Legislature(2021 - 2022)BUTROVICH 205

04/21/2021 01:30 PM JUDICIARY

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       SJR 6-CONST. AM:SJR 6-CONST. AM: PERM FUND & PFDS                                                                    
                 SB 53-PERM FUND; ADVISORY VOTE                                                                             
1:34:17 PM                                                                                                                    
CHAIR  HOLLAND  announced  the   consideration  of  SENATE  JOINT                                                               
RESOLUTION  NO. 6,  Proposing amendments  to the  Constitution of                                                               
the  State  of Alaska  relating  to  the Alaska  permanent  fund,                                                               
appropriations from  the permanent  fund, and the  permanent fund                                                               
SENATE BILL  NO. 53,  "An Act  relating to use  of income  of the                                                               
Alaska permanent  fund; relating to  the amount of  the permanent                                                               
fund  dividend; relating  to the  duties of  the commissioner  of                                                               
revenue;  relating to  an advisory  vote on  the permanent  fund;                                                               
providing for an  effective date by repealing  the effective date                                                               
of  sec. 8,  ch. 16,  SLA 2018;  and providing  for an  effective                                                               
[This was the first hearing for both SJR 6 and SB 53.]                                                                          
1:35:01 PM                                                                                                                    
BRANDON  BREFCZYNSKI, Special  Assistant to  the Policy  Advisor,                                                               
Office of the Governor, Juneau, Alaska,  stated that SJR 6 is the                                                               
governor's  constitutional  amendment  related to  the  permanent                                                               
fund and  SB 53 is  the governor's  statutory 50:50 rule  for the                                                               
permanent  fund dividend  (PFD). On  behalf of  the governor,  he                                                               
related  that  these  two  pieces  of  legislation  are  Governor                                                               
Dunleavy's top priorities.  The first step to  achieving the goal                                                               
of  securing the  state's fiscal  future  is to  constitutionally                                                               
protect the permanent  fund and the PFD. After  years of spending                                                               
down the  Constitutional Budget Reserve  (CBR) and  the Statutory                                                               
Budget  Reserve  (SBR) accounts,  a  simple  majority vote  could                                                               
deplete  the accounts  and jeopardize  the  permanent fund.  This                                                               
could  potentially eliminate  the PFD  for future  generations of                                                               
Alaskans. The governor  senses the urgency of  the fiscal crisis,                                                               
he said. The governor has  proposed this legislation to establish                                                               
a framework for managing the  permanent fund and implementing the                                                               
necessary protections  to prevent ad  hoc spending and  allow for                                                               
continued growth.  In addition to protecting  the permanent fund,                                                               
this  proposal  will  protect  the  PFD.  It  will  also  restore                                                               
Alaskan's confidence and trust that  they will receive the annual                                                               
share  of Alaska's  resources and  wealth. The  governor believes                                                               
the public must be included because  it was through the people of                                                               
the state  that the permanent  fund was initially created.  SJR 6                                                               
and  SB  53 must  be  considered  together  to make  sense.  This                                                               
resolution and bill will protect  the permanent fund, provide for                                                               
the continued  growth of  the fund and  will involve  Alaskans in                                                               
the process.                                                                                                                    
1:37:51 PM                                                                                                                    
SENATOR  SHOWER  asked him  to  explain  why  both the  bill  and                                                               
resolution are necessary.                                                                                                       
MR.  BREFCZYNSKI responded  that SJR  6 proposes  two provisions.                                                               
First, it  would provide  for an annual  draw from  the permanent                                                               
fund  through   a  percentage-of-market-value  (POMV)   rule  and                                                               
establish  the  permanent  fund  dividend  (PFD)  in  the  Alaska                                                               
Constitution.  Second, it  would require  that a  portion of  the                                                               
funds withdrawn be  used for the PFD. SB 53  proposes a change in                                                               
the  PFD formula  to 50  percent of  the 5  percentage-of-market-                                                               
value (POMV) draw  from the permanent fund earnings.  Thus, SB 53                                                               
provides the  formula referenced in the  constitutional amendment                                                               
proposed in SJR  6 and will ensure  that the PFD will  be paid as                                                               
provided by law.                                                                                                                
1:39:09 PM                                                                                                                    
SENATOR SHOWER stated  one concern he has  heard some legislators                                                               
express  is   that  enshrining  the   formula  into   the  Alaska                                                               
Constitution could  bind future  legislatures. He said  that this                                                               
concern can  be assuaged since  SB 53 establishes the  formula in                                                               
statute. This  provides the  legislature the  ability to  work on                                                               
the formula. SJR 6 would guarantee  the POMV draw for the PFD, he                                                               
MR. BREFCZYNSKI  added that while  the formula for the  PFD would                                                               
be provided  for in statute,  any further changes to  the formula                                                               
would require a vote of the people to ratify the change.                                                                        
1:40:15 PM                                                                                                                    
SENATOR HUGHES  asked if the reason  for the 50:50 split  was not                                                               
only because  it was  how then  Governor Hammond  established the                                                               
permanent fund but also because  50 percent falls halfway between                                                               
the amount of the permanent fund  that would be available to fund                                                               
government and the amount that could be paid out in PFDs.                                                                       
She recalled  that initially, the  governor suggested that  70 to                                                               
80  percent of  the  draw would  be  paid out  for  PFDs and  the                                                               
remaining  20 to  30 percent  would be  deposited in  the general                                                               
fund   to  provide   for  government   services.  However,   some                                                               
legislators  wanted to  reverse that  ratio, so  the 50:50  split                                                               
falls in the middle, she said.                                                                                                  
1:41:42 PM                                                                                                                    
MR. BREFCZYNSKI replied it is  both. Alaska's resources are owned                                                               
in  common  by  the  people  of  the  state.  He  agreed  that  a                                                               
disconnect exists  between the current  statutory PFD  formula in                                                               
law and  how the legislature uses  the POMV formula to  draw from                                                               
the permanent  fund. The  governor has decided  to   meet halfway                                                               
with the 50:50 proposal.                                                                                                        
SENATOR HUGHES asked if the  governor is proposing a midway point                                                               
or if he  is using the 50:50 rule to  negotiate some other split,                                                               
such as 20 percent for the PFD and 80 percent for government.                                                                   
MR. BREFCZYNSKI said  the governor believes the  50:50 formula is                                                               
the appropriate split.                                                                                                          
SENATOR HUGHES  asked him  to verify  that the  governor supports                                                               
the statutory PFD but he is willing to meet at the mid-point.                                                                   
MR. BREFCZYNSKI answered yes. He  said the governor believes that                                                               
50 percent  for PFDs  and 50 percent  for government  services is                                                               
the appropriate split.                                                                                                          
1:43:47 PM                                                                                                                    
At ease                                                                                                                         
1:44:04 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
1:44:06 PM                                                                                                                    
SENATOR  MYERS  offered his  view  that  the  50:50 rule  is  not                                                               
accurate. He  said that SJR 6  relates to 50 percent  of earnings                                                               
from  investments. However,  the  state has  already diverted  75                                                               
percent of royalties to fund  government, perhaps more. Thus, the                                                               
state  has already  diverted  a  significantly higher  proportion                                                               
than 50 percent to fund government services.                                                                                    
MR. BREFCZYNSKI agreed. It is not  50 percent of the pure royalty                                                               
wealth  but it  also includes  the investment  earnings from  the                                                               
royalties.  Then through  a  formula, 50  percent  of the  annual                                                               
statutory net  income from the royalties  and investment earnings                                                               
provides  for the  dividends. He  explained  that since  Alaskans                                                               
cannot  own   the  subsurface  rights,  this   is  a  compromise.                                                               
Landowners in  the Lower  48 receive  royalties for  any resource                                                               
development  on  their property  so  if  they  choose to  save  a                                                               
portion  of  those  royalties,  it  would  result  in  investment                                                               
earnings, which would pay these landowners an ongoing dividend.                                                                 
1:45:42 PM                                                                                                                    
SENATOR  SHOWER agreed  with Senator  Myers, that  the amount  to                                                               
fund  government does  not  represent 50  percent.  He asked  Mr.                                                               
Brefczynski to highlight the differences  between SJR 6 and SJR 1                                                               
introduced by Senator Wielechowski.  He expressed his interest in                                                               
inflation  proofing   the  permanent   fund  for   the  continued                                                               
protection and growth of the fund.                                                                                              
1:46:40 PM                                                                                                                    
MR. BREFCZYNSKI  deferred to Mr. Barnhill  to speak to SJR  1. In                                                               
terms of inflation proofing, SJR  6 will constitutionally protect                                                               
the  permanent fund  so it  will  not be  necessary to  inflation                                                               
proof the  fund by depositing  a portion of the  Earnings Reserve                                                               
Account into  the principal  of the fund.  The permanent  fund is                                                               
also  protected from  inflation by  having a  set draw,  he said.                                                               
Currently in statute,  the draw is set at 5  percent. The goal is                                                               
to have  the permanent  fund earn more,  he said.  He illustrated                                                               
how  the calculation  in SJR  6 would  work, such  that permanent                                                               
fund earnings  of 7 percent  with a 5  percent draw would  have a                                                               
real growth  of 2 percent. He  explained that the 5  percent draw                                                               
would  be based  on a  five-year  average so  the effective  rate                                                               
would also  be considered. He  reported that currently,  the fund                                                               
balance is $78  billion. He clarified that  the five-year average                                                               
goes back  6 years. Thus,  it is a much  smaller number than  a 5                                                               
percent  calculation on  $78 billion,  the current  value of  the                                                               
1:47:49 PM                                                                                                                    
SENATOR KIEHL agreed  it is not a 50:50 split  for the people and                                                               
government.  As  Mr. Brefczynski  said  when  he paraphrased  the                                                               
preamble of the  Alaska Constitution, the state is  the people so                                                               
it  is the  peoples' roads,  bridges, troopers,  prisons, courts,                                                               
education, schools,  clean air, clean drinking  water, biologists                                                               
and fish managers.                                                                                                              
1:48:49 PM                                                                                                                    
At ease                                                                                                                         
1:51:47 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
1:52:22 PM                                                                                                                    
MIKE  BARNHILL,  Deputy   Commissioner,  Department  of  Revenue,                                                               
Juneau,   Alaska,   began  a   PowerPoint   on   behalf  of   the                                                               
administration.  He  said  that   the  proposals  are  relatively                                                               
straight  forward. In  response to  Senator Shower's  request, he                                                               
offered to compare SJR 1 and SJR 6 during his presentation.                                                                     
MR. BARNHILL  referred to slide  2, that outlines  the objectives                                                               
of SJR  6. The first objective  is to protect the  permanent fund                                                               
to ensure  that it lasts  forever by bringing the  permanent fund                                                               
structure  into alignment  with the  modern approach  to managing                                                               
institutional  funds and  endowments. As  the third  bullet point                                                               
suggests,  that happens  by adopting  a single-account  structure                                                               
for the permanent  fund. The current structure was  placed in the                                                               
Alaska Constitution  in 1976. The drafters  crafted the amendment                                                               
based on  historic trust  law and trust  structures which  used a                                                               
two-account  structure:   a  principal  account  and   an  income                                                               
account. Historically, the  mantra was to save  the principal and                                                               
spend the income.  In the last few  decades, investment advisers,                                                               
consultants,  and  investment   managers  have  recommended  that                                                               
endowments  update their  structures to  a one-account  structure                                                               
from  which a  specific percentage  can be  spent annually.  When                                                               
that  percentage  is  devised, it  will  automatically  inflation                                                               
proof  the institutional  fund or  endowment  and its  inflation-                                                               
adjusted value will last forever.                                                                                               
MR.   BARNHILL   stated  that   the   second   objective  is   to                                                               
constitutionally  protect the  PFD. SJR  6 would  require that  a                                                               
percentage  of  the  distribution  from  the  permanent  fund  be                                                               
dedicated to  the permanent fund  dividend (PFD). One  reason the                                                               
administration and other stakeholders,  including the trustees of                                                               
the Alaska  Permanent Fund Corporation, are  suggesting the state                                                               
update the structure in the  Alaska Constitution is concern about                                                               
prematurely depleting  the Earnings Reserve Account  (ERA). Since                                                               
the  enactment of  Senate Bill  26 in  2018, the  state has  been                                                               
using the  permanent fund to  pay the  PFD and provide  funds for                                                               
government spending.  The spending demands on  the permanent fund                                                               
have increased, therefore the percentage  of funds drawn from the                                                               
permanent fund  has also increased.  It is possible that  the ERA                                                               
could be  depleted in  a series  of years  by annually  drawing 5                                                               
percent  from  the   fund,  combined  with  a   downturn  in  the                                                               
investment market.  To avoid that  occurrence, the  APFC trustees                                                               
and  the  administration  propose  to covert  the  existing  two-                                                               
account structure to a  one-account endowment structure. Finally,                                                               
this measure  requires an advisory  vote by the people  of Alaska                                                               
when statutory changes to the allocation for PFDs are made.                                                                     
1:57:07 PM                                                                                                                    
SENATOR  KIEHL  asked  which  provision in  SJR  6  will  protect                                                               
against  eroding  the  real  value of  the  permanent  fund.  The                                                               
drafting structure for SJR 6  would allow the legislature to draw                                                               
10 percent  in a year  with a simple  majority vote by  each body                                                               
and the governor's signature.                                                                                                   
MR. BARNHILL answered  that his PowerPoint contains  a slide that                                                               
discusses the real value versus  the nominal value of returns. He                                                               
explained  that  the real  value  of  a  fund is  its  inflation-                                                               
adjusted  value.  The  purpose of  using  the  inflation-adjusted                                                               
value of the  fund is to ensure that the  purchasing power of the                                                               
fund will  be no less  over time. Governor Dunleavy  has proposed                                                               
to  allow   the  legislature  through  statute   to  specify  the                                                               
distribution percentage.  In 2018, the legislature  passed Senate                                                               
Bill 26, the distribution rule.  Initially, the distribution rule                                                               
specified 5.25 percent  of the lagging five-year  market value of                                                               
the permanent fund and today it  is 5 percent. As Mr. Brefczynski                                                               
described, the  five-year lagging average  is the average  of the                                                               
first 5  of last  6 fiscal  years (FY).  The legislature  has had                                                               
ongoing  discussions  in the  past  few  years  as to  whether  5                                                               
percent is the right number.  He opined that this discussion will                                                               
never  end. In  order to  protect  the fund  from inflation,  the                                                               
state  must  always  evaluate  the  spending  from  the  fund  in                                                               
relation  to the  real return  of the  fund. That  calculation is                                                               
subject  to  fluctuations  in  capital  markets,  inflation,  and                                                               
spending levels.                                                                                                                
He said  this creates a bit  of a dilemma. One  solution would be                                                               
to hardwire  a specific percentage  into the constitution  but as                                                               
capital markets  fluctuate, the percentage  could be too  high or                                                               
too low. SJR  1 proposes placing a 5 percent  distribution of the                                                               
lagging  five-year   percentage-of-market-value  (POMV)   of  the                                                               
permanent fund in the  constitution. Governor Dunleavy's proposal                                                               
in SJR  6 would not  specify the percentage in  the constitution.                                                               
Instead, SB 53  would establish an annual distribution  rule of 5                                                               
percent of  the lagging  five-year market  value. This  will give                                                               
the  legislature  the flexibility  to  pick  a distribution  rate                                                               
consistent with protecting the real value of the fund over time.                                                                
2:00:31 PM                                                                                                                    
MR. BARNHILL responded to Senator  Kiehl's question as to whether                                                               
the  legislature  could  draw  10 percent.  He  argued  that  the                                                               
constitution sets  out that  it must be  a permanent  fund, which                                                               
means  that  the real  value  of  the  fund must  be  permanently                                                               
maintained.  Enacting distribution  rates that  are at  odds with                                                               
that constitutional purpose.                                                                                                    
He  said the  markets  could have  such high  returns  that a  10                                                               
percent distribution  is consistent with  the real return  of the                                                               
permanent  fund. That  has happened  for brief  periods over  the                                                               
past  50 years,  but  it  is not  likely  to  be sustainable.  He                                                               
offered his  belief that the  legislature will not only  focus on                                                               
the  spirit  of  the  Alaska   Constitution  but  also  that  any                                                               
distribution  rate  that risks  eroding  the  real value  of  the                                                               
permanent fund over time will likely be found invalid.                                                                          
MR.  BARNHILL  said  that  the  governor's  approach  will  allow                                                               
flexibility and for indefinite,  ongoing discussions because that                                                               
is how endowment  funds are managed. However,  if the legislature                                                               
so desires, the  governor is willing to let  the legislature make                                                               
the policy  decision to hardwire  a specific percentage  into the                                                               
constitution.  This  could  happen  in a  variety  of  ways.  One                                                               
approach  taken in  2018 in  House Bill  213 was  to convert  the                                                               
Public School Trust  from a historic two-account  structure to an                                                               
endowment  with not  more  than a  5  percent distribution  rate.                                                               
Adding  specific  language  "not  more  than"  provided  it  some                                                               
flexibility to  distribute less if  APFC's staff  and consultants                                                               
determined  there  was a  risk  of  overdraw.  HJR 1  takes  that                                                               
approach, he said.                                                                                                              
2:03:09 PM                                                                                                                    
SENATOR  MYERS asked  if the  constitutional language  should use                                                               
the average real realized rate  of return rather than hardwire in                                                               
a specific figure into the Alaska Constitution or statute.                                                                      
MR.  BARNHILL answered  that was  worth  considering because  the                                                               
goal of modern  institutional fund management is to  try to match                                                               
the real rate  of return to the spending rate.  One difficulty is                                                               
that  market rates  can fluctuate  substantially.  The danger  of                                                               
using the real  rate of return is that when  markets are high, it                                                               
is possible to draw out too much  and fund the budget at a higher                                                               
level,  which then  would  need to  be  ratcheted down.  However,                                                               
setting  the percentage  of distribution  rate in  statute, using                                                               
the  lagging  five-year  market  value  of  the  permanent  fund,                                                               
provides the permanent fund and  the legislature some consistency                                                               
each  year. Currently,  under  the Senate  Bill  26 formula,  the                                                               
permanent fund distributions have been about $3 billion a year.                                                                 
2:05:48 PM                                                                                                                    
SENATOR HUGHES asked  if there is universal  or general agreement                                                               
among  financial experts  that a  5 percent  POMV will  allow for                                                               
inflation  proofing.   She  said   she  has  heard   some  people                                                               
supporting a lower amount.                                                                                                      
MR. BARNHILL moved  to slide 4, distribution  rates. He explained                                                               
that  discussions  about  the returns  from  the  permanent  fund                                                               
typically relate  to nominal returns.  In order to  calculate the                                                               
real rate  of return, it  is necessary to subtract  inflation. In                                                               
order  to  inflation proof  an  institutional  or endowment  fund                                                               
model, the  fund needs to  retain earnings  in the amount  of the                                                               
inflation  during  that  period.  He clarified  that  the  global                                                               
capital market has been a  bull market, meaning returns have been                                                               
rising  since  2009.  Investment  markets were  concerned  as  to                                                               
whether  the bull  market  was sustainable.  In  March 2020,  the                                                               
global pandemic caused  a sharp market correction  with an almost                                                               
automatic  rebound. The  bull market  has continued  or else  the                                                               
markets have entered a new business cycle and bull market.                                                                      
He offered  his belief that  overall, the  investment consultants                                                               
never agree. However, the majority  of investment consultants and                                                               
market advisors the  state uses are concerned that  over the next                                                               
10  years  hitting   the  5  percent  rate  of   return  will  be                                                               
challenging.  Currently, the  year to  date investment  return is                                                               
greater than 20 percent for  the retirement systems and permanent                                                               
2:08:52 PM                                                                                                                    
MR.  BARNHILL  offered his  view  that  the capital  markets  are                                                               
pulling returns forward  and the state will pay a  price for that                                                               
over the  next three  to five  years. However,  no one  knows for                                                               
sure. The Department of Revenue  recommends that the state always                                                               
keep an eye on  the 1, 3, 5, and 10-year real  rate of return and                                                               
the effective rate  of spending. In fact, the  permanent fund has                                                               
started  reporting   its  effective  rate  of   spending  in  its                                                               
presentations to  the Finance committees.  If the  effective rate                                                               
of spending  is higher than  the real  rate of return  over time,                                                               
there is  a risk of  eroding the inflation-adjusted value  of the                                                               
permanent  fund.  He  opined  that  investment  consultants  have                                                               
expressed concern  that 5  percent may not  be achievable  over a                                                               
ten-year  period, so  the state  must be  very aware  of spending                                                               
versus the real rate of return.                                                                                                 
MR. BARNHILL  said the administration  will bring reports  to the                                                               
finance  committee to  provide an  understanding with  respect to                                                               
spending versus a real return.                                                                                                  
2:10:44 PM                                                                                                                    
SENATOR  SHOWER recalled  that in  prior  years legislators  have                                                               
extensively discussed  the spending cap related  to the structure                                                               
of  the  permanent  fund.  As Mr.  Barnhill  highlighted,  it  is                                                               
possible  to draw  down permanent  fund savings.  He acknowledged                                                               
that a spending cap would provide stability.                                                                                    
MR. BARNHILL opined that a 10  percent real rate of return is not                                                               
likely to be sustainable.                                                                                                       
2:12:32 PM                                                                                                                    
MR. BARNHILL restated  the mechanics of SJR 6. SJR  6 proposes to                                                               
convert  the Alaska  Permanent Fund  in  the Alaska  Constitution                                                               
from  its   existing  two-account  structure  to   a  one-account                                                               
endowment  structure. SJR  6  would establish  the  formula as  a                                                               
percentage  times the  lagging five-year  average  of the  market                                                               
value  of  the Alaska  Permanent  Fund.  It would  establish  the                                                               
permanent  fund  dividend in  the  Alaska  Constitution with  the                                                               
legislature  establishing  the  allocation  formula  in  statute.                                                               
Finally, SJR 6 proposes when  statutory changes to the allocation                                                               
for  PFDs are  made,  it will  require an  advisory  vote by  the                                                               
people of Alaska.                                                                                                               
2:14:06 PM                                                                                                                    
SENATOR  HUGHES  stated  that  the  State  v.  Wielechowski  case                                                               
determined  that  the  appropriation powers  of  the  legislature                                                               
superseded  the   statutory  formula   for  the   permanent  fund                                                               
dividend. Some legislators consider  the operating budget as law.                                                               
She related  a scenario in  which SJR 6 and  SB 53 both  pass and                                                               
that the  PFD formula  is set in  statute. The  legislature could                                                               
fund  PFDs at  a different  amount in  the operating  budget. She                                                               
asked whether SJR 6 would  prevent that from happening since they                                                               
are both  laws. She referred  to page 2, line  7 of SJR  6, which                                                               
read,  "A law  that  changes the  amount  allocated for  dividend                                                               
payments must  be approved by the  voters of the State  under (d)                                                               
of this section." Therefore, the  formula could be set in statute                                                               
but also  in the  operating budget. If  the legislature  does not                                                               
follow  the statutory  formula, but  uses the  amount set  by the                                                               
operating budget, she  asked if it must be put  before the voters                                                               
for approval.                                                                                                                   
MR. BARNHILL  referred to the language  on page 3, lines  5-11 of                                                               
the bill, which read:                                                                                                           
     (d) For purposes  of the 2022 amendments  to Section 15                                                                    
     of Article  IX, the law governing  the amount allocated                                                                    
     for dividend  payments to residents of  the State under                                                                    
     Section 15(c)  of Article IX  is the law  setting forth                                                                    
     the  allocation for  dividend payments  at the  time of                                                                    
     adoption  of the  2022 amendments  to Section  15(c) of                                                                    
     Article IX and that is not  a law that is enacted as an                                                                    
     appropriation bill,  subject to the enactment  of a law                                                                    
     amending  the   law  regarding  dividend   payments  in                                                                    
     accordance with  the requirements  of Section  15(d) of                                                                    
     Article IX.                                                                                                                
MR.  BARNHILL explained  that the  bill drafters  considered that                                                               
question  and included  language in  SJR 6  that the  law setting                                                               
forth  the  allocation for  dividend  payments  could not  be  an                                                               
appropriation bill.                                                                                                             
2:16:29 PM                                                                                                                    
SENATOR HUGHES  expressed concern that  SJR 6 will  give Alaskans                                                               
less assurance that a dividend  will be paid because the language                                                               
related  to the  draw states  "may".  She related  a scenario  in                                                               
which the  state has a windfall,  assuming it has a  spending cap                                                               
and  it can  fund  the budget  without a  draw.  She related  her                                                               
understanding that without a draw there would not be a PFD.                                                                     
MR.  BARNHILL responded  that her  scenario was  considered at  a                                                               
hearing yesterday and  that Mr. Brefczynski responded  that it is                                                               
the  administration's intention  that  PFDs will  be issued  each                                                               
year.  He  said  that  Mr.  Brefczynski offered  to  work  on  an                                                               
amendment to make that clear.                                                                                                   
2:18:24 PM                                                                                                                    
SENATOR  KIEHL  agreed that  the  language  needs to  be  revised                                                               
because the way it is currently  written, without a draw it would                                                               
take a vote of  the people. He was unsure about  the timing of an                                                               
advisory vote  under SJR 6.  He said  it seems like  "protect the                                                               
check" rather than a "protect  the permanent fund." He asked what                                                               
the vision  and role of  government is  in the approach  taken in                                                               
SJR 6.                                                                                                                          
2:19:34 PM                                                                                                                    
MR.  BARNHILL  answered  that the  administration's  goal  is  to                                                               
protect the inflation adjusted value  of the permanent fund going                                                               
forward  with no  overspending. The  proposed plan  is consistent                                                               
with modern  institution and  endowment practices,  which attempt                                                               
to balance access  to the funds for the present  versus access to                                                               
funds  in the  future.  The best  way to  accomplish  this is  to                                                               
ensure that  spending is limited to  the real return of  the fund                                                               
and  nothing more.  This  needs to  be  viewed in  5  to 10  year                                                               
averages  because  market  returns  can be  volatile.  The  whole                                                               
philosophy    of    governing    endowments   is    to    protect                                                               
intergenerational equity. As  long as the real value  of the fund                                                               
is  the  same  over  time  it  maintains  purchasing  power.  The                                                               
governor's  proposal  is  similar  to   how  the  trustees  of  a                                                               
university endowment fund would  manage its fund. The legislature                                                               
will decide the  rate of distribution but  the legislature should                                                               
always consider  a distribution rate  that will protect  the real                                                               
value of the  fund. He offered to  work on the language  in SJR 6                                                               
to make that  clear. That is somewhat at odds  with the 5 percent                                                               
rate that  is hardwired in  the Alaska Constitution under  SJR 1.                                                               
He acknowledged that  5 percent could be too  high during certain                                                               
economic  time   periods  in  investment  market   climates.  The                                                               
administration's  goal  is to  protect  the  permanent fund  over                                                               
2:23:09 PM                                                                                                                    
SENATOR MYERS acknowledged that SJR 6  and SB 53 were designed to                                                               
work concurrently. He asked what happens  if SB 53 passes but SJR
6 does  not pass since SB  53 will take  11 votes but SJR  6 will                                                               
take 14 votes to pass the Senate.                                                                                               
2:23:48 PM                                                                                                                    
MR.  BARNHILL  turned  to  slide  5.  He  explained  that  SB  53                                                               
implements SJR 6 but it also acts  as a stand-alone bill if SJR 6                                                               
does not  pass. SB 53 proposes  a 5 percent distribution  rate, a                                                               
50:50 rule to  allocate the PFD, and it will  require an advisory                                                               
vote on  the PFD. If SJR  6 fails to  pass, but SB 53  passes, it                                                               
will make  a number  of conforming changes  to align  the statute                                                               
with State v.  Wielechowski. The state would  continue under that                                                               
paradigm, he said.                                                                                                              
2:24:52 PM                                                                                                                    
SENATOR MYERS  offered his  view that  the legislature  will face                                                               
more problems  if SB  53 passes but  SJR 6 does  not than  if the                                                               
statutes were  left alone. In the  interest of time and  to allow                                                               
people to consider  this, he said he does not  have any questions                                                               
for now.                                                                                                                        
2:25:28 PM                                                                                                                    
MR. BARNHILL,  in response to  Senator Shower's  earlier request,                                                               
he compared SJR 1 to SJR 6.                                                                                                     
SJR 1 would use the  historical approach of distributing from the                                                               
permanent  fund by  using statutory  net income,  which considers                                                               
cash and realization. These funds  would then be deposited in the                                                               
Earning Reserve Account. Using the  statutory net income approach                                                               
to investment management decisions  would generate more income at                                                               
limes and  less at other times.  The point is that  the statutory                                                               
net income approach can be volatile.                                                                                            
SJR 6 proposes using an  institutional endowment fund approach, a                                                               
percent-of-market-value  (POMV) approach,  which is  the standard                                                               
method  of  distributing from  one  account  fund. In  fact,  the                                                               
(POMV)  approach is  used by  institutional  and endowment  funds                                                               
throughout the  world because  it is  more consistent  over time.                                                               
While this  percentage can  be calculated in  a variety  of ways,                                                               
the administration proposes using  a 5 percent distribution rule,                                                               
using a percentage of the  average lagging five-year market value                                                               
of the  permanent fund, which would  be split 50:50 to  fund PFDs                                                               
and government.                                                                                                                 
The basic difference between SJR 1 and  SJR 6 is that SJR 1 would                                                               
place  the legacy  statutory formula  consisting of  a 5  percent                                                               
hardwired  distribution   rate  into  the   Alaska  Constitution.                                                               
However, a  lack of alignment  exists for using that  approach to                                                               
distribute PFDs.  He expressed his  concern that SJR 1  is taking                                                               
an approach  to distribution  that is  nonstandard at  this point                                                               
and that  can be volatile.  There are times  when it could  be in                                                               
excess of  the 5  percent distribution  rate. He  suggested those                                                               
are concerns the committee should consider.                                                                                     
2:30:01 PM                                                                                                                    
At ease                                                                                                                         
2:30:40 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
2:31:32 PM                                                                                                                    
WILLIAM MILKS,  Senior Assistant Attorney General,  Legislation &                                                               
Regulations Section,  Civil Division, Department of  Law, Juneau,                                                               
Alaska, stated  that SJR  6 proposes an  amendment to  the Alaska                                                               
Constitution and SB  53 would set out the  specific percentage of                                                               
market  value (POMV)  at 5  percent and  a 50  percent split.  He                                                               
stated  the  Alaska  Supreme Court  State  v.  Wielechowski  case                                                               
relates to the statute that sets out how a PFD would be paid.                                                                   
2:33:00 PM                                                                                                                    
SENATOR  HUGHES  stated  that  Art. [XI],  Sec.  7,  pertains  to                                                               
restrictions  for  initiatives,   including  that  an  initiative                                                               
cannot make or  repeal appropriations. She asked  if any conflict                                                               
would arise by requiring the amendments  proposed by SJR 6 be put                                                               
to a vote to the people to approve or disapprove an amount.                                                                     
MR.  MILKS said  SJR  6  proposes a  percentage  of market  value                                                               
(POMV) draw from  the permanent fund and in Sec.  2 (c) a portion                                                               
of that  amount shall be  allocated for dividend  payments (PFD).                                                               
It  includes  language that  a  future  law changing  the  amount                                                               
allocated  for PFDs  must be  approved by  the voters.  He stated                                                               
that  SJR  6  will  govern  over  more  general  restrictions  on                                                               
initiatives in Art. XI than was identified.                                                                                     
2:34:37 PM                                                                                                                    
SENATOR  HUGHES expressed  concern that  SB 53  does not  ask the                                                               
voters  if  the  proposal  is something  the  legislature  should                                                               
consider   adopting  as   a  resolution   for  a   constitutional                                                               
amendment.  She asked  if that  were added  to the  advisory vote                                                               
whether it  could be combined  as one question  or if it  must be                                                               
two questions. She  clarified her concern was  that asking people                                                               
if the  law should be changed  when they have knowledge  that the                                                               
law establishing the PFD statutory  formula has not been followed                                                               
might bring voters  to conclude that changing the  law won't mean                                                               
She said it  seems as though an advisory vote  would also include                                                               
SJR 6. It would ask voters if  the 50:50 rule is okay and whether                                                               
the  legislature  should  consider the  Constitutional  Amendment                                                               
proposed by SJR 6 to establish this in the Alaska Constitution.                                                                 
MR. MILKS responded  that the legislature has a  broad ability to                                                               
draft language  for an advisory  vote. The legislature's  goal is                                                               
to  understand  what  the  people  think. He  said  that  if  the                                                               
legislature asks a compound question,  it could create ambiguity.                                                               
For example,  some people  may like  the 50:50  rule but  may not                                                               
want  that  language in  the  Alaska  Constitution. He  cautioned                                                               
members  that  the  legislature  must  be  careful  in  how  that                                                               
language is drafted.                                                                                                            
2:37:01 PM                                                                                                                    
SENATOR  HUGHES  related  her understanding  that  combining  the                                                               
questions will  not pose any legal  issue but care must  be taken                                                               
when drafting the language.                                                                                                     
2:37:09 PM                                                                                                                    
SENATOR MYERS suggested  that the advisory vote  as written would                                                               
not pass  because an advisory vote  on SJR 6 would  require a yes                                                               
or no  answer. However,  some people will  vote yes  because they                                                               
like the  change, some will  vote no  because they want  a bigger                                                               
ratio  to  increase government  funding  and  some will  vote  no                                                               
because they support the original  statutory formula for the PFD.                                                               
He  suggested that  an advisory  vote  as written  might be  like                                                               
"putting the cart before the horse."                                                                                            
MR.  MILKS deferred  to  Mr.  Barnhill to  answer  why  SJR 6  is                                                               
written  in this  fashion.  He  said SB  53  would establish  the                                                               
framework for  how to spend  permanent fund income  and establish                                                               
an advisory  vote to ask voters  if the 50:50 rule  sounds like a                                                               
good idea.                                                                                                                      
2:39:06 PM                                                                                                                    
MR.  BARNHILL  said  the administration  wants  a  proposal  that                                                               
comprehensively addresses  some thorny problems that  have defied                                                               
resolution. The three principles  the governor is putting forward                                                               
are first,  protect the permanent  fund forever;  second, involve                                                               
the people in a meaningful  way; and third, protect the permanent                                                               
fund dividend (PFD)  forever. He said if you ask  60 people about                                                               
these  issues, there  will  be disagreement  in  the details  but                                                               
there  would  be  broad-scale agreement  on  the  principles.  He                                                               
acknowledged  that it  is fair  to ask  which should  come first.                                                               
However,   the  administration   is   trying  to   put  forth   a                                                               
comprehensive set  of measures for  the legislature  to consider.                                                               
He said he hoped a super majority would agree.                                                                                  
2:40:57 PM                                                                                                                    
SENATOR MYERS expressed concern  about meaningfully involving the                                                               
people, such that the meaning will  get lost. He offered his view                                                               
that by changing  the Alaska Constitution in SJR 6  and a statute                                                               
in SB 53  first, then asking the people if  they agree with those                                                               
changes muddles the meaning. In  fact, if an advisory vote fails,                                                               
the legislature  could interpret the  reasons it failed in  a lot                                                               
of  different ways.  He offered  his  belief that  it fails  that                                                               
2:41:58 PM                                                                                                                    
SENATOR  KIEHL  offered  his  view  that there  is  an  order  of                                                               
operations issue in  SJR 6 and SB 53 that  the legislature should                                                               
consider as  this legislation  moves through  the process.  SJR 6                                                               
proposes  any  change  to the  50:50  distribution  rule  between                                                               
government  services and  PFDs must  be approved  by the  voters.                                                               
However,  the  transitional  language states  that  this  happens                                                               
after  SB  53 becomes  law,  regardless  of  the outcome  of  the                                                               
advisory vote.  He said  it strikes him  as inconsistent  to make                                                               
changes  in the  Alaska  Constitution, then  require an  advisory                                                               
vote for  further changes instead  of requiring an  advisory vote                                                               
before changing the Alaska Constitution.                                                                                        
MR. BARNHILL  answered that the  people will be consulted  at the                                                               
first general election, after which  the legislature is given the                                                               
flexibility to set the PFD  distribution rate. The purpose of the                                                               
advisory vote is  to determine whether the voters  agree with the                                                               
changes the  legislature made. He  acknowledged that  there could                                                               
be  different  ways to  accomplish  this.  However, this  process                                                               
seems relatively  efficient in that  it gives  appropriate accord                                                               
to the  legislative process. The people  elect their legislators,                                                               
the  legislature uses  its expertise,  in  consultation with  the                                                               
executive branch, to make decisions  on behalf of the people. The                                                               
people subsequently can voice their  opinions in an advisory vote                                                               
as to  whether they  agree with  the legislature's  decisions. As                                                               
previously mentioned, any  number of conclusions can  be drawn on                                                               
the  advisory vote.  He recalled  that in  1999, the  legislature                                                               
seriously considered the outcome of  the advisory vote on the use                                                               
of permanent  fund earnings. Therein  lies the  meaningful nature                                                               
of  this  process  because  the people  are  being  consulted  on                                                               
decisions being made by the legislature.                                                                                        
2:45:21 PM                                                                                                                    
SENATOR  SHOWER commented  on where  the legislature  is at  this                                                               
point.  Discussions  and  debates  are   held  on  the  level  of                                                               
services,  including  the value  of  services  to the  public  as                                                               
compared  to receiving  PFD checks.  He  offered his  view it  is                                                               
important  to  note  that government  services  are  not  equally                                                               
distributed.  Some people  are consumers,  others are  producers;                                                               
some people  use substantial government services,  others do not.                                                               
However,  PFDs are  equally distributed.  The  legislature has  a                                                               
number  of options  to  address these  issues.  It's basically  a                                                               
philosophical issue about  whether to support SJR 6 and  SB 53 or                                                               
how else  to solve the  level of government services  as compared                                                               
to the amount of the PFDs.                                                                                                      
[SB 53 and SJR 6 were held in committee.]                                                                                       

Document Name Date/Time Subjects
SB 53 Sectional.pdf SJUD 4/21/2021 1:30:00 PM
SB 53
Dept of Revenue SJR 6 042021 - Final.pdf SJUD 4/21/2021 1:30:00 PM
SB 53
SB 122 Sponsor Statement v. B.pdf HJUD 5/10/2021 1:00:00 PM
HJUD 5/12/2021 1:00:00 PM
HJUD 5/14/2021 1:00:00 PM
HJUD 5/17/2021 1:00:00 PM
SJUD 4/21/2021 1:30:00 PM
SB 122
SB 122 Sectional Analysis v. B.pdf HJUD 5/10/2021 1:00:00 PM
HJUD 5/12/2021 1:00:00 PM
HJUD 5/14/2021 1:00:00 PM
HJUD 5/17/2021 1:00:00 PM
SJUD 4/21/2021 1:30:00 PM
SB 122