 2020.  He                                                                    
stated  that  in SB  103,  the  transfer dropped  from  $1.9                                                                    
billion to $1.5, the split would  be 50/50 and the PFD would                                                                    
be  $2285.  He related  that  the  numbers depended  on  the                                                                    
strength of  the ERA and  the financial markets;  a ten-year                                                                    
bull market  was hard  to beat.  He pointed  to FY  2028 and                                                                    
noted  that the  dividend  would be  reduced  to $2600,  but                                                                    
there  would be  more  stability. He  hoped  for input  from                                                                    
committee  members to  craft the  legislation to  ensure the                                                                    
long-term survival  of the PFD  and to restrict  the ability                                                                    
of the governor and the  legislature to overdraw the PFD and                                                                    
reduce  purchasing power;  net real  losses in  market value                                                                    
would destabilize the PDF for future generations.                                                                               
10:38:56 AM                                                                                                                   
Senator Micciche requested  a graph like the one  on Slide 8                                                                    
beginning in 2000. He wondered  whether income was currently                                                                    
calculated excluding unrealized gains and losses.                                                                               
Co-Chair  Stedman  replied in  the  negative.  He said  that                                                                    
current income used realized gains  and losses in income for                                                                    
the  dividend   formula.  He  deferred  to   Angela  Rodell,                                                                    
Executive  Director, Alaska  Permanent Fund  Corporation for                                                                    
more information.                                                                                                               
10:40:56 AM                                                                                                                   
Senator Olson asked  whether the APFC Director  and Board of                                                                    
Trustees had weighed in on the legislation.                                                                                     
10:41:06 AM                                                                                                                   
Co-Chair Stedman deferred to Ms. Rodell.                                                                                        
10:41:31 AM                                                                                                                   
Co-Chair von  Imhof said  that how the  money was  spent was                                                                    
the  per  view  of  the   legislature.  She  asked  why  the                                                                    
presenter had landed on the 50/50 split.                                                                                        
10:42:12 AM                                                                                                                   
Co-Chair Stedman  stated that  he had  tried to  gauge where                                                                    
there would  be public  support. He  thought that  the 50/50                                                                    
split was  a good starting  point for discussions.  He added                                                                    
that a  50/50 split  would take time  to implement  and that                                                                    
the state  may need  financial assistance  from the  APFC to                                                                    
meet its obligations without massive budget cuts.                                                                               
10:44:32 AM                                                                                                                   
Senator  Bishop spoke  to Slide  3. He  stressed that  small                                                                    
dividend payments had  gone out in the  past, without public                                                                    
outcry, and  felt that the 50/50  split was a good  idea. He                                                                    
believed that  the effective  rate could  be lowered  to 4.5                                                                    
10:46:35 AM                                                                                                                   
Co-Chair von  Imhof agreed that  the 50/50 split was  a good                                                                    
place to  start. She  pointed out to  the committee  that it                                                                    
would  require,  based  on the  current  budget,  over  $800                                                                    
million  in cuts.  She argued  that a  50/50 split  may seem                                                                    
fair, but  that there  were many factors  that needed  to be                                                                    
10:48:30 AM                                                                                                                   
Senator Wilson  said that people  had been happy  with lower                                                                    
dividends in the past because  they knew what was happening.                                                                    
He suggested that  people did not become  outraged until the                                                                    
government began  messing with the  formula. He said  he was                                                                    
in  favor  of a  50/50  plan.  He thought  the  constitution                                                                    
should  be changed  with a  vote of  the people.  He worried                                                                    
about tinkering  with the formula  to  feed the  appetite of                                                                    
10:50:59 AM                                                                                                                   
Co-Chair Stedman thought that  the predictability of the PFD                                                                    
payout and  the cashflow to  the treasury would be  best for                                                                    
the state. He believed that  the decision was a multi-decade                                                                    
one.  He added  that LFD  would  be working  to provide  the                                                                    
historical data requested by Senator Micciche.                                                                                  
10:51:55 AM                                                                                                                   
Senator Shower  noted that  the original  language in  SB 26                                                                    
had  a 70/30  split. He  said  that the  narrative had  been                                                                    
driven that  the money belonged  to the government,  and the                                                                    
public  as being  allowed a  portion. He  thought the  50/50                                                                    
seemed like an equitable split.  He lamented that the public                                                                    
did not trust the legislature  to follow statute. He offered                                                                    
an analogy about a fish countered by one involving Caesar.                                                                      
10:54:40 AM                                                                                                                   
Senator Wielechowski  stressed that  the maximum  benefit of                                                                    
the resource should be provided  to the people. He felt that                                                                    
government had  received its fair share;  the peoples  share                                                                    
was a tiny  fraction of the total value of  the oil produced                                                                    
in  the  state.  He  expressed  concern  with  changing  the                                                                    
language from  shall transfer   to  may appropriate  because                                                                    
it could lead an even smaller share going to Alaskans.                                                                          
10:57:07 AM                                                                                                                   
Co-Chair von Imhof discussed housekeeping.                                                                                      
SB 103 was HEARD and HELD in committee for further                                                                              

Document Name Date/Time Subjects
SB 104 - Sponsor Statement.pdf SFIN 4/10/2019 9:00:00 AM
SFIN 2/4/2020 9:00:00 AM
SB 104
SB 104 - Sectional Analysis.pdf SFIN 4/10/2019 9:00:00 AM
SB 104
041019 SB104 Spending Cap Presentation.pdf SFIN 4/10/2019 9:00:00 AM
SB 104
SB 103 - Sectional Analysis.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 - Sponsor Statement.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 Presentation 041019.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 Work Draft Version U.pdf SFIN 4/10/2019 9:00:00 AM
SB 103