Legislature(2019 - 2020)BUTROVICH 205

02/05/2019 03:30 PM STATE AFFAIRS

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.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SCR 1 UNIFORM RULE AMENDMENT; BUDGET TELECONFERENCED
Scheduled but Not Heard
*+ SB 23 APPROP:SUPP. PAYMENTS OF PRIOR YEARS' PFD TELECONFERENCED
Heard & Held
*+ SB 24 PFD SUPPLEMENTAL PAYMENTS TELECONFERENCED
Heard & Held
                     ALASKA STATE LEGISLATURE                                                                                 
             SENATE STATE AFFAIRS STANDING COMMITTEE                                                                          
                         February 5, 2019                                                                                       
                            3:32 p.m.                                                                                           
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Mike Shower, Chair                                                                                                      
Senator John Coghill, Vice Chair                                                                                                
Senator Lora Reinbold                                                                                                           
Senator Peter Micciche                                                                                                          
Senator Scott Kawasaki                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 23                                                                                                              
"An Act making special appropriations from the earnings reserve                                                                 
account for the payment of permanent fund dividends; and                                                                        
providing for an effective date."                                                                                               
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 24                                                                                                              
"An Act directing the Department of Revenue to pay dividends to                                                                 
certain eligible individuals; and providing for an effective                                                                    
date."                                                                                                                          
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
SENATE CONCURRENT RESOLUTION NO. 1                                                                                              
Proposing an amendment to the Uniform Rules of the Alaska State                                                                 
Legislature relating to the appearance of measures on the daily                                                                 
calendar after the ninetieth day of the regular session.                                                                        
                                                                                                                                
     - SCHEDULED BUT NOT HEARD                                                                                                  
                                                                                                                                
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB  23                                                                                                                  
SHORT TITLE: APPROP:SUPP. PAYMENTS OF PRIOR YEARS' PFD                                                                          
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/16/19       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/16/19       (S)       STA, FIN                                                                                               
02/05/19       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
BILL: SB  24                                                                                                                  
SHORT TITLE: PFD SUPPLEMENTAL PAYMENTS                                                                                          
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
01/16/19       (S)       READ THE FIRST TIME - REFERRALS                                                                        
01/16/19       (S)       STA, FIN                                                                                               
02/05/19       (S)       STA AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRUCE TANGEMAN, Commissioner Designee                                                                                           
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Presented SB 23 and  SB 24 on behalf  of the                                                             
administration.                                                                                                                 
                                                                                                                                
ED KING, Chief Economist                                                                                                        
Department of Revenue                                                                                                           
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Delivered the  sectional analyses for  SB 23                                                             
and SB 24.                                                                                                                      
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:32:34 PM                                                                                                                    
CHAIR  MIKE  SHOWER  called the  Senate  State  Affairs  Standing                                                             
Committee meeting  to order at 3:32  p.m. Present at the  call to                                                               
order were  Senators Coghill,  Reinbold, Micciche,  Kawasaki, and                                                               
Chair Shower.                                                                                                                   
                                                                                                                                
        SB  23-APPROP:SUPP. PAYMENTS OF PRIOR YEARS' PFD                                                                    
                                                                                                                                
3:33:46 PM                                                                                                                    
CHAIR SHOWER  announced the consideration  of SENATE BILL  NO. 23                                                               
"An Act  making special appropriations from  the earnings reserve                                                               
account  for  the  payment  of   permanent  fund  dividends;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
He asked  the presenters to  introduce themselves and  noted that                                                               
Commissioner  Designee Tangeman  would provide  opening comments.                                                               
He  advised that  public testimony  would  be taken  at a  future                                                               
hearing.                                                                                                                        
                                                                                                                                
3:35:18 PM                                                                                                                    
BRUCE  TANGEMAN, Commissioner  Designee,  Department of  Revenue,                                                               
stated that  SB 23 and  the next bill on  the agenda, SB  24, are                                                               
critical in the cornerstone of  what Governor Dunleavy campaigned                                                               
on and is dear to his  heart. They are more about restoring trust                                                               
in  government  than paying  back  the  permanent fund  dividends                                                               
(PFD).   The   governor   wanted    to   correct   the   previous                                                               
administration's  decision to  take  a different  route than  the                                                               
long-standing statutory  calculation for the PFD.  He highlighted                                                               
that the  size of government  was not significantly  reduced over                                                               
the  last  three  years  while  the  dividend  was  reduced,  and                                                               
Governor Dunleavy  believes these go  hand in hand.  The dividend                                                               
can be  restored but  the size  of government  in Alaska  must be                                                               
brought  into check.  He advised  that  considering the  dividend                                                               
issue is just  one part of the larger discussion  that will begin                                                               
on February 13 when the budget is released.                                                                                     
                                                                                                                                
3:38:05 PM                                                                                                                    
ED KING,  Chief Economist, Department of  Revenue, explained that                                                               
SB  23 is  an appropriation  bill that  transfers money  from the                                                               
earnings reserve account  into the dividend fund.  He delivered a                                                               
sectional analysis speaking to the following prepared document:                                                                 
                                                                                                                                
     Section 1(a). This section  makes an appropriation from                                                                    
     the  permanent   fund  earnings  reserve   account  (AS                                                                    
     37.13.145) to  the dividend  fund (AS  43.23.045(a)) of                                                                    
     the amount  of money necessary  for a payment  of $1061                                                                    
     to eligible  individuals who  received a  2016 dividend                                                                    
     and who  are eligible  to receive  a 2019  dividend for                                                                    
     fiscal year 2020.                                                                                                          
                                                                                                                                
     Section 1(b). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund  of the amount  of money necessary  for a                                                                    
     payment of  $1289 to eligible individuals  who received                                                                    
     a 2017 dividend and who  are eligible to receive a 2020                                                                    
     dividend for fiscal year 2021.                                                                                             
                                                                                                                                
     Section 1(c). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund  of the amount  of money necessary  for a                                                                    
     payment of  $1328 to eligible individuals  who received                                                                    
     a 2018 dividend and who  are eligible to receive a 2021                                                                    
     dividend  for fiscal  year 2022.  [He noted  that there                                                                    
     may have been  an error in this calculation,  and it is                                                                    
     under review.]                                                                                                             
                                                                                                                                
     Section 1(d). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund of the amount  authorized for transfer by                                                                    
     the Alaska  Permanent Fund  Corporation pursuant  to AS                                                                    
     37.13.145(b)   for  the   payment  of   permanent  fund                                                                    
     dividends for fiscal year 2020.                                                                                            
                                                                                                                                
     Section 1(e). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund of the amount  authorized for transfer by                                                                    
     the Alaska  Permanent Fund  Corporation pursuant  to AS                                                                    
     37.13.145(b)   for  the   payment  of   permanent  fund                                                                    
     dividends for fiscal year 2021.                                                                                            
                                                                                                                                
     Section 1(f). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund of the amount  authorized for transfer by                                                                    
     the Alaska  Permanent Fund  Corporation pursuant  to AS                                                                    
     37.13.145(b)   for  the   payment  of   permanent  fund                                                                    
     dividends for fiscal year 2022.                                                                                            
                                                                                                                                
     Section 1(g). This section  makes an appropriation from                                                                    
     the  permanent fund  earnings  reserve  account to  the                                                                    
     dividend fund of the amount  authorized for transfer by                                                                    
     the Alaska  Permanent Fund  Corporation pursuant  to AS                                                                    
     37.13.145(b)   for  the   payment  of   permanent  fund                                                                    
     dividends for fiscal year 2023.                                                                                            
                                                                                                                                
     Section  2. This  section  is  a contingency  provision                                                                    
     that  makes  the  appropriations  in  section  1(a)-(c)                                                                    
     contingent on  the legislature's passage  and enactment                                                                    
     into  law  of  a  bill directing  the  commissioner  of                                                                    
     revenue  to  include  certain payments  for  the  2016,                                                                    
     2017, and  2018 dividends to eligible  individuals with                                                                    
     the dividend payments for 2019, 2020, and 2021.                                                                            
                                                                                                                                
     Section  3. This  section makes  the appropriations  in                                                                    
     section 1(b) and (e) which  relate to dividend payments                                                                    
     in 2020 effective July 1, 2020.                                                                                            
                                                                                                                                
     Section 4. This section makes the appropriations in                                                                        
     section 1(c) and (f) which relate to dividend payments                                                                     
     in 2021 effective July 1, 2021.                                                                                            
                                                                                                                                
     Section 5. This section makes the appropriation in                                                                         
     section 1(g) which relates to dividend payments in                                                                         
     2022 effective July 1, 2022.                                                                                               
                                                                                                                                
     Section 6. This section provides that except for                                                                           
     sections 3-5, the Act takes effect immediately under                                                                       
     AS 01.10.070(c).                                                                                                           
                                                                                                                                
3:41:42 PM                                                                                                                    
ED KING,  Chief Economist,  Department of  Revenue, characterized                                                               
SB 23 and SB 24 as "basically  married" and said he would move on                                                               
to the sectional analysis for SB 24 unless there were questions.                                                                
                                                                                                                                
SENATOR  MICCICHE asked  if the  bill received  legal vetting  to                                                               
look  at constitutionality  and the  potential for  challenges by                                                               
those who  received a  dividend during  the three  previous years                                                               
but are no longer a resident and thus ineligible.                                                                               
                                                                                                                                
MR.  KING deferred  to the  commissioner to  speak to  policy and                                                               
advised that a legal team  would be available to answer questions                                                               
at a subsequent hearing.                                                                                                        
                                                                                                                                
3:43:07 PM                                                                                                                    
COMMISSIONER  DESIGNEE TANGEMAN  related that  the Department  of                                                               
Law  (DOL)  vetted the  bill  thoroughly  and the  administration                                                               
believes it will stand up in a court.                                                                                           
                                                                                                                                
[SB 23 was held in committee.]                                                                                                  
                                                                                                                                
                 SB  24-PFD SUPPLEMENTAL PAYMENTS                                                                           
                                                                                                                                
3:43:35 PM                                                                                                                    
                                                                                                                                
CHAIR SHOWER  announced the consideration  of SENATE BILL  NO. 24                                                               
"An Act directing  the Department of Revenue to  pay dividends to                                                               
certain  eligible individuals;  and  providing  for an  effective                                                               
date."                                                                                                                          
                                                                                                                                
MR. KING  explained that  SB 24 directs  the commissioner  of the                                                               
Department  of  Revenue (DOR)  to  disburse  the funds  that  are                                                               
appropriated from the earnings reserve  to the dividend fund. The                                                               
entire bill amends uncodified law directing the commissioner to                                                                 
disburse the funds that are transferred into the dividend fund                                                                  
in addition to the calculated dividend for the year.                                                                            
                                                                                                                                
MR. KING delivered a sectional analysis for SB 24 speaking to                                                                   
the following prepared document:                                                                                                
                                                                                                                                
     Section 1(a).  This section would amend  the uncodified                                                                    
     law to  provide that notwithstanding AS  43.23.005, the                                                                    
     commissioner  of revenue  shall include  with permanent                                                                    
     fund  dividends in  2019, 2020,  and  2021 payments  to                                                                    
     eligible  individuals  of  $1,061 in  2019,  $1,289  in                                                                    
     2020, and $1,328 in 2021.                                                                                                  
                                                                                                                                
     Section  1(b).  This  section  would  provide  that  an                                                                    
     individual eligible in 2019 for  a payment of $1,061 in                                                                    
     addition  to   the  permanent   fund  dividend   is  an                                                                    
     individual who received a  2016 permanent fund dividend                                                                    
     and  is  eligible  to receive  a  2019  permanent  fund                                                                    
     dividend.                                                                                                                  
                                                                                                                                
     Section  1(c).  This  section  would  provide  that  an                                                                    
     individual eligible in 2020 for  a payment of $1,289 in                                                                    
     addition  to   the  permanent   fund  dividend   is  an                                                                    
     individual who received a  2017 permanent fund dividend                                                                    
     and  is  eligible  to receive  a  2020  permanent  fund                                                                    
     dividend.                                                                                                                  
                                                                                                                                
     Section  1(d).  This  section  would  provide  that  an                                                                    
     individual eligible in 2021 for  a payment of $1,328 in                                                                    
     addition  to   the  permanent   fund  dividend   is  an                                                                    
     individual who received a  2018 permanent fund dividend                                                                    
     and  is  eligible  to receive  a  2021  permanent  fund                                                                    
     dividend.                                                                                                                  
                                                                                                                                
     Section  1(e).  This  section would  provide  than  the                                                                    
     amount  appropriated from  the permanent  fund earnings                                                                    
     reserve  account (AS  37.13.145) to  the dividend  fund                                                                    
     (AS 43.23.045(a))  for the payments in  section 1(a) to                                                                    
     eligible   individuals   during   2019-2021   may   not                                                                    
     contribute  to  the  calculation  for  the  2019-  2021                                                                    
     dividends under AS 43.23.025.                                                                                              
                                                                                                                                
     Section  2. This  provides for  an immediate  effective                                                                    
     date.                                                                                                                      
                                                                                                                                
3:45:41 PM                                                                                                                    
SENATOR  COGHILL  asked if  the  Permanent  Fund Corporation  has                                                               
talked about how the disbursements would be managed.                                                                            
                                                                                                                                
MR. KING clarified  the question and explained that  should SB 24                                                               
pass, the  appropriation would be  booked as a liability  and the                                                               
corporation  would   manage  those  assets  to   ensure  adequate                                                               
liquidity to  make the transfer  to the Permanent  Fund Division.                                                               
The division would  manage the transfer to the  dividend fund and                                                               
the  disbursements.  That date  would  align  with the  date  the                                                               
disbursements generally are made, usually in September.                                                                         
                                                                                                                                
SENATOR COGHILL  suggested the committee ask  the corporation how                                                               
this would affect liquidity. He  also asked for confirmation that                                                               
this would not impose any lingering tax liability on recipients.                                                                
                                                                                                                                
MR. KING  confirmed that the  payments would be booked  as income                                                               
for federal  tax purposes  in the  year in  which the  payment is                                                               
received.                                                                                                                       
                                                                                                                                
SENATOR COGHILL  summarized his understanding  of the  answer and                                                               
Mr. King agreed.                                                                                                                
                                                                                                                                
3:48:22 PM                                                                                                                    
SENATOR  MICCICHE  countered  that  the  payment  may  push  some                                                               
individuals into the next tax bracket.                                                                                          
                                                                                                                                
MR. KING agreed  an individual in that circumstance  would have a                                                               
higher  tax liability,  but it  would not  be an  amendment to  a                                                               
previous year's tax return.                                                                                                     
                                                                                                                                
SENATOR  REINBOLD  asked  how  the  repayments  will  impact  the                                                               
dividend over the long term.                                                                                                    
                                                                                                                                
MR. KING  replied that removing  money from the  earnings reserve                                                               
leaves a  smaller balance  in the  fund to  spin off  returns. He                                                               
directed attention  to the bar  graphs on  slide 4 that  show the                                                               
expected impact  on the  earning reserve  account (ERA)  with and                                                               
without  the  backpay and  the  size  of  the dividend  with  and                                                               
without  the backpay.  The projected  dividend payments  in FY20,                                                               
FY21, and  FY22 reflect  larger payments  with the  backpay. That                                                               
changes in subsequent years showing  that the status quo payments                                                               
would be slightly smaller. The reason  for that is that a smaller                                                               
fund  balance  results  in  smaller   returns,  and  the  PFD  is                                                               
calculated  on  those returns.  "There  is  no denying  it,  that                                                               
impact does exist," he said.                                                                                                    
                                                                                                                                
CHAIR  SHOWER asked  for  the  source of  the  data  and how  the                                                               
numbers were validated.                                                                                                         
                                                                                                                                
MR.  KING replied  he  personally produced  the  graphics on  the                                                               
slide as  the chief economist  and head of the  Economic Research                                                               
Group at the Department of Revenue.                                                                                             
                                                                                                                                
3:50:57 PM                                                                                                                    
SENATOR REINBOLD asked for an explanation of the fiscal notes.                                                                  
                                                                                                                                
MR. KING  replied the  fiscal note  for SB 24  is $24,000  and is                                                               
intended  to  pay for  programing  costs  so the  Permanent  Fund                                                               
Division can determine who is eligible and disburse the funds.                                                                  
                                                                                                                                
SENATOR REINBOLD clarified that she  was asking about the draw on                                                               
the earnings reserve account.                                                                                                   
                                                                                                                                
MR. KING said  as currently structured, the draw  on the earnings                                                               
reserve would be just less than $2 billion.                                                                                     
                                                                                                                                
3:52:57 PM                                                                                                                    
SENATOR REINBOLD  clarified for the  public that the  proposed $2                                                               
billion  draw is  in addition  to the  approximately 2.9  billion                                                               
POMV [percent of market value] draw. She asked if he agreed.                                                                    
                                                                                                                                
MR. KING replied that was his understanding.                                                                                    
                                                                                                                                
SENATOR REINBOLD  calculated that the  total draw would  be about                                                               
$5 billion, should the bill pass.                                                                                               
                                                                                                                                
MR. KING  pointed out that  the bill appropriates the  money over                                                               
three years, not  all at once. The impact for  FY20 would be $2.9                                                               
billion  plus   the  estimated  $565  million   dividend  payment                                                               
[described in slide  2 of the presentation] for a  total of about                                                               
$3.5  billion. The  estimated dividend  payment in  FY21 of  $683                                                               
million would  be in addition to  the POMV, which would  be about                                                               
$3 billion.  He noted that  making the payments over  three years                                                               
allows time  for the fund  to make money  so the fund  balance is                                                               
not injured as much as it would be with lump sum payments.                                                                      
                                                                                                                                
SENATOR COGHILL suggested  it would be helpful  for the committee                                                               
to know the potential payout for those in Alaska.                                                                               
                                                                                                                                
MR. KING said he could read the number into the record.                                                                         
                                                                                                                                
CHAIR  SHOWER  asked  that  he  also update  the  slide  for  the                                                               
committee.                                                                                                                      
                                                                                                                                
3:54:50 PM                                                                                                                    
MR. KING agreed and stated the following:                                                                                       
                                                                                                                                
     The  number   that  is  estimated   for  the   FY20  is                                                                    
     $566,756,995. With a maximum  appropriation (that is if                                                                    
     every  eligible person  in  2016  remained eligible  in                                                                    
     2019) the maximum appropriation would be $682,839,753.                                                                     
                                                                                                                                
Responding to a question from  Senator Coghill, he clarified that                                                               
would  be  the  back  payment.  He  further  clarified  that  the                                                               
anticipated payment for the FY20  dividend is $1.9 billion. If SB                                                               
24 were  to pass, it would  add another $565 million  for a total                                                               
of $2.5 billion.                                                                                                                
                                                                                                                                
SENATOR  COGHILL  said  his  point was  to  highlight  the  total                                                               
because, "when  we get the budget,  we're going to have  to think                                                               
of it in that term."                                                                                                            
                                                                                                                                
3:56:45 PM                                                                                                                    
CHAIR  SHOWER clarified  that the  discussion is  about what  the                                                               
total bill would be each year if SB 24 were to pass.                                                                            
                                                                                                                                
SENATOR COGHILL said  it looks like the draw would  be about $0.5                                                               
billion  plus  the   usual  payment  of  about   $1  billion.  He                                                               
calculated  that it  would be  $1.5 billion  plus per  year going                                                               
forward.                                                                                                                        
                                                                                                                                
MR. KING provided the following clarification:                                                                                  
                                                                                                                                
     For FY20,  we're expecting there to  be a  draw  on the                                                                    
     fund of $2.9  billion from the earnings  reserve to the                                                                    
     general  fund for  the purposes  of  percent of  market                                                                    
     value.   In  addition   to   that,   this  bill   would                                                                    
     appropriate   an   additional   $565   million.   We're                                                                    
     expecting that  that fund will earn  about $4.1 billion                                                                    
     that year so the total  fund balance won't decrease. It                                                                    
     will  actually  increase  slightly.  There  will  be  a                                                                    
     transfer to the principal  if you do inflation-proofing                                                                    
     but  the  fund  itself   won't  decrease.  That's  $3.5                                                                    
     billion  of total  draws from  the ERA  to the  general                                                                    
     fund and the dividend fund.                                                                                                
                                                                                                                                
     In FY21,  the POMV  will be about  $3 billion  plus the                                                                    
     [$683]  so $3.7  billion  total moving.  In  FY 22,  it                                                                    
     would  be a  little  bit more,  about  $3.8 billion  in                                                                    
     total.                                                                                                                     
                                                                                                                                
     Once  you  get  past  that, [in  FY23]  the  additional                                                                    
     appropriations go  away. We've  paid those off,  so the                                                                    
     total draw goes down to  close to that $3 billion draw.                                                                    
     Of that, ...the permanent  fund dividend also begins to                                                                    
     shrink and  that's just  a product  of the  really good                                                                    
     year that  we had last  year in FY18. That  number will                                                                    
     drop off  of the five-year  rolling average in  2024 so                                                                    
     the permanent fund  dividend will be smaller  just as a                                                                    
     natural consequence.  That has  nothing to do  with the                                                                    
     bill.                                                                                                                      
                                                                                                                                
MR. KING summarized  that the money coming out of  the fund isn't                                                               
any more  than about  $3.5 billion  in the  next three  years and                                                               
about $3 billion every year thereafter.                                                                                         
                                                                                                                                
3:59:33 PM                                                                                                                    
SENATOR COGHILL said  it's still a cash draw on  the state and he                                                               
wanted to know what that gross draw would be.                                                                                   
                                                                                                                                
MR. KING said he would follow up with the numbers in a table.                                                                   
                                                                                                                                
4:00:28 PM                                                                                                                    
CHAIR SHOWER  asked him  to explain where  the money  that should                                                               
have  been  allocated  the  first   two  years  is  sitting.  His                                                               
understanding is that the money was allocated the third year.                                                                   
                                                                                                                                
4:00:51 PM                                                                                                                    
MR. KING explained  that for all intents and  purposes, the money                                                               
that was not  distributed in each of the three  years is still in                                                               
the earnings reserve.                                                                                                           
                                                                                                                                
CHAIR SHOWER asked  for clarification about what  happened to the                                                               
money that was not distributed last year.                                                                                       
                                                                                                                                
MR. KING  explained that last  year the returns were  far greater                                                               
than the distributions  from the fund, so the effect  is that the                                                               
money is sitting in the earnings reserve.                                                                                       
                                                                                                                                
4:01:28 PM                                                                                                                    
SENATOR MICCICHE pointed out that  money was allocated out of the                                                               
earnings  reserve last  year  to  the POMV  and  it  went to  the                                                               
general fund.                                                                                                                   
                                                                                                                                
CHAIR SHOWER said that was his question.                                                                                        
                                                                                                                                
SENATOR  MICCICHE  responded  that,  "Whether  it's  those  exact                                                               
dollars  that were  transferred out  or not  is one's  individual                                                               
judgment. But  last year the monies  were actually used to  pay a                                                               
proportion of the bills for the state."                                                                                         
                                                                                                                                
CHAIR SHOWER  said that  is the point.  "Was the  money allocated                                                               
used or was it essentially left sitting in the fund?"                                                                           
                                                                                                                                
MR. KING responded that there  was enough money appropriated from                                                               
the earnings reserve to the general  fund to pay a full dividend,                                                               
although it was not transferred  for that purpose. He agreed that                                                               
it's a matter of perspective and either description is accurate.                                                                
                                                                                                                                
CHAIR  SHOWER said  this  is the  opportunity to  put  it on  the                                                               
public  record and  into the  light. We  want to  make sure  that                                                               
we're arguing with good facts, he said.                                                                                         
                                                                                                                                
4:02:57 PM                                                                                                                    
SENATOR  MICCICHE   said  it's   important  for  the   public  to                                                               
understand that  the money that  was withheld from  dividends the                                                               
first two  years was not used  to pay any state  operating costs,                                                               
but  a  proportion  was  used  the third  year.  He  said  that's                                                               
important  because for  the first  time in  state history,  money                                                               
from the earnings reserve was used to supplement state services.                                                                
                                                                                                                                
He  referred to  slide  2 and  asked for  an  explanation of  the                                                               
assumptions  that were  used for  outmigration  to determine  the                                                               
numbers of people who would be eligible for a backpay dividend.                                                                 
                                                                                                                                
4:04:18 PM                                                                                                                    
MR.  KING explained  that DOR's  historical  analysis found  that                                                               
about 17  percent of people who  received a dividend in  one year                                                               
do not  receive a  dividend three years  later. In  2016, 643,581                                                               
people received the dividend and  DOR anticipates that 534,172 of                                                               
those  will receive  the additional  payment.  For 2017,  640,248                                                               
people  received a  dividend and  83  percent of  that number  is                                                               
531,406 people. In  FY18, 639,247 people received  a dividend and                                                               
the  expectation   is  that  530,575  people   will  receive  the                                                               
additional payment.                                                                                                             
                                                                                                                                
SENATOR  REINBOLD calculated  that a  $3 billion  POMV draw  plus                                                               
about $1  billion per year  for dividends plus the  back payments                                                               
proposed  in SB  24  roughly  totals $14  billion.  She said  she                                                               
struggles with  that number  if one wants  to save  the permanent                                                               
fund. She asked if her public math was close to accurate.                                                                       
                                                                                                                                
MR. KING pointed  out the PFD payment comes out  of the POMV, not                                                               
in addition  to it so  the total  would be $11  billion. However,                                                               
the fund  is anticipated  to earn  over $12  billion so  the fund                                                               
should not be injured.                                                                                                          
                                                                                                                                
CHAIR SHOWER  asked him  to break  the dividend  out of  the POMV                                                               
draw.                                                                                                                           
                                                                                                                                
4:08:35 PM                                                                                                                    
MR. KING  explained that for  FY20 the  POMV is $2.9  billion and                                                               
the  dividend payment  is  estimated to  be  about $1.9  billion,                                                               
leaving  $1  billion  for  the general  fund.  The  situation  is                                                               
similar in  FY21; about  $3 billion is  transferred and  about $2                                                               
billion goes  to the dividend,  leaving about $1 billion  for the                                                               
general fund.                                                                                                                   
                                                                                                                                
CHAIR SHOWER  summarized that the  statutory calculation  for the                                                               
permanent fund over three years  is roughly $6 billion. Adding $2                                                               
billion for the  payback brings the rough total  over three years                                                               
to $8 billion.                                                                                                                  
                                                                                                                                
MR. KING  clarified that the  transfer over three years  would be                                                               
$9 billion  plus the $2 billion  dividend payback for a  total of                                                               
$11 billion.                                                                                                                    
                                                                                                                                
SENATOR  REINBOLD commented  that  it's  important to  understand                                                               
that the POMV draw includes the PFD.                                                                                            
                                                                                                                                
CHAIR SHOWER pointed  out that the money is  not transferred from                                                               
the  earnings reserve  in one  lump  sum, which  leaves a  larger                                                               
balance  in  the  earnings reserve  that  continues  to  generate                                                               
returns.                                                                                                                        
                                                                                                                                
He said  it's also  important to  note the  impact on  the budget                                                               
this year. The  $2.9 billion draw under the POMV  model less $1.9                                                               
billion for the dividend leaves  about $1 billion for the general                                                               
fund. Add  that to the  $2.2 billion from  oil and gas  this year                                                               
yields a  revenue model  of about $3.2  billion. If  things don't                                                               
change, it should be similar over the next few years.                                                                           
                                                                                                                                
SENATOR MICCICHE commented that he  keeps hearing a little lawyer                                                               
voice warning  that past returns  are not an indicator  of future                                                               
performance.                                                                                                                    
                                                                                                                                
He asked if DOR stress tested  the assumptions to account for the                                                               
potential  to deliver  a three-fourths  vote on  the CBR  and the                                                               
potential for  other legislators to support  an unstructured draw                                                               
from the ERA.  These factors could lead to  a significantly lower                                                               
earnings  reserve  balance which  could  stress  the ability  for                                                               
future dividend payments as well.                                                                                               
                                                                                                                                
MR.  KING  directed  attention  to  the graph  on  slide  5  that                                                               
represents  the Callan  estimates of  the risk  of depleting  the                                                               
ERA, given the assumption that draws  from the ERA are limited to                                                               
the  proposed   appropriations  in  addition  to   the  POMV  and                                                               
inflation proofing  calculations. He  said the likelihood  of the                                                               
ERA being depleted due to  random fluctuations in the marketplace                                                               
is about  1 percent. The risk  increases to about 3  percent with                                                               
the $2  billion transfer over  the next three years,  because the                                                               
balance on which  to base earnings is smaller. He  said he agrees                                                               
with Senator Micciche about past  performance and future returns,                                                               
but the past performance has  been phenomenal, averaging over 9.5                                                               
percent per year for  the last 40 years. In the  last 9 years the                                                               
average has been 9.64 percent.                                                                                                  
                                                                                                                                
For planning  purposes the  corporation projects  an historically                                                               
low 6.55  percent return on the  fund. When DOR ran  the analysis                                                               
reflected on  slide 5,  the Callan estimate  of 6.55  percent was                                                               
used. He noted  that applying a distribution  of past performance                                                               
and select  randomly from the  previous 40 years brings  the risk                                                               
of the draw depleting the fund to virtually zero.                                                                               
                                                                                                                                
CHAIR SHOWER  asked for  an explanation of  the Callan  and Monte                                                               
Carlo models.                                                                                                                   
                                                                                                                                
MR.  KING explained  that  a  Monte Carlo  simulation  is a  risk                                                               
analysis technique  that uses a distribution  of probable numbers                                                               
from  which   a  computer  randomly  selects.   DOR  ran  100,000                                                               
simulations  and   there  was  no   problem  in  99,000   of  the                                                               
simulations.   He  advised  that Callan  Associates  Inc, is  the                                                               
consultant for the Permanent Fund  Corporation that provides risk                                                               
analyses and advice on expected returns.                                                                                        
                                                                                                                                
SENATOR MICCICHE advised  that in the finance  committee he would                                                               
request DOR run  a model with some level of  unstructured draw so                                                               
he  could  understand what  that  depletion  looks like  in  that                                                               
circumstance.  "I personally  find it  difficult to  believe that                                                               
we're  going to  deliver a  three-quarter vote  with the  current                                                               
makeup  of the  legislature,  particularly  observing the  issues                                                               
across the hall," he said.                                                                                                      
                                                                                                                                
MR. KING said if the unstructured  draw is limited to the request                                                               
in the  bill and the POMV,  the risk of depletion  is negligible.                                                               
But  increasing the  draw by  $0.5 billion  to $1.0  billion into                                                               
perpetuity is not sustainable.                                                                                                  
                                                                                                                                
CHAIR SHOWER asked Mr. Tangeman if he had anything to add.                                                                      
                                                                                                                                
4:17:54 PM                                                                                                                    
COMMISSIONER  DESIGNEE  TANGEMAN  cautioned that  this  was  also                                                               
contingent  on  the budget.  As  far  as unstructured  draws  and                                                               
testing the  model, he said it's  clear we are living  beyond our                                                               
means. Continuing  draws of $1 billion  or more just to  meet the                                                               
existing operating  budget is  a problem. SB  24 is  about making                                                               
whole on  the back payments which  have been sitting in  the fund                                                               
earning a  healthy rate of  return. The discussion in  the coming                                                               
days on the  budget will be about  how to put a  stable budget in                                                               
place  for the  State  of  Alaska that  does  not  rely on  giant                                                               
unstructured  draws from  whatever revenue  source it  is -  UGF,                                                               
CBR,  ERA. He  related  the Governor's  view  is that  sufficient                                                               
revenue  cannot  be extracted  from  the  citizens of  Alaska  to                                                               
support the budget.                                                                                                             
                                                                                                                                
He suggested  that once  the Governor's budget  is on  the table,                                                               
the  entire  plan can  be  stress-tested,  including these  three                                                               
years of catchup, what the revenue  sources look like, and what a                                                               
significantly  reduced  budget  looks  like  in  that  model.  He                                                               
posited that  "reducing the budget  to the  level that we  see as                                                               
appropriate,  you  can absorb  things  like  this and  allow  the                                                               
earnings reserve and  the permanent fund itself to  grow into the                                                               
future."                                                                                                                        
                                                                                                                                
CHAIR SHOWER  asked how much  tax revenue  it would take  to make                                                               
this achievable over the next 5-6 years.                                                                                        
                                                                                                                                
COMMISSIONER  DESIGNEE TANGEMAN  advised that  the administration                                                               
is not proposing new revenues  initially, because the focus needs                                                               
to be on the budget. In step  one the discussion will be that the                                                               
available revenue  is $3.2  billion. Step two  will be  about the                                                               
level of  spending that revenue  will support, including  what is                                                               
constitutionally required.  The "goal is to  focus the discussion                                                               
on what is sustainable with  the current revenue stream we have,"                                                               
he said.                                                                                                                        
                                                                                                                                
CHAIR  SHOWER asked  for  clarification  that the  administration                                                               
believes that this is achievable  without starting the discussion                                                               
of taxes.                                                                                                                       
                                                                                                                                
4:24:22 PM                                                                                                                    
COMMISSIONER DESIGNEE  TANGEMAN replied that's correct.  He added                                                               
that it's about  $2 billion over the next three  years to correct                                                               
this issue,  but because the ERA  will continue to grow  over the                                                               
coming years,  DOR believes there will  be a net increase  to the                                                               
ERA.                                                                                                                            
                                                                                                                                
SENATOR  REINBOLD said  she continues  to have  concerns about  a                                                               
natural  disaster like  the earthquake  as well  as international                                                               
threats. Thus her belief in the necessity of having reserves.                                                                   
                                                                                                                                
Turning to  policy, she said  she hasn't  been a big  believer in                                                               
the POMV because it's a $3  billion draw, less the dividends, for                                                               
government. She described  slide five as unfair  because it shows                                                               
almost no risk  of depletion but $11 billion is  removed from the                                                               
account over three years, which draws  it down. She asked if that                                                               
was a fair statement.                                                                                                           
                                                                                                                                
MR. KING referred to the graphics  on slide 4 of the fund balance                                                               
with backpay  and the status quo.  It shows that the  $17 billion                                                               
balance in the  fund remains flat under the status  quo. The blue                                                               
bar reflects  the balance  with backpay  is basically  $2 billion                                                               
lower. This  reflects the $2  billion draw which by  itself would                                                               
not deplete  the ERA.  Additional draws on  the fund  or earnings                                                               
that are significantly lower than  expected would impact the fund                                                               
negatively.                                                                                                                     
                                                                                                                                
SENATOR REINBOLD noted  that he was only focusing  on the balance                                                               
in the context of SB 23 and SB  24 and she was also including the                                                               
impact of Senate  Bill 26. She suggested the slide  be updated to                                                               
clarify it was only considering the  impact SB 23 and SB 24 would                                                               
have on the ERA balance.                                                                                                        
                                                                                                                                
SENATOR MICCICHE pointed out that  the numbers on slide 4 include                                                               
the  POMV,  which is  the  result  of  Senate  Bill 26.  He  also                                                               
clarified  that  SB  23  and   SB  24  are  about  returning  the                                                               
traditional statutory  calculation and  he would  not necessarily                                                               
call that  an unstructured  draw. He  said he brings  it up  as a                                                               
warning to the  legislature that any unstructured  draws from the                                                               
ERA will  put the  Alaska Permanent Fund  and the  Permanent Fund                                                               
Dividend  at  extreme  risk.  He   reiterated  the  warning  that                                                               
unstructured  draws  from  the  earnings  reserve  cannot  become                                                               
normal practice.                                                                                                                
                                                                                                                                
He restated  that he  would like  DOR to run  a risk  analysis of                                                               
additional  unstructured draws  above SB  23, SB  24, and  Senate                                                               
Bill  26 so  the legislature  more clearly  understands the  risk                                                               
this presents to the Alaska Permanent Fund.                                                                                     
                                                                                                                                
4:30:30 PM                                                                                                                    
MR. KING  said the account  is stable  with the current  POMV law                                                               
and  given  the assumptions  the  permanent  fund has  about  its                                                               
earnings.  However, any  additional draws  put that  stability at                                                               
risk. As long  as the structured draw remains in  place, the risk                                                               
highlighted on slide 5 is  correct. It demonstrates there is some                                                               
additional risk by  taking $2 billion out of the  account but the                                                               
Governor  believes the  risk  is  appropriate. Removing  anything                                                               
additional  presents a  severe risk  that the  account could  not                                                               
sustain  that  draw.  He  offered to  run  several  scenarios  at                                                               
different budget levels to show what that risk does.                                                                            
                                                                                                                                
4:31:50 PM                                                                                                                    
CHAIR SHOWER  commented that we  need to  deal with the  model we                                                               
have, and the  general warning is that past  performance does not                                                               
guarantee  similar  results  in  the  future.  Because  the  past                                                               
performance of  legislators spending  money is  not too  good, he                                                               
suggested  that, "We  need to  be the  ones putting  handcuffs on                                                               
ourselves."                                                                                                                     
                                                                                                                                
SENATOR COGHILL noted  that the POMV is roughly 5  percent of the                                                               
total valuation of the fund, which  now is about $650 million. He                                                               
asked Mr. King  to discuss what the dividend payout  would be and                                                               
what would be left for government.                                                                                              
                                                                                                                                
MR. KING explained that $1.9  million is approximately two-thirds                                                               
of the  $2.9 million that's  being transferred from  the earnings                                                               
reserve for  the dividend  under the  statutory formula.  He said                                                               
he'd follow up  with the calculation with  the additional payment                                                               
added on.                                                                                                                       
                                                                                                                                
SENATOR COGHILL  said he wanted  the general public to  know that                                                               
the percent of market value (POMV)  is an endowment that allows 5                                                               
percent of the  total value of the fund to  be withdrawn. At this                                                               
point, the distribution  would be two-thirds to  the dividend and                                                               
one-third  to government.  He said  he appreciates  that Governor                                                               
Dunleavy's  priority   is  to  put   downward  pressure   on  the                                                               
government instead of  expecting the people to pay  more. He said                                                               
this  is a  good exercise,  but he  needs to  look at  the budget                                                               
before he can support this approach.                                                                                            
                                                                                                                                
4:35:14 PM                                                                                                                    
CHAIR SHOWER read the assumptions  on slide 4 which say, "Assumes                                                               
draws from the ERA are  limited to the proposed appropriations in                                                               
addition  to the  POMV and  inflation proofing  calculations." He                                                               
asked  for confirmation  that the  charts on  slide 4  do reflect                                                               
those assumptions.                                                                                                              
                                                                                                                                
MR. KING  said yes;  the graphics  represent the  structured draw                                                               
under the POMV with no additional draw.                                                                                         
                                                                                                                                
CHAIR  SHOWER said  his point  is that  while the  chart includes                                                               
inflation-proofing, it does include any  other payback such as to                                                               
the constitutional budget reserve (CBR).                                                                                        
                                                                                                                                
MR.  KING  said  that's  correct;  the  numbers  only  reflect  a                                                               
transfer of  about $1  billion from the  earnings reserve  to the                                                               
principal account every year to account for inflation.                                                                          
                                                                                                                                
CHAIR  SHOWER noted  the talk  about  potential legislation  that                                                               
would  join the  earnings  reserve account  with  the corpus  and                                                               
continue  to have  the one  POMV draw.  He asked  how that  would                                                               
affect this legislation should that happen.                                                                                     
                                                                                                                                
MR. KING  deferred any discussion about  potential legislation to                                                               
the commissioner. As  to aggregating the funds, he  said it would                                                               
in no way change how the numbers work.                                                                                          
                                                                                                                                
CHAIR SHOWER asked Mr. Tangeman  where the additional funds would                                                               
come from if the budget is larger than $3.2 billion.                                                                            
                                                                                                                                
COMMISSIONER  DESIGNEE TANGEMAN  said the  conversation needs  to                                                               
start  with what  the  budget  looks like  on  February 13,  what                                                               
services it provides, and what  programs Alaskans want added back                                                               
into that $3.2  billion. People generally understand  that a $4.8                                                               
billion  budget  is  not  sustainable,  but  they  need  to  have                                                               
confidence  that the  budget has  been reduced  sufficiently that                                                               
they would be willing to  start entertaining discussions about an                                                               
income  tax. "We  currently  don't have  anything  in the  hopper                                                               
right now as far as new revenue building," he said.                                                                             
                                                                                                                                
CHAIR SHOWER  said the point  is that  the numbers are  likely to                                                               
change and the  money has to come from somewhere,  and that place                                                               
is likely to be the earnings reserve.                                                                                           
                                                                                                                                
He  asked  if  he  had   considered  the  legal  implications  of                                                               
requiring  an individual  to be  eligible for  the dividend  this                                                               
year to receive the back payment.                                                                                               
                                                                                                                                
4:41:05 PM                                                                                                                    
COMMISSIONER   DESIGNEE   TANGEMAN   explained   that   the   PFD                                                               
application  requires  the applicant  to  confirm  that they  are                                                               
currently in  Alaska and intend  to stay in Alaska.  The dividend                                                               
was reduced  for three  years and the  remedy to  make recipients                                                               
whole extends over  three years. There is no intention  to try to                                                               
locate the  people who are no  longer in Alaska. "We  can only do                                                               
what's  feasible  with the  system  we  have."  He noted  that  a                                                               
different bill  proposes to  make past  recipients whole  in this                                                               
coming year  and DOR  would not object  to that,  but individuals                                                               
who qualified  in 2016 and  immediately left the state  could get                                                               
the entire three-year  backpay. SB 24 provides a  glide path that                                                               
allows the earnings reserve to grow  a little bit due to a larger                                                               
balance  in the  earnings reserve.  He summarized  that the  bill                                                               
targets people who were eligible in  2016 and are still in Alaska                                                               
and eligible for a dividend today.                                                                                              
                                                                                                                                
MR. KING  added that  if the eligibility  were removed  there are                                                               
technical aspects,  such as unclaimed property  and probate, that                                                               
should be addressed with DOR or the administration.                                                                             
                                                                                                                                
SENATOR  REINBOLD highlighted  that  while she  has  been in  the                                                               
legislature the  entire budget has  been somewhere  between $10.5                                                               
billion and $16 billion. It is much larger than $3.2 billion.                                                                   
                                                                                                                                
4:44:55 PM                                                                                                                    
CHAIR SHOWER  asked Mr.  Tangeman if DOR  modeled a  one-year and                                                               
two-year  option and  to speak  to why  the three-year  model was                                                               
selected.                                                                                                                       
                                                                                                                                
COMMISSIONER DESIGNEE  TANGEMAN replied they did  not model those                                                               
shorter terms, but  it would be an easy exercise  to do so. Three                                                               
years was selected to provide a  gentler glide path and to ensure                                                               
that the Alaskans  who qualified and intend to  stay hear receive                                                               
the maximum benefit.                                                                                                            
                                                                                                                                
4:46:27 PM                                                                                                                    
CHAIR SHOWER held SB 24 in committee.                                                                                           
                                                                                                                                
4:47:20 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair  Shower   adjourned  the  Senate  State   Affairs  Standing                                                               
Committee meeting at 4:47 pm.                                                                                                   
                                                                                                                                

Document Name Date/Time Subjects
SB 23 TL - Senate President.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB0023A.PDF SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB23 Sectional.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB 24 TL - Senate President.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SB 24
SB0024A.PDF SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SB 24
SB24 Sectional.pdf SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SB 23 and 24 presentation.pptx SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 23
SB 24
[gov-pressreleases] ICYMI_ Governor Dunleavy Unveils PFD Back Pay_Legislation.pdf SSTA 2/5/2019 3:30:00 PM
Governors PFD Press Release
SB 24 Fiscal Note.PDF SSTA 2/5/2019 3:30:00 PM
SSTA 2/26/2019 3:30:00 PM
SSTA 2/28/2019 3:30:00 PM
SSTA 3/5/2019 3:30:00 PM
SSTA 3/7/2019 3:30:00 PM
SSTA 3/12/2019 3:30:00 PM
SB 24
SSTA Agenda Week of 2.04.19.pdf SSTA 2/5/2019 3:30:00 PM
Agenda