Legislature(2009 - 2010)BELTZ 105 (TSBldg)

03/23/2010 09:00 AM Senate STATE AFFAIRS


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ SB 282 PERMANENT FUND DIVIDEND AMOUNT FOR 2010 TELECONFERENCED
Moved SB 282 Out of Committee
*+ SB 249 PUBLIC RECORDS/ELECTRONIC TRANSMISSIONS TELECONFERENCED
Moved SB 249 Out of Committee
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 282-PERMANENT FUND DIVIDEND AMOUNT FOR 2010                                                                     
                                                                                                                                
9:01:57 AM                                                                                                                    
CHAIR  MENARD  announced the  first  order  of business  to  come                                                               
before the committee would be SB 282.                                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI,  sponsor of  SB  282,  said Alaskans  have                                                               
relied  on  their annual  Permanent  Fund  Dividend (PFD)  checks                                                               
since  1977.  Many Alaskans  are  relying  more heavily  on  this                                                               
year's PFD due to the economic  downturn. SB 282 will ensure that                                                               
Alaskans receive a full dividend this year.                                                                                     
                                                                                                                                
SENATOR MEYER joined the meeting.                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  explained that the  PFD is calculated  by a                                                               
formula that considers the average  amount the fund's investments                                                               
have  earned  over  the  past   five  years.  A  current  statute                                                               
preventing the  PFC from paying out  more than 50 percent  of the                                                               
fund's earnings  reserve in any  given year could be  invoked for                                                               
the first  time ever this  year due  to the market  downturn over                                                               
the  last couple  years. This  means the  full calculated  amount                                                               
could not legally be appropriated  from the earnings reserve even                                                               
though sufficient funds  exist. When SB 282  was initially filed,                                                               
enough money  was in  the earnings  reserve to  pay out  the full                                                               
dividend;  however, considering  the 50  percent limitation,  the                                                               
account  was  several  hundred million  short  of  the  necessary                                                               
amount. That gap is now smaller but still exists.                                                                               
                                                                                                                                
SB  282  addresses only  2010  by  transferring  one half  of  21                                                               
percent  of the  net income  of  the five  year dividend  average                                                               
calculated for  fiscal years 2006-2010 from  the earnings reserve                                                               
account to the dividend account.                                                                                                
                                                                                                                                
9:04:58 AM                                                                                                                    
This  issue should  not be  a problem  in 2011  because inflation                                                               
proofing is expected to be  zero. Alaskans deserve to receive the                                                               
full  benefit from  the state's  oil revenue  during these  tough                                                               
economic times.  SB 282 will  ensure Alaskans receive  their full                                                               
dividend  for 2010  in the  event  that earnings  fall below  the                                                               
threshold required for a full payout.                                                                                           
                                                                                                                                
SENATOR KOOKESH joined the meeting.                                                                                             
                                                                                                                                
CHAIR MENARD asked  if Senator Wielechowski was  concerned that a                                                               
precedent would be set for future similar situations.                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI replied  that ultimately  the way  in which                                                               
the PFD  is paid out  needs to change.  "We have enough  money to                                                               
pay out  the full dividend, however  the way the law  is written,                                                               
we can't  pay out the  full dividend".  With oil high,  and costs                                                               
and expenses high, Alaskans will not  be happy if they do not get                                                               
their full dividend.                                                                                                            
                                                                                                                                
SENATOR PASKVAN asked what the loss per PFD might be.                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI  replied that  when  SB  282 was  initially                                                               
filed, the  fund was  short over  $100 million,  equaling several                                                               
hundred  dollars to  PFD's. The  gap has  closed to  $50 million,                                                               
roughly equaling an  $80 shortfall per PFD. Whether  the gap will                                                               
open or close between now and June is unknown.                                                                                  
                                                                                                                                
SENATOR MEYER  said a lot  of things  can happen between  now and                                                               
June  30th. In  2003, the  same  concern existed  but the  market                                                               
improved. He is concerned about  tinkering with a system that has                                                               
been working for nearly 30 years.                                                                                               
                                                                                                                                
9:08:58 AM                                                                                                                    
SENATOR  WIELECHOWSKI replied  that oil  prices are  high, a  $10                                                               
million savings account  and $2.2 billion surplus  exist. It will                                                               
be difficult  to tell  Alaskans they  do not  get their  full PFD                                                               
this year  because of a provision  that the fund must  have twice                                                               
as much as the payout amount.                                                                                                   
                                                                                                                                
SENATOR MEYER  said he warns  people that the PFD  fluctuates and                                                               
not to count  on it. He has been telling  his constituents, "It's                                                               
out of our hands;  we have a system set up. You  don't want us to                                                               
intervene  because we'll  screw  it up".  He understands  Senator                                                               
Wielechowski's purpose,  especially considering the  economy, but                                                               
it is a slippery slope.                                                                                                         
                                                                                                                                
9:11:55 AM                                                                                                                    
SENATOR FRENCH asked about the  policy debate or rationale behind                                                               
the statute  that no  more than  50 percent of  the money  in the                                                               
earnings reserve account be paid out.                                                                                           
                                                                                                                                
LAURA   ACHEE,  director   of   communications,  Permanent   Fund                                                               
Corporation  (PFC),  replied that  she  does  not know  what  the                                                               
legislative  intent  was  for the  50  percent  limitation.  That                                                               
section of statute has not been altered since the 1980's.                                                                       
                                                                                                                                
SENATOR FRENCH  clarified that the  50 percent limitation  is the                                                               
rule that would prevent a full payout of the dividend this year.                                                                
                                                                                                                                
MS. ACHEE replied yes. The ultimate  point of the statute is that                                                               
no more  than 50 percent of  the balance of the  earnings reserve                                                               
may go to the PFD in any given year.                                                                                            
                                                                                                                                
SENATOR  FRENCH  suggested that  part  of  the rationale  was  to                                                               
ensure that money  was available for inflation  proofing which is                                                               
paid from the same account.                                                                                                     
                                                                                                                                
MS. ACHEE agreed  and said that statute stipulates  the next step                                                               
after paying the PFD is to calculate and pay inflation proofing.                                                                
                                                                                                                                
SENATOR FRENCH said 2010 is  a year of historically low inflation                                                               
and little  demand for inflation  proofing. He asked  what amount                                                               
might be appropriated for inflation proofing this fiscal year.                                                                  
                                                                                                                                
MS. ACHEE replied  that the rate used for this  year is zero; the                                                               
PFC will not make an inflation  proofing transfer on June 30th of                                                               
this year.                                                                                                                      
                                                                                                                                
9:16:00 AM                                                                                                                    
SENATOR  FRENCH  summarized  that  plenty  of  money  is  in  the                                                               
earnings reserve account  to pay the PFD but the  50 percent rule                                                               
is holding this  up. Paying out the full PFD  would not result in                                                               
any  loss  to the  permanent  fund  because  no money  from  that                                                               
account is needed for inflation proofing this year.                                                                             
                                                                                                                                
MS. ACHEE said that is correct.                                                                                                 
                                                                                                                                
CHAIR MENARD  said the PFD  is upmost on all  constituents' minds                                                               
and  the Legislature  should  look  at getting  the  full PFD  to                                                               
constituents.                                                                                                                   
                                                                                                                                
SENATOR  MEYER  asked  what  year   the  same  situation  existed                                                               
previously.                                                                                                                     
                                                                                                                                
MS. ACHEE  replied 2003.  She said, "the  cupboard was  bare" and                                                               
paying the  dividend at all was  a concern. The issue  was solved                                                               
by early 2003 after markets recovered dramatically.                                                                             
                                                                                                                                
SENATOR MEYER  asked if 2010  is similar  to 2003. He  said these                                                               
past five  years seem  to be  doing better  than the  tech bubble                                                               
bursting in 2001-2003.                                                                                                          
                                                                                                                                
9:18:35 AM                                                                                                                    
MS. ACHEE  replied that the  dividend calculation has  two parts:                                                               
the five year average calculation,  and the presence of the money                                                               
to pay it. In 2003, regardless  of the five year calculation, the                                                               
earnings  reserve   was  empty.   In  2010,  regardless   of  the                                                               
calculation, the earnings reserve  account, according to statute,                                                               
does not have enough money to pay the projected dividend amount.                                                                
                                                                                                                                
Since 2003, the Attorney General  (AG) has issued an opinion that                                                               
moved unrealized gains and losses  out of the earnings reserve to                                                               
principle. In 2003, unrealized gains  would have been part of the                                                               
earnings reserve and would have  caused that dramatic swing. Now,                                                               
only  realized  gains  and  losses are  booked  to  the  earnings                                                               
reserve, meaning the balance of that fund is more stable.                                                                       
                                                                                                                                
CHAIR MENARD  asked if the  dividend calculation is still  six or                                                               
seven months away.                                                                                                              
                                                                                                                                
MS. ACHEE said it's about four months away.                                                                                     
                                                                                                                                
SENATOR MEYER asked if the PFC has any projections.                                                                             
                                                                                                                                
MS. ACHEE  replied that  the dividend  is probably  calculated at                                                               
$791 million, based  in part on a stream of  regular income every                                                               
month  and not  including any  gains  from selling  an asset.  In                                                               
November, that stream  of regular income was not going  to add up                                                               
to  be  enough.  Since  then,  movement  in  the  portfolios  has                                                               
resulted  in some  gain and  the account  is now  short only  $50                                                               
million.  The CFO  thinks that  gap is  or will  be closed;  that                                                               
information will not come until the end of the month.                                                                           
                                                                                                                                
9:22:58 AM                                                                                                                    
SENATOR PASKVAN said  inflation proofing is expected  to be zero.                                                               
The  law,  with  respect  to inflation  proofing,  is  not  being                                                               
changed;  the cap  at 50  percent  is the  problem. The  earnings                                                               
reserve account  is $50 million  short of  being able to  pay out                                                               
the  full PFD.  He asked  what percentage,  above the  50 percent                                                               
cap, does would the additional pay out constitute.                                                                              
                                                                                                                                
MS. ACHEE said the PFC is  projecting a $790 million dividend and                                                               
ending the year  at $1.5 billion. $790 million is  more than half                                                               
of $1.5  billion. The $50  million shortfall is about  3 percent,                                                               
or a small percentage, of the overall earnings reserve.                                                                         
                                                                                                                                
9:25:35 AM                                                                                                                    
SENATOR PASKVAN  said the permanent  fund now is $35  billion. He                                                               
asked what a  1 percent inflation protection  would calculate out                                                               
to.                                                                                                                             
                                                                                                                                
MS. ACHEE replied  that historically, when inflation  has been in                                                               
the 2 and  3 percent range, about $800 million  to $1 billion has                                                               
been  paid  to  inflation proofing.  When  considering  inflation                                                               
proofing  in  the future,  she  suggested  looking at  the  total                                                               
volume  of the  principle  because the  percentage is  multiplied                                                               
against  that principle,  which  has grown  huge. Going  forward,                                                               
bigger  and  bigger  numbers  will be  thrown  off  on  inflation                                                               
proofing  even  if  we  stay in  a  stationary  environment.  Any                                                               
positive  percentage is  going  to  throw off  a  big number  for                                                               
inflation proofing.                                                                                                             
                                                                                                                                
SENATOR PASKVAN  said the  gap between the  $791 million  and the                                                               
forecasted $1.5 billion  is $700 million or 2 percent  of the $34                                                               
billion. There is enough for a  2 percent inflator if needed, but                                                               
this year it is zero.                                                                                                           
                                                                                                                                
MS. ACHEE  said even if a  full dividend is paid  this year, over                                                               
$700 million will be left in the earnings reserve.                                                                              
                                                                                                                                
CHAIR MENARD asked if Ms. Achee  felt this legislation was a mute                                                               
point.                                                                                                                          
                                                                                                                                
MS. ACHEE replied  that creating the dividend and  the 50 percent                                                               
rule  were the  Legislature's call.  Whether or  not to  put this                                                               
mechanism in place is also. The PFC is neutral.                                                                                 
                                                                                                                                
9:29:08 AM                                                                                                                    
MS. ACHEE  said Mr.  Burns, executive director  of the  PFC, felt                                                               
that letting the Legislature know  about the gap was crucial even                                                               
though he felt confident that the gap would be made up.                                                                         
                                                                                                                                
SENATOR  MEYER read  from  SB 282  and asked  if  one-half of  21                                                               
percent of the net income is the  right number to get us to where                                                               
we want to be.                                                                                                                  
                                                                                                                                
MS. ACHEE  replied that the  dividend calculation is  one-half of                                                               
21 percent of  the net income. SB  282 says you will  pay out the                                                               
calculated dividend regardless of what statutes say.                                                                            
                                                                                                                                
9:31:17 AM                                                                                                                    
CHAIR MENARD closed public testimony.                                                                                           
                                                                                                                                
SENATOR  FRENCH  moved  to  report SB  282  from  committee  with                                                               
individual  recommendations and  attached  fiscal note(s).  There                                                               
being no objection, the motion carried.                                                                                         

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