Legislature(2019 - 2020)SENATE FINANCE 532
04/10/2019 09:00 AM Senate FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| SB103 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 103 | TELECONFERENCED | |
| *+ | SB 104 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
April 10, 2019
9:01 a.m.
9:01:28 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:01 a.m.
MEMBERS PRESENT
Senator Natasha von Imhof, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Click Bishop
Senator Peter Micciche
Senator Donny Olson
Senator Mike Shower
Senator Bill Wielechowski
Senator David Wilson
MEMBERS ABSENT
Senator Lyman Hoffman;
ALSO PRESENT
Juli Lucky, Staff, Senator Natasha von Imhof; Senator Chris
Birch; Senator Cathy Giessel; Senator Mia Costello; Senator
Gary Stevens.
SUMMARY
SB 103 PFD APPROPRIATIONS
SB 103 was HEARD and HELD in committee for
further consideration.
SB 104 APPROPRIATION LIMIT
SB 104 was HEARD and HELD in committee for
further consideration.
SENATE BILL NO. 104
"An Act relating to an appropriation limit; relating
to the budget responsibilities of the governor; and
providing for an effective date."
9:04:20 AM
CO-CHAIR NATASHA VON IMHOF, SPONSOR, explained the bill.
She shared that there was already a spending cap in the
constitution. She noted that the governor had introduced
Senate Joint Resolution 6, which was a spending cap
amendment. She remarked that any constitutional amendment
would go before voters in 2020; this legislation would
provide a more immediate solution. She spoke to the
PowerPoint presentation related to the bill (copy on file).
Co-Chair von Imhof looked at Slide 1, "Why a Spending Cap?"
1. Restrain the growth of the state budget over time
2. Save during the good times so we have a backstop
for the tough
times.
? Spending Cap aka: TEL (Tax and Expenditure Limit)
She said that her research had shown that states with
successful spending caps also had spending mechanisms in
place to bridge periods of revenue downturns; Alaska has
the Constitutional Budget Reserve (CBR). She shared that a
2010 report from the National Conference of State
Legislatures described how Colorados Taxpayers Bill of
Rights (TBR) initially allowed access revenue collected
above the cap to be refunded to voters. However, after the
severe economic downturn in 2001 and 2002, when Colorado
experience significant revenue shortfalls, there was no
account to provide a buffer and a recession soon followed.
In 2005, Colorado voters approved a legislative referendum
to forego the projected mandatory tax refunds and instead
kept surpluses in a savings account to provide a fiscal
buffer when revenue shrank. She reiterated that Alaska has
the CBR, which needed to be funded during years of excess
revenue to fund the state when the need arose.
Co-Chair von Imhof addressed Slide 2, "Five Decision
Points:"
1. Starting Point
2. Growth rate
3. What is included under the cap
4. What is excluded outside the cap
5. What do we do with excess revenue
She explained that the plan for excess revenue was not in
the bill but was an important issue to address. She hoped
that the meeting would result in a deeper understanding of
the pros and cons for each decision point, to think about
how different options might make sense under a wide variety
of circumstances, and to understand the pros and cons of a
spending cap in statute versus in the constitution.
9:07:46 AM
Co-Chair von Imhof highlighted Slide 3, "What are other
states doing?" She noted that there was a mix within the
states that had a tax and expenditure limit (TEL) in place.
She said that as of 2015, 28 (represented in blue, pink and
yellow) states had a TEL. The black states did not have a
TEL, and of the colored states on the map, 17 had a limit
in their constitution, 11 in statute. She said that the
difference between putting it in the constitution versus
statute was the level of flexibility over time.
9:08:19 AM
Co-Chair von Imhof highlighted Slide 4, "Looking back." She
relayed that the slide showed the historical levels, since
1980, when the current constitutional spending cap began,
and oil became a major contributor to state revenue. The
orange line was the unrestricted general fund (UGF)
spending, plus the permanent fund dividend (PFD). The green
line was the UGF revenue, plus the PFD.
9:08:46 AM
Co-Chair Stedman asked for a definition of UGF and how it
could be manipulated by the legislature.
9:09:05 AM
Co-Chair von Imhof explained that UGF was revenue that
could be used by the legislature to appropriate to
anything. She added that there were other federal funds and
designated general funds (DGF) that were generally directed
to a specific area.
9:09:58 AM
Co-Chair Stedman clarified that UGF were the fund that
could be used for general expenditure in the budget to meet
the states fiduciary obligations and were flexible and
could be moved as the legislature deemed fit.
9:10:06 AM
Co-Chair von Imhof continued to discuss the slide. She said
that for approximately 25 years, revenue and spending did
not fluctuate very much. She continued that in 2005,
revenue and spending experienced wild swings, resulting in
13 years of chaos. She relayed that in that time revenue
spiked high and spending jumped up accordingly. She
furthered that in 2012, revenue went into a free-fall for 6
years, during which time $13 billion of the CBR was spent
to offset budget deficits. She noted the jump in revenue in
2019, due to the passage of SB 26.
9:11:07 AM
Senator Micciche was curious about the green line and
whether the PFD earnings were factored in.
9:11:24 AM
Co-Chair von Imhof replied that UGF plus PFD meant that on
top of the permanent fund, the amount of money that was
used to pay the PFD had been added.
9:11:38 AM
Co-Chair Stedman understood that the PFD had been added on
top of the UGF.
9:11:44 AM
Co-Chair von Imhof agreed.
9:11:50 AM
Co-Chair von Imhof related that calculations showed that if
the state had had an effectual spending cap in place from
2005 to 2018, more would have ween saved in high revenue
years, and less spent out of the CBR in low revenue years,
and a total of $15 billion would have been retained in the
CBR. She felt that the take-away was that it was important
to have a savings account to provide a buffer, as well as
an effectual spending cap.
9:12:37 AM
Co-Chair von Imhof addressed Slide 5. She explained that
the grey line represented the current constitutionally
mandated spending cap. She said that under the status quo,
UGF spending will be $10 billion in 2020. She believed that
the rate was too high. She noted the dark grey line along
the bottom of the graph that showed population growth. She
pointed out that growth had been steady. The dark blue line
reflected the SB 104 limit. In the graph the dark blue line
had been modeled backwards and forwards to see what an
effectual spending cap would look like had it been in
place. She said that the growth rate of the cap was the
last five-year trailing consumer price index average. The
green dotted line was the estimated revenues published in
the current Spring Revenue Source Book, it appeared that
revenues were estimated to remain steady over the next five
years. She stated that the current spending cap illustrated
why long-term growth rates, left untouched, could become
very large. She stressed that the growth rate mattered and
would have to contend with Compound Annual Growth Rate
(CAGR). She discussed CAGR. She asserted that revenue and
expenditure projections were not based on the same things;
revenue in the state, or oil prices, were not based on
inflation but on supply and demand, technology, and global
politics. The market value of the permanent fund, under SB
26, was based on the value of stocks, bonds, real estate,
supply and demand, consumer confidence, and global free
market forces (green line). She furthered that the orange
line, or expenditures, was based mainly on federal
matching, federal mandates, and politics. She believed that
an effectual spending cap would have been helpful during FY
05 and FY 18, assuming there had been the political will to
follow it. She warned that compound annual growth rate was
a mathematical calculation that had economic consequences
when it was inside a spending cap and she recommended
periodic reevaluation of any spending cap that was put in
place, regardless of whether it was in the constitution or
in a statute.
9:17:02 AM
Senator Olson asked whether the sponsor had plans for the
surplus revenue that could be generated by implementing a
spending cap like Colorado.
Co-Chair von Imhof thought the issue should be had at the
table. She said that past proposals that suggested a
certain percentage of excess revenue could go towards
capital, savings, and perhaps a dividend.
9:18:19 AM
Co-Chair Stedman reminded the committee of a decade between
the late 80s and through the 90s when Capital Budgets were
flattened due to tight revenue which had led a substantial
deferred maintenance buildup in the state. The buildup had
resulted increased in the Capital Budget as revenue
increased in the early 2000s. He wondered how the spending
formula would affect the ability to deal with deferred
maintenance.
9:19:03 AM
Co-Chair von Imhof replied in years of surpluses money
would be put in the CBR to use for years when the market
forces were not favorable.
9:20:56 AM
Senator Wielechowski queried the penalty if the legislature
exceeded the appropriation limit.
9:21:10 AM
Co-Chair von Imhof replied that she had not come across
that information in her research. She thought that it was
up to the committee to discuss whether the legislature
could exceed the cap with a three-quarter vote.
9:22:17 AM
Senator Wielechowski argued that the legislature could
ignore the statute in much the same way it ignores the
constitutional provision for a 90-day legislative session.
9:22:26 AM
Co-Chair von Imhof offered that other states exercised
threshold votes to override statutes.
9:22:31 AM
Senator Micciche noticed that the bill did not add an
exclusion on capital spending. He asked whether the sponsor
could be open to tighter reigns on capital spending outside
of the exclusion.
9:24:10 AM
Co-Chair von Imhof replied that capital matching funds had
been paid out of UGF over the past several years. She said
that she was attempting to keep the Capital Budget at $150
million for FY 20, that would allow for federal matching
funds, limited deferred maintenance, and several new
capital items. She said that the constitution stated that
any new Capital Budget must communicate to the legislature
what the ongoing costs would be in subsequent years.
9:25:56 AM
Senator Wielechowski understood that the appropriation
limit would be $5 billion and would include the PFD at $1.9
billion.
9:26:05 AM
Co-Chair von Imhof replied in the affirmative. She pointed
to the green line on Slide 5 and relayed that an amount had
to be chosen to put in the bill. She offered a brief
explanation of that process.
9:26:26 AM
Co-Chair von Imhof looked at Slide 6.
9:27:19 AM
Co-Chair von Imhof highlighted Slide 7, "Expenses as a
comparison." [Secretary Note: Slides 6 and 7 are not in
backup and were not provided to the committee]
9:27:47 AM
Senator Bishop asked whether it would be possible to take
Slides 4 and 5 and model them with the 50/50 dividend
split.
9:28:07 AM
Co-Chair von Imhof agreed to provide that information.
9:28:14 AM
Co-Chair Stedman said that the legislature had the ability
to increase expenditures, and drive the economy, through
the Capital Budget. He said that certain past Capital
Budget had been in response to the declining national and
international economy to keep Alaska out of the recessions.
He said that Capital Projects were funded throughout the
state that had kept Alaska out of harms way during the
Great Recession. He wondered how the same thing could be
done under SB 104.
9:30:33 AM
Co-Chair von Imhof thought that the decision could be made
by the legislature to slightly increase the budget over the
spending cap after weighing the risk. She asserted that the
spending cap could give the legislature a guideline.
9:32:00 AM
Co-Chair Stedman felt that the committee should closely
examine the capital budget. He noted that in the 90s the
budget was flat, like the current budget. He warned that
capping the capital budget at $150 million would be too low
and would limit the states ability to invest in state
infrastructure outside of federal support.
9:33:18 AM
Senator Micciche thought that the state was victim to
investment growth versus inflation. He thought that the
problem was when getting so far out of moderation that the
spend above the spending cap could cause a recession. He
suggested moderating capital spend to level out the long-
term effects. He expressed the desire to talk about a
percent over UGF spend for capital, which would moderate
the spend while allowing usage of stimulus and the building
of necessary infrastructure.
9:34:39 AM
Co-Chair Stedman mentioned two major budgetary distortions:
oil tax credits that were paid out and retirement
liability. He thought that when those distortions had a
financial impact that should be considered when structuring
policy.
9:35:02 AM
Senator Bishop added on a positive distortion note, the
additional inflation proofing payments that had been made
to the PFD for approximately $6 billion.
9:35:25 AM
Co-Chair Stedman agreed that the legislature had
historically added funds to the constitutionally protected
portion of the fund and could add more in the future.
9:35:36 AM
Senator Wielechowski relayed that the constitutional
appropriation limit specifically excluded appropriations
for PFDs and expressed concern with their inclusion. He
wondered whether having a limit of $5 billion, with a
statutory PDF that costs $1.9 billion, left $3.1 billion in
UGF. He thought that this would create a situation where
future permanent cuts to the PFD, or government, would be
locked in. He considered that the PFD should be excluded
from the number set for the cap.
9:37:03 AM
Co-Chair Stedman asked for clarity concerning the pros and
cons of excluding, or including, the PFD.
9:37:19 AM
Co-Chair von Imhof retorted that the POMV was used to pay
the PFD. She argued that it would be unwise moving forward,
to take extra money from the ERA, thereby depleting it, to
pay a large dividend based on the current statutory
calculation. She said that the second option was to spend
what was available. She stressed that she was interested in
a spending cap that matched the green line on Slide 5. She
thought that thought choices needed to be made: either the
state could cut teachers, troopers, and health care
professionals to pay a $3000 dividend, or a balance could
be found that paid a reasonable dividend as well as a
reasonably sized budget that funded core government
services. She related that this would require a
recalculation to the dividend going forward. She noted that
the material change was the passage of SB 26.
9:39:15 AM
Senator Shower touched on the broader topic of taking the
ERA out of play and putting it into the corpus under the
POMV model.
9:40:00 AM
Co-Chair von Imhof responded that the APFC had testified
that the PFD was the only sovereign wealth fund endowment
or foundation that has an accounting with and ERA and a
corpus. She shared that all other endowments and
foundations had one account and the percentage endowment
payment came from that one account. With the passage of the
POMV it made sense to incorporate the ERA and the corpus
into one large account and ask the head of the APFC to
manage the percentage draw overtime.
9:41:16 AM
Senator Shower expressed concern for a statutory spending
limit when there was already a constitutional spending
limit. He said that the problem with a statutory spending
limit was the rule of 21 and 11 vote. He said that there
was a propensity in the legislature to ignore statutes that
it did not like. He asked whether a statutory spending
limit would even be effective.
9:42:55 AM
Co-Chair von Imhof said in 1982 there had been a 4-year
check in and the voters got to check in in 1986. She
wondered whether a periodic check in with voters on the
constitutional spending cap could be effective. She added
that currently, if SJR 6 were in place, voters would not
vote until 2020, leaving no solution in the meantime. She
suggested that with a statute it could be on the books for
several years as a trial run, then voters could on a
constitutional amendment in 4 years.
9:43:49 AM
Senator Wielechowski did not want the public to be left
with the perception that the only solution to the states
budget problems was the PFD versus cuts. He argued that
those were not the only options. He said that a solution
could be found in cutting deductible oil tax credits, which
costs the state $1.25 billion. He argued that a statutory
PFD could be paid out if the legislature considered other
available options.
9:44:42 AM
Co-Chair Stedman thought that the potential rise of the
states pension obligation should be considered while
working thorough the factors on the model.
9:45:26 AM
Senator Bishop agreed. He relayed that the unfunded
liability of the pension plans was currently underfunded by
approximately 30 percent.
9:46:23 AM
Senator Wilson wondered about putting forward a bill that
excluded the PFD and added a sunset date of 2020. He
suggested a bill that mirrored SJR 6, with a sunset date
included.
9:47:21 AM
Co-Chair von Imhof rebutted that she preferred her bill
over SJR 6.
9:47:43 AM
Co-Chair Stedman thought that the bill would be modified by
committee after modeling and sensitivity analysis by the
Legislative Finance Division.
9:48:45 AM
Senator Micciche stated that he liked aspects of both
pieces of legislation.
9:49:06 AM
Co-Chair Stedman asked Senator Micciche to define SJR 6.
9:49:12 AM
Senator Micciche replied that SJR 6 was the governors
spending limit that was being worked on in another
committee. He asserted that there was no way to deny
inflation. He supported not allowing growth in government
and a safety valve on capital spending. He thought that
without a statutory limit it was challenging for the
legislature to stay within the constitutional limit. He
admitted that the legislature did not always follow
statutes and thought that this issue warranted further
discussion.
9:51:09 AM
Senator Shower highlighted that some of the things under
discussion at the table had been addressed in resolutions
that had been filed and would be discussed in committee.
9:52:09 AM
Co-Chair Stedman reiterated that LFD would craft
presentations and projections to aid in future discussions
on spending limits. He noted that the vote hurdle for a
statutory bill was lower than the hurdle for a
constitutional amendment.
9:53:12 AM
JULI LUCKY, STAFF, SENATOR NATASHA VON IMHOF, discussed the
Sectional Analysis (copy on file):
Sec. 1: Amends AS 37.05.540(a) by deleting a reference
to the existing statutory appropriation limit that is
repealed by this bill.
Sec. 2: Enacts a new AS 37.05.545 - Appropriation
Limit.
(a) Establishes the parameters of the limit:
.notdef Includes all Unrestricted General Fund
(UGF) appropriations for agency spending,
Permanent Fund dividends, retirement
obligations, and capital projects. Does not
include reappropriations, federal funds,
Designated General Fund (DGF) spending,
program receipts, money received from
nonstate sources for specific purposes, or
the exclusions listed in (b).
.notdef Starting point is $5 billion for FY 2021,
with a growth rate based on the average of
the previous five-year's inflation. This
rate was chosen because it provides a more
stable rate than an annual inflation
adjustment.
(b) Lists the exclusions to the appropriation
limit:
(1) Appropriations to the Permanent Fund
principal (corpus);
(2) Debt payments;
(3) Disaster funding; and
(4) Deposits into savings accounts and
transfers into accounts that require
additional legislative action to spend.
(c) Defines the terms "unrestricted general fund"
and "program receipts" for the purposes of this
section.
Sec. 3: Adds a requirement to AS 37.07.020 that the
governor submit, along with the annual budget, a
report noting whether the proposal is within the
spending limit. The report must be updated to include
any supplemental appropriations and budget amendments.
Sec. 4: Repeals the current statutory appropriation
limit, specifically AS 37.05.540(b); 37.05.540(c), and
37.04.540(e).
Secs 5 - 7: Applicability, transition, and effective
date language that specifies when the new
appropriation limit and reporting requirements would
take effect. The limit would apply to the FY2021
budget and the governor would be required to file the
necessary reports for the proposed budgets starting in
December 2019.
9:56:53 AM
AT EASE
9:57:16 AM
RECONVENED
9:57:20 AM
Senator Micciche attempted to make a motion.
9:57:28 AM
AT EASE
9:58:27 AM
RECONVENED
9:58:43 AM
Senator Micciche pointed out that there was nothing in the
bill that considered designated general funds (DGF). He
spoke of a past conversation concerning voluntary increases
where Alaskans picked up a part of state spending, such as
University tuitions. He lamented that the administration
had been lumping the funding sources all together leaving
the committee to explain the difference. He asked Co-Chair
von Imhof to explain why DGF might become a valuable tool
in managing state budgets moving forward as Alaskans
volunteered to pick up some expenses.
9:59:44 AM
Co-Chair von Imhof related that UGF had been chosen for the
spending cap if the University increased its tuition so
that the tuition receipts would go to the University and
nowhere else.
10:00:13 AM
Senator Micciche shared that he often explained UGF to
constituents as the amount that would come out of the
publics pocket if the state could not pay. He appreciated
that DGF specifically paid for programs and he supported
that it was not part of the spending limit.
10:00:56 AM
Senator Wielechowski asked whether the current statutory
budget limit, AS 37.05.540, had ever been violated.
10:01:09 AM
Ms. Lucky understood that the existing in statute had not
been violated.
10:01:47 AM
Co-Chair Stedman repeated the LFD would be before the
committee to provide details on the current spending cap
and the proposed cap.
10:02:17 AM
Ms. Lucky clarified that she would make the most current
graph crafted by LFD available to the committee.
10:02:26 AM
Co-Chair Stedman said that a robust discussion would take
place on the issue. He was hopeful that a solution was
possible.
10:02:53 AM
Senator Bishop noted that the bill was a Senate Finance
Committee bill and that the entire committee was working
together on the issue.
10:03:15 AM
Co-Chair von Imhof stated that a spending cap was very
important to the governor and she sincerely hoped to
deliver a spending cap that all parties could support.
SB 104 was HEARD and HELD in committee for further
consideration.
10:04:31 AM
AT EASE
10:07:47 AM
RECONVENED
Co-Chair Stedman handed the gavel to Co-Chair von Imhof.
SENATE BILL NO. 103
"An Act relating to deposits into the dividend fund
and appropriations from the earnings reserve account;
and providing for an effective date."
10:08:15 AM
Senator Micciche MOVED to ADOPT the committee substitute
for SB 103, Work Draft 31-LS0654\U (Nauman, 4/9/19).
Co-Chair von Imhof OBJECTED for discussion.
10:08:35 AM
CO-CHAIR BERT STEDMAN, SPONSOR, explained the committee
substitute.
Co-Chair von Imhof WITHDREW the OBJECTION. There being NO
OBJECTION, it was so ordered.
10:10:23 AM
Co-Chair Stedman said that the bill would take the percent
of market value and adjust the split, or which portion went
to the PFD, and which portion went to other expenditures or
was reinvested back in the fund.
Co-Chair Stedman explained the Sectional Analysis (copy on
file):
Sec. 1 & 2: Removes from AS 37.13.140(a) the 1982
formula for calculating the amount available for
distribution and leaves the Net Income language for
accounting purposes.
Adds language to AS 37.13.140(b), the Percent of
Market Value (POMV) calculation for the Permanent Fund
draw, stating that the amount for appropriation cannot
exceed the balance of the Earnings Reserve Account
(ERA).
Section 1 inserts the language into current statute;
Section 2 is necessary to accommodate the delayed
effective date of the same statute when the POMV draw
rate "steps down" effective July 1, 2021 (Fiscal Year
2022).
Sec. 3: Amends AS 37.13.145(b) to enact the "split"
of the POMV draw: 50 percent to dividends and 50
percent to the general fund.
Sec. 4: Conforming: AS 37.13.145(c) states that
inflation proofing payments may not be used to
increase the value of Amerada Hess subaccount. Sec. 4
makes technical changes in this statute to conform
with changes made by this bill.
Sec. 5: Conforming: AS 37.13.145(d) states that
funds from the Amerada Hess settlement cannot be used
for dividends. Section 5 makes technical changes in
this statute to conform to changes made by this bill.
Sec. 6: Conforming: AS 37.13.300(c) states that net
income from the Mental Health Trust Fund is not
included in calculations for the Permanent Fund.
Section 6 makes technical changes in this statute to
conform to changes made by this bill.
Sec. 7: Conforming: AS 37.14.031(c) states that the
computation of net income of the Mental Health Trust
Fund shall be computed in the same way as the
Permanent Fund. Since the POMV split makes the net
income calculation for the Permanent Fund obsolete,
section 7 replaces the reference with a net income
calculation.
Sec. 8: Conforming: AS 43.23.025(a) defines the
formula for calculating individual dividends once the
amount available for appropriation is known. Section 8
makes technical changes to conform to changes made by
section 3 of this bill.
Sec. 9: Conforming: Repeals statutes that are no
longer needed: AS 37.13.145(e) & (f), which limit the
draw to the net income calculation being repealed in
this bill.
Sec. 10: Effective date for Section 2 of this bill.
10:15:29 AM
Senator Wilson asked about the language in Section 3, and
the use of the work may rather than shall.
10:16:03 AM
Co-Chair Stedman replied that the language was suggested
language, and that the committee could weigh in on how
restrictive or broad the language should be.
10:16:30 AM
Senator Wilson felt that stronger language would assure
that the rules were followed.
10:17:13 AM
Co-Chair von Imhof interjected that the work shall could
connotate a dedicated fund, which was potentially
unconstitutional.
10:17:25 AM
Senator Wielechowski was curious about the 2018 effective
date.
10:17:39 AM
Co-Chair Stedman said that the effective date concept
considered budget cycles. He relayed that he was open to
all discussions and possible committee changes.
10:18:40 AM
Co-Chair Stedman discussed the presentation, "Senate Bill
103; Senate Finance Committee; April 10, 2019" (copy on
file). He looked at Slide 2:
The Permanent Fund was established in 1976 by a vote
of the people to save a portion of Alaska's mineral
wealth for future generations and limit overspending
by the legislature.
10:19:14 AM
Co-Chair Stedman highlighted Slide 3:
The Permanent Fund is an Alaska success: current value
of $64 billion from a total contribution of $40.4
billion.
Co-Chair Stedman said that chart sowed the growth of the
permanent fund overtime. The top bar represented the ERA.
He shared that the state has a formula driven dividend,
established when the portfolio was smaller. The portfolio
had grown overtime to over $60 billion. The formula took
the 5-year average of gains and losses and net income to
pay out a dividend to every resident of the state. He said
that the passage of SB 26 had created a linking problem
between how the dividend was calculated and how the POMV
was drawn. A Strong bull market resulted in bigger
dividends and currently the formula targeted a $3000
dividend, which took a substantial percentage of the POMV
draw. He said that the dividend today, after a decade long
bull market, took a bigger portion. He directed committee
attention to 2008, 2009, 2010, and recalled conversations
then over concern about the declining financial markets and
possible politics involved in the management of the PFD at
that time. He noted that in 2003 the gold bar on the chart
nearly disappeared. He stated that looking over the past
several years, a historical distortion could be seen of a
massive ERA driving a large dividend. He shared that the
hope was to create a smoothing of the dividends and the
cash flow to the general fund, when it was needed. He said
that the smoothing mechanism looked back over the past 5
years, averaged the market value, then took 5.25 percent to
pay out dividends and or state core services. He said that
stretching out 5 years helped reduce volatility in the cash
flow. He said that the smoothing made the dividend more
stable.
10:25:17 AM
Co-Chair Stedman addressed Slide 5, "The ERA is variable
and uncertain. By its nature it lacks the stability to be
relied upon for budget stabilization."
Co-Chair Stedman pointed to 2009, when there was $420
million in the ERA, $29.5 constitutionally prote4cted. He
lamented that $420 million would not meet the states
current obligations. He noted that under POMV, in 2003 the
entire ERA would have to be used to pay dividends. He
stressed that the dividend calculation needed to be
modified to coincide with the POMV structure. He noted the
targeted numbers for 2019 and warned that the legislature
needed to deal with the massive growth in the ERA. He
warned that the ERA should not be relied on for both
dividends to residents and any operational assistance to
the state. He said that even if there was no operation
assistance to the state the dividend was in peril by being
focused in the ERA.
10:27:23 AM
Co-Chair Stedman discussed Slide 4, "SB 103 Protects the
Permanent Fund." The slide offered the basic layout of the
draw and the split. He hoped that the final bill would be
transparent and understandable by the citizens of the
state; the people of Alaska are the collective owners of
the entire portfolio. The slide reflected a 50/50 split,
which Co-Chair Stedman said was a proposal for the purpose
of discussion only.
10:30:19 AM
Co-Chair Stedman discussed Slide 6, "SB 103 Doesn't Alter
the Fund's Principles; Save and Grow":
SB 103 limits any draw from the Fund to a maximum 5
percent of its 5-year average value.
This draw limit is conservative and sustainable.
5 percent is comfortably under the Fund's growth
performance.
Co-Chair Stedman shared that the 5 percent long-term was a
reasonable target and was set in statute. This percentage
could be higher or lower and would be under discussion. He
said that when the distribution rate was set at 5 percent
it was driven by the asset allocation and performance of
the PFD and a deliberate effort had been made not to
distort and push the PFD asset allocation; the draw rate
should not be so high that APFC had to chase risky assets
to produce the return, or so low that the sharing of the
wealth was inequitable for future generations. He said that
SB 26 recognized APFC was a separate entity that knew the
cashflow that needed to be produced to the treasury in
advance and prepare their portfolio prepared accordingly.
10:32:45 AM
Co-Chair von Imhof noted that the bill did not address the
draw rate in SB 26 but reiterated the draw rate as 5
percent starting in 2021 and addressed the split of that 5
percent.
10:33:12 AM
Co-Chair Stedman agreed.
10:33:31 AM
Co-Chair Stedman looked at Slide 7, "SB 103 Protects the
Permanent Fund; Let's Talk Dividends":
The dividend (est. 1982) has disbursed $22b to
Alaskans.
It is an equitable distribution of resource
wealth to those who own the resources.
SB 103 provides a predictable and transparent
dividend via a 50/50 formula.
Dividends will once again be reliable and linked
to the value of the fund.
10:34:12 AM
Co-Chair Stedman addressed Slide 8, "Comparison of 1982
Formula and SB 103."
Co-Chair Stedman noted that the chart offered a linear
interpretation and reminded committee members that the
market was anything but linear. He said that the draw rate
on the first row and relayed that the long-term objective
was to get to 5 percent. He spoke to the second row, which
showed the total POMV draw and was the total amount of
money that could be drawn from the PFD in any given year.
He moved to the 1982 formula, which was the current
dividend calculation, $3332 per resident in FY 2020. He
stated that in SB 103, the transfer dropped from $1.9
billion to $1.5, the split would be 50/50 and the PFD would
be $2285. He related that the numbers depended on the
strength of the ERA and the financial markets; a ten-year
bull market was hard to beat. He pointed to FY 2028 and
noted that the dividend would be reduced to $2600, but
there would be more stability. He hoped for input from
committee members to craft the legislation to ensure the
long-term survival of the PFD and to restrict the ability
of the governor and the legislature to overdraw the PFD and
reduce purchasing power; net real losses in market value
would destabilize the PDF for future generations.
10:38:56 AM
Senator Micciche requested a graph like the one on Slide 8
beginning in 2000. He wondered whether income was currently
calculated excluding unrealized gains and losses.
Co-Chair Stedman replied in the negative. He said that
current income used realized gains and losses in income for
the dividend formula. He deferred to Angela Rodell,
Executive Director, Alaska Permanent Fund Corporation for
more information.
10:40:56 AM
Senator Olson asked whether the APFC Director and Board of
Trustees had weighed in on the legislation.
10:41:06 AM
Co-Chair Stedman deferred to Ms. Rodell.
10:41:31 AM
Co-Chair von Imhof said that how the money was spent was
the per view of the legislature. She asked why the
presenter had landed on the 50/50 split.
10:42:12 AM
Co-Chair Stedman stated that he had tried to gauge where
there would be public support. He thought that the 50/50
split was a good starting point for discussions. He added
that a 50/50 split would take time to implement and that
the state may need financial assistance from the APFC to
meet its obligations without massive budget cuts.
10:44:32 AM
Senator Bishop spoke to Slide 3. He stressed that small
dividend payments had gone out in the past, without public
outcry, and felt that the 50/50 split was a good idea. He
believed that the effective rate could be lowered to 4.5
percent.
10:46:35 AM
Co-Chair von Imhof agreed that the 50/50 split was a good
place to start. She pointed out to the committee that it
would require, based on the current budget, over $800
million in cuts. She argued that a 50/50 split may seem
fair, but that there were many factors that needed to be
discussed.
10:48:30 AM
Senator Wilson said that people had been happy with lower
dividends in the past because they knew what was happening.
He suggested that people did not become outraged until the
government began messing with the formula. He said he was
in favor of a 50/50 plan. He thought the constitution
should be changed with a vote of the people. He worried
about tinkering with the formula to feed the appetite of
government.
10:50:59 AM
Co-Chair Stedman thought that the predictability of the PFD
payout and the cashflow to the treasury would be best for
the state. He believed that the decision was a multi-decade
one. He added that LFD would be working to provide the
historical data requested by Senator Micciche.
10:51:55 AM
Senator Shower noted that the original language in SB 26
had a 70/30 split. He said that the narrative had been
driven that the money belonged to the government, and the
public as being allowed a portion. He thought the 50/50
seemed like an equitable split. He lamented that the public
did not trust the legislature to follow statute. He offered
an analogy about a fish countered by one involving Caesar.
10:54:40 AM
Senator Wielechowski stressed that the maximum benefit of
the resource should be provided to the people. He felt that
government had received its fair share; the peoples share
was a tiny fraction of the total value of the oil produced
in the state. He expressed concern with changing the
language from shall transfer to may appropriate because
it could lead an even smaller share going to Alaskans.
10:57:07 AM
Co-Chair von Imhof discussed housekeeping.
SB 103 was HEARD and HELD in committee for further
consideration.
ADJOURNMENT
10:57:50 AM
The meeting was adjourned at 10:57 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 104 - Sponsor Statement.pdf |
SFIN 4/10/2019 9:00:00 AM SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 - Sectional Analysis.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 104 |
| 041019 SB104 Spending Cap Presentation.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 104 |
| SB 103 - Sectional Analysis.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 - Sponsor Statement.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 Presentation 041019.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 Work Draft Version U.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |