04/13/2018 03:30 PM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| HB136 | |
| SJR9 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 136 | TELECONFERENCED | |
| *+ | SJR 9 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
April 13, 2018
4:09 p.m.
MEMBERS PRESENT
Senator Kevin Meyer, Chair
Senator David Wilson
Senator Cathy Giessel
Senator John Coghill
Senator Dennis Egan
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 136(TRA)
"An Act relating to motor vehicle franchises, motor vehicle
dealers, motor vehicle manufacturers, and motor vehicle
distributors."
- MOVED CSHB 136(TRA) OUT OF COMMITTEE
SENATE JOINT RESOLUTION NO. 9
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund and to appropriations from
the Alaska permanent fund.
- MOVED SJR 9 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
BILL: HB 136
SHORT TITLE: MOTOR VEHICLE DEALER FRANCHISES
SPONSOR(s): REPRESENTATIVE(s) CLAMAN
02/20/17 (H) READ THE FIRST TIME - REFERRALS
02/20/17 (H) TRA, L&C
03/16/17 (H) TRA AT 1:00 PM CAPITOL 17
03/16/17 (H) <Bill Hearing Canceled>
03/21/17 (H) TRA AT 1:00 PM BARNES 124
03/21/17 (H) Heard & Held
03/21/17 (H) MINUTE(TRA)
04/13/17 (H) TRA AT 1:00 PM BARNES 124
04/13/17 (H) -- MEETING CANCELED --
03/27/18 (H) TRA AT 1:15 PM BARNES 124
03/27/18 (H) Heard & Held
03/27/18 (H) MINUTE(TRA)
03/29/18 (H) TRA AT 1:15 PM BARNES 124
03/29/18 (H) Moved CSHB 136(TRA) Out of Committee
03/29/18 (H) MINUTE(TRA)
03/30/18 (H) TRA RPT CS(TRA) NT 5DP
03/30/18 (H) DP: SULLIVAN-LEONARD, DRUMMOND, CLAMAN,
KOPP, WOOL
04/02/18 (H) L&C AT 3:15 PM BARNES 124
04/02/18 (H) Heard & Held
04/02/18 (H) MINUTE(L&C)
04/06/18 (H) L&C AT 3:15 PM BARNES 124
04/06/18 (H) Moved CSHB 136(TRA) Out of Committee
04/06/18 (H) MINUTE(L&C)
04/09/18 (H) L&C RPT CS(TRA) NT 5DP
04/09/18 (H) DP: SULLIVAN-LEONARD, STUTES,
JOSEPHSON, KNOPP, KITO
04/09/18 (H) TRANSMITTED TO (S)
04/09/18 (H) VERSION: CSHB 136(TRA)
04/10/18 (S) READ THE FIRST TIME - REFERRALS
04/10/18 (S) STA
04/11/18 (S) STA WAIVED PUBLIC HEARING NOTICE, RULE
23
04/12/18 (S) STA WAIVED PUBLIC HEARING NOTICE, RULE
23
04/12/18 (S) STA AT 3:30 PM BUTROVICH 205
04/12/18 (S) -- MEETING CANCELED --
04/13/18 (S) STA AT 3:30 PM BUTROVICH 205
BILL: SJR 9
SHORT TITLE: CONST. AM.: PERMANENT FUND APPROP; DIVIDEND
SPONSOR(s): SENATOR(s) STEDMAN
01/16/18 (S) PREFILE RELEASED 1/8/18
01/16/18 (S) READ THE FIRST TIME - REFERRALS
01/16/18 (S) STA, JUD, FIN
04/12/18 (S) STA WAIVED PUBLIC HEARING NOTICE, RULE
23
04/12/18 (S) STA AT 3:30 PM BUTROVICH 205
04/12/18 (S) -- MEETING CANCELED --
04/13/18 (S) STA AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
SARA PERMAN, Staff
Representative Claman
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Provided an overview and sectional analysis
of HB 136.
GARY SLEEPER, Attorney
Alaska Automobile Dealers Association
Anchorage, Alaska
POSITION STATEMENT: Addressed questions regarding HB 136.
MARTEN MARTENSEN, Owner
Continental Auto Group
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 136.
LESTER NICHOLS, Owner
Fairbanks Nissan
Fairbanks, Alaska
POSITION STATEMENT: Testified in support of HB 136.
STEVE ALLWINE, President
Mendenhall Auto Center
Juneau, Alaska
POSITION STATEMENT: Testified in support of HB 136.
SENATOR BERT STEDMAN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Sponsor of SJR 9, provided an overview.
ACTION NARRATIVE
4:21:38 PM
CHAIR KEVIN MEYER called the Senate State Affairs Standing
Committee meeting to order at 4:21 p.m. Present at the call to
order were Senators Giessel, Wilson, Coghill, and Chair Meyer.
HB 136-MOTOR VEHICLE DEALER FRANCHISES
4:22:24 PM
CHAIR MEYER announced the consideration of House Bill 136 (HB
136).
4:22:53 PM
SARA PERMAN, Staff, Representative Claman, Alaska State
Legislature, Juneau, Alaska, noted that Chair Meyer is the
sponsor of the Senate's companion bill, Senate Bill 47 (SB 47).
She provided an overview of HB 136 as follows:
The driving forces behind HB 136 were the repeated
conversations about the need to statutorily update
franchise agreements between auto dealers and auto
manufacturers; much of this discussion was driven by
issues with warranty practices and franchise
termination.
When we first introduced this bill last year, it
looked very different; however, we had trouble getting
it out of "first gear" when we hit a "speed bump" with
the auto manufacturers. With their concerns in mind we
decided to "throw the bill in reverse" and work to
find a compromise between all parties. While the bill
"idled" in the House Transportation Committee,
Representative Claman and Senator Meyer brought both
manufacturers and auto dealers to the table and we've
worked out a revision that is now acceptable to both
auto dealers and manufactures; this is the version in
front of you today.
The CS of House Bill 136 updates warranty policy to be
more consumer friendly, it provides customers who live
in remote locations either off-the-road system or more
than 100 miles from a dealer with a reasonable option
for warranty repair coverage. As it stands, customers
currently need to pay to get their vehicle to and from
an authorized dealer for warranty repairs. With House
Bill 136, the manufacturer will be responsible for
warranty repairs in the remote location or shipping
the vehicle to and from an authorized location at no
cost to the consumer.
House Bill 136 also updates the rates that
manufacturers may pay auto dealers for warranty work.
The updated rates may not be less than the rates that
the auto dealer charges customers for similar non-
warranty-retail work; this equalizes the rate for
repair work across the board.
"Shifting gears," House Bill 136 amends statutes
concerning terminations and succession of franchises.
Manufactures must have good cause for terminating the
franchise and must provide dealers with notice and
allow dealers to attempt to fix areas out of
compliance with franchise agreements before
terminating the dealer. During the sale of a
franchise, a manufacturer must also take into
consideration whether the potential buyer is an
immediate family member, partial owner, or meets the
standard requirements when approving the sale.
4:22:59 PM
SENATOR EGAN joined the committee meeting.
4:25:33 PM
MS. PERMAN referenced the sectional analysis HB 136 as follows:
Section 1
Adds legislative intent language to uncodified law,
"It is in the public interest to protect have warranty
service for new motor vehicles and maintain fair
competition among auto manufacturers and auto
dealers."
Section 2
Amends AS 45.25.010: Applicability: AS 45.25.020 -
045.25.310 apply to franchise agreements between
manufacturers and Alaska auto dealers.
Section 3
Amends AS 45.25.110(a): Manufacturers may not
terminate an auto dealer unless they have complied
with notice requirements and shown good cause for
termination. Auto dealers have up to 120 days to
correct areas out of compliance with the franchise
agreement. The manufacturer may terminate a franchise
if the dealer has systemically engaged in fraud.
Section 4
Adds new subsection to AS 45.25.110, "Good cause to
terminate a franchise does not include the failure of
an auto dealer to meet sales or service goals due to
factors beyond the control of the dealer including
market conditions or insufficient supply of new motor
vehicles."
Section 5
Amends AS 45.25.140(a), updates and amends the
manufacturers repurchase requirements upon termination
of a franchise agreement. The manufacturer must
repurchase current year models of new motor vehicles,
certain new motor vehicle models from the prior year,
parts, trademark signs and equipment, special tools,
computer, printers, and electronic hardware.
Section 6
Amends AS 45.25.150(b), if a franchise termination
occurs, auto dealers have an obligation to mitigate
damages under a lease and mitigate the costs of
facility relocations, alterations or remodels.
Section 7
Adds new subsection to AS 45.25.150, if a franchise
termination occurs, manufacturers must pay the costs
of relocation, alteration or remodeling of an auto
dealers facilities if they were required by the
manufacturer and were completed within three years of
termination.
Section 8
Repeals and reenacts AS 45.25.160. This section
establishes a procedure for the proposed transfer of a
dealership:
• Manufacturers may not prevent the sale of a
franchise to a potential buyer who is capable of
being licensed as an auto dealer and who meets
the manufacturers' standards.
• Upon receipt of the notice to transfer the
franchise, manufacturers have 30 days to request
supplemental information after which the
manufacturer has 75 days to give notice of
rejection of the transfer.
• The manufacturer has the right of first refusal
to a transfer with limitations. The manufacturer
has the same notice requirements for the right of
first refusal as they have for rejecting the
transfer outright. A manufacturer may not
exercise the right of first refusal if the
transfer of the franchise is to a family member
or a managerial employee owning 15 percent or
more of the dealership. If a manufacturer
exercises the right of first refusal, then the
manufacturer must provide the auto dealer with
the same compensation as offered by the proposed
buyer. The manufacturers must also pay the legal
fees incurred for the preparation of the void
transfer agreement.
Section 9
Amends AS 45.25.180(d), expands the factors that the
superior court must consider in a lawsuit addressing
whether good cause exists to establish or relocate a
dealership.
Section 10
Adds new subsection to AS 45.25.180, establishes the
burden of proof in a franchise lawsuit. A manufacturer
has the burden of proof to establish good cause for
establishing or relocating a dealership that the
manufacturer has proposed. An auto dealer must
establish good cause for any establishment or
relocation that the auto dealer proposes.
Section 11
Amends AS 45.25.190, this section updates the
statutory references in the arbitration section.
Section 12
Adds new sections to article 2 of AS 45.25, this
section addresses warranty work and pay rates for
warranty work:
• Sec 45.25.200: A manufacturer must pay an auto
dealer for all warranty work if the auto dealer
provides documentation of the need for the
repairs. The auto dealer must submit the claim
within 90 days of the completed warranty work,
and a manufacturer must approve the claim within
30 days of receipt. If the manufacturer rejects
the claim, they must provide notice of their
reasons to the auto dealers, who may correct the
issues within 30 days of receipt of the
rejection. A manufacturer may conduct an audit of
warranty repairs performed, which must be done
within a year of the claim. Only one audit can be
performed per year.
• Sec 45.25.210: A manufacturer must provide auto
dealers with a schedule of compensation for
warranty work. The rates may not be less than the
rates that the auto dealer charges customers for
similar retail work. To establish this warranty
rate, auto dealers shall submit 100 sequentially
ordered claims. Rates for special events and
manufacturer specials are not considered in this
calculation.
• Sec 45.25.220: If a vehicle needs warranty
repairs and is located in a remote location, the
manufacturer shall make reasonable efforts to
repair the vehicle in the remote location. If the
repairs cannot be made on site, the manufacturer
may arrange, at no cost to the owner, to ship the
vehicle to a location where repairs can be
completed. The manufacturer is responsible for
returning the repaired vehicle to the remote
location. The manufacturer may direct auto
dealers to refer customers in remote locations to
the manufacturer. Auto dealers may subcontract
warranty work in a remote location. "Remote
location" refers to a location that is not
accessible by road or is 100 road miles or more
from an auto dealer.
• Sec 45.25.230: Manufacturers shall provide auto
dealers with specific instructions for the
preparation of new vehicles before delivery to
buyers, compensation for the preparation, and the
amount of time allowed for preparation.
Section 13
Repeals and reenacts AS 45.25.300 regarding unfair
practices, manufacturers may not:
• Require or coerce auto dealers to relocate or
remodel their facilities if the changes are
unreasonable.
• Require auto dealers to purchase a set number of
certified pre-owned vehicles or lease return
vehicles.
• Refuse to deliver for sale a line or make of
vehicles that manufacturer makes.
• Require auto dealers to purchase unreasonable
advertising displays or an unreasonable number of
signs.
• Require auto dealers to accept vehicles, parts,
accessories or equipment they did not voluntarily
order.
• Increase the price of a vehicle ordered by the
auto dealer between the time of order and the
time of payment.
• Require or coerce auto dealers to join an
advertising association or contribute to an
advertising campaign.
Section 14
Repeals and reenacts AS 45.25.990(19), defines
"terminate" for this chapter.
Section 15
Adds new paragraph to AS 45.25.990, defines "schedule
of compensation" and "warranty work" for this chapter.
Section 16
Repeals AS 45.25.320.
MS. PERMAN reviewed the "substantial parts" of HB 136 as
follows:
Section 3
Is about dealership terminations. Manufactures may not
terminate dealers without good cause and meeting the
proper notice requirements.
Section 4
Expands upon that good cause, if a dealer cannot meet
sales goals due to factors out of the dealer's
control, such as lack of inventory or delayed
shipments, it does not amount to good cause for
termination.
Section 5
When terminating dealerships, the manufacturer must
repurchase all current year models, certain new motor
vehicles from the previous year, trademark signs,
parts, tools, computers and equipment.
Section 8
Is about the transfer of dealerships. Manufactures are
given the right of first refusal for transfers;
however, they may not prevent the transfer of a
dealership if the potential buyer is capable of being
licensed as an auto dealer and meets the manufacturers
standards. Manufacturers also may not reject the
transfer of a dealership to an immediate family member
of the current owner or a managerial employee who owns
15 percent or more of a dealership.
Section 12
Covers warranties, manufactures have the burden of
repairing warranty vehicles for consumers that live in
remote, off-road locations or more than 100 miles from
a dealership; this is places like Kodiak or Nome where
someone may have a brand-new Mercedes but there isn't
a Mercedes dealer in town, they have the burden of
repairing it either in the location or paying for it
to be transfer to an authorized shop and then paying
of it to come back at no cost to the consumer. This
section also changes the rates dealers are paid for
warranty work to match the amount they are paid for
non-warranty retail work.
Section 13
Lists unfair practices and among these manufactures
may not require unreasonable advertising displays or
require dealers to join advertising associations.
4:27:39 PM
SENATOR WILSON asked what the shipping costs are to ship a
vehicle to off-road locations.
MS. PERMAN answered that there were concerns about the use of a
third party to do warranty work with the manufacturer unable to
guarantee the work that the manufactures preferred to take on
the burden of doing the maintenance themselves to maintain their
reputation and brand.
SENATOR WILSON asked who sets vehicle transportation in motion.
MS. PERMAN replied that she was not sure but noted that the
burden falls on the manufacturer.
SENATOR COGHILL asked how the new law will affect existing
franchises. He inquired if the legislation requires immediate
conformity.
MS. PERMAN replied that she would defer to the lawyer for the
Alaska Auto Dealers Association, Gary Sleeper.
4:31:18 PM
GARY SLEEPER, Attorney, Alaska Automobile Dealers Association,
Anchorage, Alaska, explained that the bill was drafted to be
remedial and apply to existing franchise agreements but only to
the extent permitted by the Alaska Constitution and the United
States Constitution. He noted that the provision was approved by
the manufactures and detailed that it may or may not be applied
retroactively depending on the particular provision at stake and
decided on a case-by-case basis.
4:33:00 PM
SENATOR COGHILL remarked that many manufactures can come down
with requirements and asserted that the provision provides a
backdrop for some protection. He noted that franchises have
requirements for advertising, quality and volume. He asked if
the bill provides enough "Alaska unique protection."
MR. SLEEPER answered yes. He explained that section 13
identifies a couple of unfair practices. He noted that a new
section was added to say that the manufactures cannot require a
new auto dealer to purchase unreasonable advertising. He
detailed that the intent was to give the Alaska dealers the
right to pushback a little bit when manufactures try to require
participation in expensive advertising campaigns, especially
when designed for a national audience rather than an Alaska
audience.
SENATOR COGHILL asked if the arbitration addressed in the bill
is a new technique.
MR. SLEEPER answered that the amendment was technical and
conforming to correctly cite the statute. He added that there
was no change from the existing law.
CHAIR MEYER thanked Ms. Perman for providing partial credit for
the legislation but asserted that all the credit goes to her and
Representative Claman. He conceded that he did not think it was
possible to get both groups in agreement but somehow "A rabbit
was pulled out of a hat." He noted that Senator Coghill has
tried to get similar legislation passed for many years as well.
He continued as follows:
This "vehicle" has been "going many miles" and I want
to thank you for not "wrecking this vehicle" and
"keeping it on the road."
4:36:39 PM
CHAIR MEYER opened public testimony.
4:36:47 PM
MARTEN MARTENSEN, Owner, Continental Auto Group, Anchorage,
Alaska, testified in support of HB 136. He disclosed that work
began on the legislation four years ago. He detailed that the
bill was over 30 pages long but Representative Claman
recommended the bill be pared down. He revealed that
Representative Claman mediated between the Alaska Auto Dealers
Association and the manufactures. He asserted that the
legislation protects dealers and its customers.
CHAIR MEYER emphasized that the bill is neither for the auto
dealers or the manufactures, but for consumers.
4:39:00 PM
LESTER NICHOLS, Owner, Fairbanks Nissan, Fairbanks, Alaska,
testified in support of HB 136. He opined that a good deal is
only good if it was good for everybody and asserted that HB 136
"fits that criteria." He said the bill is good for Alaska
consumers, dealers and manufactures. He emphasized that the bill
helps Alaskans protect the work that he and other auto dealers
have put in to create a legacy. He said having the ability to
hand his dealership on to his children is important to him. He
added that there are a lot of Alaskan consumers living in
outlying areas that need assistance in warranty issues.
4:42:59 PM
STEVE ALLWINE, President, Mendenhall Auto Center, Juneau,
Alaska, testified in support of HB 136. He noted that he is also
a member of the Alaska Auto Dealers Association board of
directors as well as the state director for the National
Automobile Dealers Association. He asserted that HB 136 serves
to update state franchise law that has not been updated since
originally written in 2002. He said HB 136 will serve dealers,
employees and consumers throughout the state, especially those
in remote areas. He added that HB 136 addresses dealer
succession by clarifying the ability for qualified people within
an organization to own the dealership without a manufacturer
jumping in with a right of first refusal. He emphasized that the
bill provides that a dealer will be compensated for warranty
issues and recalls at the same retail level that's charged to a
consumer that walks into a dealership for repairs. He added that
the bill allows dealerships the ability to fix a warranty issue
that is discovered while fixing an initial warranty issue,
something that currently is not allowed. He summarized that the
bill addresses consumers in outlying areas by providing the
option to either find someone locally that is qualified for
warranty repairs or to have the automobile sent back to the
dealer.
SENATOR COGHILL said he supported the bill.
4:48:50 PM
CHAIR MEYER closed public testimony.
4:49:35 PM
SENATOR GIESSEL noted that she has a bill that addresses a
similar situation for heavy commercial equipment franchisers and
she will be using HB 136 as a model.
She moved to report CSHB 136(TRA), 30-LS0561\N from committee
with individual recommendations and attached zero fiscal note.
4:50:14 PM
CHAIR MEYER announced without objection the motion carried.
4:50:24 PM
At ease.
SJR 9-CONST. AM.: PERMANENT FUND APPROP; DIVIDEND
4:52:51 PM
CHAIR MEYER announced the consideration of Senate Joint
Resolution 9 (SJR 9).
4:53:24 PM
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,
sponsor of SJR 9, emphasized that his presentation addresses the
Alaska Permanent Fund (Fund) management and does not address a
fiscal system solution for the state; although, SJR 9 is a major
portion of a fiscal solution. He referenced his investment
background 30 years in the past where he worked with the City
and Borough of Sitka regarding changing their permanent fund to
a percentage of market value, something that was not too
dissimilar from the intent of SJR 9. He conceded that it takes
time to get people comfortable with the change and noted that
the process had taken 4 years where the Sitka's permanent fund
was changes from an all-bond portfolio to a balanced portfolio
with 60-percent equity and stocks to give more growth, and 40-
percent bonds to provide more income and stability with a 5-year
lookback to provide "smoothing" to stabilize cash flows.
He referenced slide 2 from his visual presentation of SJR 9,
"Permanent Fund Protection" as follows:
• The Permanent Fund can be a budget stabilization
fund with a limited payout method that allows the
fund to continue to save and grow:
o Budget Stabilization:
square4 Alaska Has two "rainy day" accounts:
• Constitutional Budget Reserve
(CBR),
• Statutory Budget Reserve (SBR).
o Permanent Fund:
square4 The Permanent Fund has two purposes:
• Save,
• Grow.
• The Permanent Fund consists of the Principal and
the Earnings Reserve Account (ERA). If the ERA is
used to balance the budget on an ad hoc basis,
the Permanent Fund's value will decrease, which
conflicts with its purpose.
SENATOR STEDMAN summarized slide 2 as follows:
The Permanent Fund is really a composition of two
major accounts, the Constitutional Budget Reserve
(CBR), the protected principle of the constitution,
and the Earning Reserve (ERA) that is not
constitutionally protected, but from the state's
perspective, the Constitutional Budget Reserve (CBR)
is a "rainy day" account along with a Statutory Budget
Reserve (SBR) and it's been "raining" financially
speaking for several years now and those are
diminished relative to their historic peaks. We are in
a position now where we want to restructure, look at
seriously restructuring the Permanent Fund (Fund). The
Permanent Fund (Fund) is something that is set in
place for future generations and we are supposed to
save and grow the assets.
4:56:53 PM
He referenced slide 3: "The Permanent Fund Established" as
follows:
• The Permanent Fund was established in 1976 by a
vote of the people to save a portion of Alaska's
oil wealth for future generations and limit
overspending by the Legislature.
SENATOR STEDMAN commented on slide 3 and noted that the Fund was
created by a vote of the people for a storage mechanism for the
wealth generated from the state's finite oil, gas and other
resources. He pointed out to the adult Alaskans in the room that
the Fund has been in place for the entirety of their adult lives
and has grown due to the state's hard work over time.
He referenced slide 4: "The Permanent Fund Is an Alaska Success"
as follows:
• Graph on the "Historical Values of Principal and
Earnings Reserve" (1976-2016).
• The Permanent Fund is an Alaska success. Current
value of $65 billion from a total contribution of
$39.9 billion.
He commented on slide 4 that the chart showed the
constitutionally-protected principal and the ERA which
represented the trading profits from the net gains and
losses along with dividends and interest income. He pointed
out that the ERA changes a lot due to constant economic
changes that goes on worldwide.
4:59:22 PM
He referenced slide 5: "ERA Is Variable and Uncertain" as
follows:
• ERA is variable and uncertain. By its nature it
lacks stability to be relied upon for budget
stabilization:
o 2000:
square4 ERA: $2.973 billion,
square4 Principal: $23.543 billion.
o 2001:
square4 ERA: $2.384 billion,
square4 Principal: $22.431 billion.
o 2002:
square4 ERA: $1.136 billion,
square4 Principal: $22.389 billion.
o 2003:
square4 ERA: $0.100 billion,
square4 Principal: $24.094 billion.
o 2004:
square4 ERA: $0.859 billion,
square4 Principal: $26.541 billion.
o 2005:
square4 ERA: 1.440 billion,
square4 Principal: $28.522 billion.
o 2006:
square4 ERA: $2.585 billion,
square4 Principal: $30.325 billion.
o 2007:
square4 ERA: $4.132 billion,
square4 Principal: $33.695 billion.
o 2008:
square4 ERA: $5.321 billion,
square4 Principal: $31.213 billion.
o 2009:
square4 ERA: $0.420 billion,
square4 Principal: $29.496 billion.
o 2010:
square4 ERA: $1.210 billion,
square4 Principal: $32.045 billion.
o 2011:
square4 ERA: $2.308 billion,
square4 Principal: $37.832 billion.
o 2012:
square4 ERA: $2.081 billion,
square4 Principal: $38.253 billion.
o 2013:
square4 ERA: $3.994 billion,
square4 Principal: $40.909 billion.
o 2014:
square4 ERA: $6.211 billion,
square4 Principal: $45.002 billion.
o 2015:
square4 ERA: $7.162 billion,
square4 Principal: $45.638 billion.
o 2016:
square4 ERA: $8.570 billion,
square4 Principal: $44.200 billion.
o 2017:
square4 ERA: $12.816 billion,
square4 Principal: $46.970 billion.
SENATOR STEDMAN commented on slide 5 and pointed out the "no
bars at all" for the ERA for the years 1996-1998 and 2003. He
noted that the Fund is constitutionally protected where the
Legislature cannot access the corpus without a vote of the
people. He pointed out that the trading profits and dividends in
the ERA can be appropriated by the Legislature. He added that
inflation proofing the Fund comes from the ERA as well. He noted
that the Legislature was presently talking about taking funds
from the ERA for the following fiscal year to pay the state's
bills.
SENATOR STEDMAN addressed slide 5 and noted the years 2003
and 2009 as follows:
In 2003 we had $24 billion in principal and $100
million in the ERA, the next year a little less than
$1 billion in the ERA. If we jump up to 2009, we see
the ERA down to $420 million, next year it is $1.2
billion. So, when we take a look at relying on the
Permanent Fund and pulling money out of it, we all
recognize that we can only pull funds out of the
lighter colored bar on the top [ERA]. Well, some years
there isn't any, and I would like to also highlight
that we haven't, in the Legislature, appropriated
monies out of the ERA other than dividends, inflation
proofing just goes into the other account, we've taken
a little bit every year off for internal management of
the Permanent Fund, it kind of runs itself, but for
all significant analysis it's basically we haven't
touched it until this year.
He explained that the intent of his presentation was to
look at the Fund from several different angles. He offered
that the state could look at the Fund as either a "milk
cow" for revenue to get as much out without collapse for
budgetary needs, or the strategy, which he recommends,
would be to isolate the state's needs and to ask how the
Fund should be structured and managed for its long-term
viability for future generations. He said he was concerned
with the current structure which relies on draws from the
ERA but noted that times like 2003 and 2009 when there was
virtually no earnings reserve would occur again. He
asserted the state needs to take a serious look at the
current structure's constitutionally protected Fund and the
ERA which the Legislature can appropriate from. He conceded
that he was worried that the state was in peril of over
drawing the Fund.
5:04:53 PM
He referenced slide 6: "Current Principles For The Permanent
Fund: Save and Grow" as follows:
• A "Permanent" Savings Account: The fund should
conserve part of the state's revenue from mineral
resources to benefit all generations of Alaskans. AS
37.13.020(l).
• The Fund's Principle Should Be Protected While
Prudently Invested The fund should be managed to
protect the principal while maximizing total return.
AS 37.13.020(2).
• The Fund's Purchasing Power Over Time Should Be
Preserved While Maximizing Return AS 37.13.120(a).
SENATOR STEDMAN commented on slide 6 as follows:
If we take a look at the Permanent Fund and follow and
not get away from the guiding principles, it's a
savings account and we should conserve it for future
generations, there's no doubt about it. Our
forefathers set up this structure and it's held up,
frankly, worldwide as a model. Without going through
the effects of purchasing power, the "thief of the
night" of inflation, we all understand that, we want
to come up with something that is going to protect us.
5:05:25 PM
He referenced slide 7: "SJR 9 Does Not Alter The Fund's
Principles: Save and Grow:" as follows:
• SJR 9 merges the ERA into the principal, which
constitutionally protects the whole Fund from
legislative appropriation:
o Current Alaskans shouldn't take ad hoc draws
from the Fund that will significantly affect
its value to future Alaskans.
o Overspending will decrease the Fund's
benefit to future generations this is the
opposite of saving.
He commented on slide 7 and noted that one of the most critical
parts is to put the ERA into the constitutionally protected
corpus of the Fund, a fund that the Legislature cannot draw any
money out unless a constitutionally-protected mechanism was also
set up. He continued as follows:
We should not have ad hoc draws. The adults today I
don't feel should have ad hoc draws that are going to
significantly or minorly impact the future balance of
the account. The monies or the value of the Permanent
Fund is possibly to use a little bit today but it's
really for future generations, our grandkids, our
great grandkids that aren't even born yet, future
generations. When we have an oil field that is 100
years old and not much future in front of it, that we
have built up a massive amount of wealth for future
Alaskans. If we allow the current needs, today and the
near distant future, if we let our spending desires
and our budgetary desires drive the structure of the
Permanent Fund, we could easily make a mistake that
hurts our long-term objectives and goals of protecting
it for the future of the kids, our future Alaskans.
5:07:35 PM
SENATOR STEDMAN referenced slide 8: "SJR 9 Does Not Alter The
Fund's Principles: Save and Grow:" as follows:
• SJR 9 limits any draw from the Permanent Fund to an
annual 4.5 percent of its 5-year average value:
o This draw limit is conservative and sustainable.
o 4.5 percent is well under the Permanent Fund's
growth performance.
• 1 year (FY2017):
o Total growth: 12.89 pct.,
o Objective (CPI + 5 pct.): 6.63 pct.
• 3 years:
o Total growth: 6.21 pct.,
o Objective (CPI + 5 pct.): 5.92 pct.
• 5 years:
o Total growth: 8.85 pct.,
o Objective (CPI + 5 pct.): 6.32 pct.
• Since inception:
o Total growth: 8.79 pct.,
o Objective (CPI + 5 pct.): 7.67 pct.
He said based on the information disclosed on slide 8 he
proposes that the ERA be combined with the Fund's
constitutionally-protected principal so that "The whole thing is
constitutionally protected." He added that a draw limit would be
placed on the Fund that dictates what annual percentage could be
taken out. He specified that the Fund's potential rate of return
would be dictated by its asset mix, then the real rate less
inflation. He emphasized that the Fund's current management
structure would not be altered, that it be left intact to do
their job and manage the Fund.
SENATOR STEDMAN explained that SJR 9's proposes a 4.5-percent
draw, a percentage that takes into the targeted rate of return
with the historic inflation rate of 2.5 percent. He emphasized
that the rate of return must be north of the inflation target
plus the draw, a percentage that leaves a little bit of room. He
proposed that at the end of the fiscal year the 4.5-percent
payout of the Fund be based on a 5-year average to smooth out
the volatility. He pointed out that a 5-year average could be
calculated using the first five years out of a 6-year timeframe
to make sure everyone knows how much money would be drawn up to
the 4.5 percent. He continued as follows:
That's why there's a five-year average, you use the
average rates of return targeted by your asset
allocation and then you add in your inflation and you
basically have your structure. So, some of the most
important points when we restructure this Permanent
Fund: first, you got to get on the road you want to be
on, do you want to be on a road that you are going to
just look at it as a milk cow and strain, which is one
road; or, you can go down the other road and say, "I
don't care initially what the fiscal position of the
state is, I'm not going to let it drive the management
and structure of the Permanent Fund, I want the best
structure for the Permanent Fund and then I'll come
over here and work on this other problem."
5:13:13 PM
He referenced slide 9: "SJR 9 Protects The Fund: Mechanics Of
The Draw and The Split" as follows:
• $65 billion Permanent Fund:
o 4.5 pct. draw:
square4 2.0 pct. dividends,
square4 2.5 pct. to remain in the Permanent Fund, augment
the dividend, or for state services.
He commented on slide 9 and noted that the there was nothing
"magical" in his proposed 4.5 percent draw for a split with 2
percent for dividends and 2.5 percent for state services. He
opined that the proposal would be easy for the public to look at
and see where the money is going. He pointed out that the
committee might through its process decide to change the
percentages. He noted that the Legislature could decide in years
of higher oil prices to reinvest the state services' percentage
back into the Fund, or to pay a higher dividend, perhaps due to
situation that occurred a few years ago to address higher
heating fuel prices. He said the third option would be in times
like today where the state needs the 2.5 percent to come into
the treasury to pay for basic services. He emphasized that his
proposal provides flexibility.
5:16:20 PM
SENATOR STEDMAN referenced slide 10: "SJR 9 Protects The
Permanent Fund - 'Let's Talk Dividends'" as follows:
• Since 1982 the dividend has disbursed $22 billion to
Alaskans:
o Equitable distribution of resource wealth to those who
own the resources.
o SJR 9 provides a predictable and transparent dividend
via constitutional formula.
o Dividends will once again be reliable and linked to
the investment success of the fund.
He commented on slide 10 and noted that some people have said
the dividend money should have been left in the Fund where the
state would have $100 billion; however, he pointed out that
Alaska is the only state where the citizens own the subsurface.
He emphasized that the intent is to share and continue to share
the wealth that all Alaskans own.
He referenced slide 11: "SJR 9 - Projected 4.5 Percent Draw and
Dividend Amounts" as follows:
• FY 2020:
o 4.5 pct. draw: $2.513 billion;
o 2.0 pct. draw for dividends: $1.117 billion,
square4 Dividend: $1,816;
o 2.5 pct. draw for General Fund: $1.396 billion;
o Total ending Fund value: $67.017 billion.
• FY 2021:
o 4.5 pct. draw: $2.638 billion;
o 2.0 pct. draw for dividends: $1.172 billion,
square4 Dividend: $1,906;
o 2.5 pct. draw for General Fund: $1.369 billion;
o Total ending Fund value: $68.984 billion.
• FY 2022:
o 4.5 pct. draw: $2.766 billion;
o 2.0 pct. draw for dividends: $1.172 billion,
square4 Dividend: $1,998;
o 2.5 pct. draw for General Fund: $1.537 billion;
o Total ending Fund value: $70.882 billion.
• FY 2023:
o 4.5 pct. draw: $2.911 billion;
o 2.0 pct. draw for dividends: $1.294 billion,
square4 Dividend: $2,103;
o 2.5 pct. draw for General Fund: $1.617 billion;
o Total ending Fund value: $72.792 billion.
SENATOR STEDMAN commented on slide 11 and noted that if the 4.5-
percent draw was used, changing the draw percentage would take a
vote of the people. He pointed out that markets are not linear
but the projections on slide 11 are linear. He admitted that
some people would say the projected dividend amounts are ghastly
but noted that the state would currently be paying out a $2,800
dividend with a picture of the governor holding a big check like
previous governors had done. He said the state was experiencing
different economic times but emphasized that the dividend should
be based on the portfolio's value where Alaskans get 2 percent
of the market value over 5 years. If the economy expands the
dividend goes up, if the economy shrinks the dividend goes down.
He added that new oil and gas coming online would add to the
Fund as well.
He summarized that SJR 9 would take the politics out of the
dividend where 4.5 percent mechanically comes out with 2 percent
for dividends and the remaining balance for the State of Alaska.
He conceded that state services would require the draw for the
foreseeable future but asserted that the state can find its way
out of relying heavily on the Fund going forward.
5:20:45 PM
He summarized as follows:
Let me recap because it's a different conversation
that has been in the press for months. This is driven
off of how to manage the Permanent Fund without being
unduly influenced over our own financial position,
good or bad for the State of Alaska, and how do we set
it up to split the earnings and benefit directly with
the people and have the ability of the state treasury
and or leave the monies in the fund to grow, and then
we can look at this projection and we can see roughly
$1.4 billion this next year into our budget. We all
know sitting here, we've all been up to our neck in
budget mess the last several years, we know we are
going to need a lot more than that.
What we did 30 years ago in Sitka is we had a spending
rate of 6 percent. The financial markets were a lot
different then, they had a lot higher dividend yields
and the administrator at the time, he needed cashflow
because we lost our pulp mill. We on the investment
committee wanted a lower payout because we wanted the
future value for the community and we settled in on a
6 percent payout; that's run for years and that has
been ratcheting back a quarter percent a year. We had
political difficulties in ratcheting it back because
it's like, all governments are the same, they get used
to the cashflow, it's very hard to pull it back.
So, I would suggest, and hopefully we will over the
next several years, go forward with a discussion and a
conclusion that we are going to set the Permanent Fund
up in isolation regardless of our needs and desires,
then overlay that with a transition from where we are
at that given time to where we need to be with the
Permanent Fund; in other words, we may not, and this
is kind of getting kind of one step further, we may
not want to say starting in 2020 we are going to have
a 4.5-percent payout, just bang. We might want to
start, I think in the building now, we are talking
about 5.25 percent, we might want to start with a
higher one and ratchet ourselves back over several
years like 0.25 percent back so we can get to the
position where we want the Permanent Fund to be run
without undo influence, but we work in the real world
and we have real bills to pay, so we have to have some
flexibility. So, don't get the impression I am
advocating that one day we come with a number and shut
the door on the Permanent Fund and lock it up and we
can't put everybody in a pickle, we can work these
things through.
Mr. Chairman, I waited 30 years to come before your
committee to talk about percent of market value,
that's how long I have been working on percent of
market value. Nothing new to me, my staff just laughs,
they don't have to prepare the boss for anything, just
stick him in front of the group, it's very simple.
We had sent this piece of legislation back several
times to the drafters, they over complicate it, with
good intentions. For the public I think to become
comfortable with the restructuring of the Permanent
Fund, it needs to be very clear, very transparent, "No
bells and whistles of this arm wiggles money comes out
of this end," just straight forward. Under this plan
we would close the door for any draws over 4.5 percent
and the Permanent Fund would manage the fund, it would
be inflation proofed, we wouldn't have any inflation
discussions on the floor of the Legislature because it
is automatically done. The Department of Revenue would
get a check coming in, we would have the discussion on
what do we want to do with our share, the state's
share, the 2.5 percent, the other 2 percent goes out
as a dividend, and then we manage the financial
affairs of the state with what we have.
5:25:55 PM
CHAIR MEYER asked if the forefathers and mothers who put the
Permanent Fund and dividend together intended the dividend to go
into the constitution.
SENATOR STEDMAN answered as follows:
I firmly believe that the Earnings Reserve needs to be
rolled into the principal and the entire Permanent
Fund needs to be constitutionally protected. I think
having the portion, the 2-percent dividend portion or
the split, in this case we are talking about a 4-
percent draw, so the split of the draw is open for
public discussion, I think the Judiciary Committee has
been working on that. My expectation is it would be
less than a 50:50 probability that that would prevail
in the final version of this piece of legislation, it
is much more critical that the 4.5-percent draw is
protected than the dividend.
CHAIR MEYER asked if the 2.5 percent for the General Fund would
used for inflation proofing the Fund.
5:27:56 PM
SENATOR STEDMAN answered no and explained as follows:
The inflation proofing is derived as a component off
of your rate of return; for instance, if you had a 2-
percent inflation in this scenario, you would have to
make at least 6.5 percent or more a year, so if you
make 6.5 percent and you took out 2 percent inflation,
that leaves you with the 4.5 percent. So, if you run
your draw up too high relative to the performance of
your portfolio, you will erode your purchasing power,
that's why it is so critical that the draw rate is
less than the targeted after-inflation rate of return,
if you make them the same you have no room for error
and the probability is not good that you will step on
your foot, most likely. So, you draw that down, you
move that draw number down to give you some real rate
of return after inflation, after your withdrawal, so
it's growing beyond the rate of inflation every year.
5:29:21 PM
CHAIR MEYER asked what would happen if the Fund does not make at
least 6.5-percent rate of return. He inquired if the dividend or
the General Fund would be impacted.
SENATOR STEDMAN explained as follows:
When you have really robust markets, we are going to
payout 4.5 percent a year on a five-year average
regardless of what the market does. Market could go
up, market could go down, market could stay flat,
doesn't matter, 4.5 percent every year. There will be
times, if fact there will be more up markets than down
markets, on average, that's why economies get larger
and larger on average, that's why the markets get
bigger. So, there will be more years when you make
extra, you'll make your 4.5 percent draw, you will
make your 2 percent inflation, whatever your inflation
is at the time, 2.5 percent, whatever. You might make
12 percent in a year or 15 percent in a year, and all
of that is great because you are jumping up in your
return.
There will be years like when you go back and look at
recessions, 2008 and 2009, 2000, go back to 1978 with
"Black Monday," you can go back about every decade
you'll have a dip. In those dip years you'll still get
a draw of 4.5 percent over the 5-year average, but the
5-year average is going to be coming down because your
market value is going down. Some would argue, "Well,
then from the previous year you spent part of the
principal," let's say you only made 1 percent in a
given year and you take out 4.5 percent as an example,
some would argue, "Well, then you spent some of the
principal," but that's true in certain regards, but
that's why you want this structure so when we have
down years you have the smooth cashflow coming out
because your up years are going to more than offset
that. To turn it upside down you just bring your
payout rate 6-8 percent, and then your down markets
push your value down, your purchasing power, you can't
afford down markets, that's why it's more comfortable
to have a draw rate with some cushion in it, that's
why it is not at 4.75-5.25 percent, but that's also
the discussion and the evolution in the Legislature.
The Legislature may decide that 4.5 percent is too
conservative, they want 4.75 percent to 5.25 percent.
I think the Permanent Fund will have some discussions
or some input on some of that, what rates they are
comfortable with, but there will be times when you
have a down market and it could last two to three
years.
5:32:38 PM
SENATOR GIESSEL asked how he calculated for population during
the four years he portrayed.
SENATOR STEDMAN answered 1 percent growth.
He continued as follows:
I think what we did on these we took the amount of
dividends that they paid, the number, and just divided
it into the dollars, I don't have the equation in
front of me, that's how we derived the $1,800
dividend. I think it was 615,000, the actual dividend
checks are paying out, trying to get it as close as we
could, and then population historically has been
growing at 1 percent, I think lately it has been
shrinking, so if the population shrinks, I think in
this case $1.116 billion would be divided amongst
fewer people.
SENATOR GIESSEL commented as follows:
I don't question at all the mathematical accuracy of
what your calculation shows or the mathematical logic
of it at all, but as someone who deals in the realm of
people, if we had a dividend that was growing like
this, I believe our population would grow and I
believe that our Medicaid costs would mushroom to say
nothing of Office of Children's Services issues and
our substance abuse issues. Again, I'm not thinking
about this in a mathematical way, I'm thinking about
the impact that this kind of a dividend, over $2,000,
will have on people. This is pretty serious as I look
at it in a serious in a negative way.
5:34:45 PM
SENATOR STEDMAN answered as follows:
The draw rate was driven off of the asset allocation,
their investments and then performance, and that's
what set that. The dollar amounts are driven off of
the happenstance of the size of the fund, $65 billion,
and the 5-year average just happened to be what the
average was. If in through the process that the
Legislature felt that 2 percent for a dividend is too
big, you could take it down to 1.5 percent and add 3.0
percent on the other side, add that 0.5 percent to the
general fund. You could move those numbers around to
whatever the Legislature feels comfortable, but at the
end of the day we need, I firmly believe, the public
support for a constitutional amendment to restrict and
collapse the Earnings Reserve into the corpus and
block the Legislature's ability to do ad hoc
withdrawals or we are going to spend the money.
SENATOR COGHILL said he agreed with Senator Stedman on
collapsing the ERA into the corpus. He remarked that Senator
Stedman's proposal was an endowment approach that takes out
volatility. He admitted that he struggles with putting a
constitutional amendment in for the right of a dividend. He
opined that Senator Stedman's proposal was an excellent approach
of managing the wealth but noted that he would much rather have
the wealth go to a dividend in statute that could be revisited.
He explained that he did not want to put the dividend alongside
any other right in the Alaska Constitution. He added that the
state must address how to determine residency in Alaska due to
the state's transitory military population as well as the act of
people swearing that they are going to move back. He concurred
with Senator Giessel on the question she brought up of people
moving into the state "just for the right." He opined that
Senator Stedman's proposal is the best management structure that
he has seen to date.
5:38:50 PM
SENATOR STEDMAN suggested that the resolution be discussed in
the Senate Judiciary Committee. He said he would not be opposed
to the dividend's constitutional protection being removed or
adjusted with a flexible formula. He emphasized that the key
point was to protect the entire Fund with a constitutional
protection from the Legislature.
SENATOR STEDMAN said the 4.5 percent draw was a comfortable and
safe draw, albeit a lot people would consider the draw to be on
the low side. He opined that the Legislature would not establish
a draw rate that was excessively high because the Permanent Fund
Corporation would object if they saw an erosion of value.
He said he thought the concerns that Senators Coghill and
Giessel brought forward were part of the process the Legislature
goes through when each committee works on a bill and changes it.
He opined that how to control the size of the dividend was a
legitimate discussion because the state may end up with a
portfolio nest egg for future generations that is large enough
to run the state on.
5:41:14 PM
SENATOR COHILL concurred that the Fund should be preserved for
future generations with a structure that was a tried-and-true
method. He agreed that the resolution should move along to the
Senate Judiciary Committee.
SENATOR STEDMAN commented that those that think the proposal is
concrete, "Thou shalt not change it, it's perfect," are going to
be surprised. He emphasized that he is adamant of constitutional
protection of the corpus, preferably the ERA in closing that
door. He reiterated that the discussion on the dividend and
payout structure was just part of the process. He concurred that
there is a downside to constitutionally putting the dividend in
as well as the growth of a very large dividend that attracts
some social issues.
5:42:54 PM
CHAIR MEYER opened and closed public testimony.
SENATOR COGHILL agreed with the resolution's focus and said
legislators' responsibility was to bring as much stability to
the Fund as possible. He opined that the state has created a
treasure that needs to come to the time of life that it can go
on the next generation.
CHAIR MEYER pointed out that SJR 9 has a zero fiscal note.
5:45:12 PM
SENATOR GIESSEL moved to report SJR 9, version 30-LS1085\O, from
committee with individual recommendations and attached zero
fiscal note.
5:45:24 PM
CHAIR MEYER announced there being no objection, the motion
carried.
5:46:13 PM
There being no further business to come before the committee,
Chair Meyer adjourned the Senate State Affairs Standing
Committee at 5:46 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SJR 9 Sponsor Power Point Presentation.pdf |
SSTA 4/13/2018 3:30:00 PM |
SJR 9 |