02/23/2016 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB128 | |
| SB114 | |
| SJR1 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 128 | TELECONFERENCED | |
| += | SB 114 | TELECONFERENCED | |
| *+ | SJR 1 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 23, 2016
9:01 a.m.
MEMBERS PRESENT
Senator Bill Stoltze, Chair
Senator John Coghill, Vice Chair
Senator Charlie Huggins
Senator Lesil McGuire
Senator Bill Wielechowski
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 128
"An Act relating to the Alaska permanent fund; relating to
appropriations to the dividend fund; relating to income of the
Alaska permanent fund; relating to the earnings reserve account;
relating to the Alaska permanent fund dividend; making
conforming amendments; and providing for an effective date."
- HEARD & HELD
SPONSOR SUBSTITUTE FOR SENATE BILL NO. 114
"An Act relating to the Alaska Permanent Fund Corporation, the
earnings of the Alaska permanent fund, and the earnings reserve
account; relating to the mental health trust fund; relating to
deposits into the dividend fund; and providing for an effective
date."
- HEARD & HELD
SENATE JOINT RESOLUTION NO. 1
Proposing amendments to the Constitution of the State of Alaska
relating to the Alaska permanent fund, establishing the earnings
reserve account, relating to the permanent fund dividend, and
requiring the permanent fund dividend be at least equal to the
amount that would be calculated under current law.
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 128
SHORT TITLE: PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/16 (S) READ THE FIRST TIME - REFERRALS
01/19/16 (S) STA, FIN
01/26/16 (S) STA AT 9:00 AM BUTROVICH 205
01/26/16 (S) Heard & Held
01/26/16 (S) MINUTE(STA)
01/28/16 (S) STA AT 9:00 AM BUTROVICH 205
01/28/16 (S) Heard & Held
01/28/16 (S) MINUTE(STA)
02/02/16 (S) STA AT 9:00 AM BUTROVICH 205
02/02/16 (S) Heard & Held
02/02/16 (S) MINUTE(STA)
02/04/16 (S) STA AT 9:00 AM BUTROVICH 205
02/04/16 (S) Heard & Held
02/04/16 (S) MINUTE(STA)
02/04/16 (S) STA AT 5:30 PM BUTROVICH 205
02/04/16 (S) Heard & Held
02/04/16 (S) MINUTE(STA)
02/11/16 (S) STA AT 9:00 AM BUTROVICH 205
02/11/16 (S) Heard & Held
02/11/16 (S) MINUTE(STA)
02/23/16 (S) STA AT 9:00 AM BUTROVICH 205
BILL: SB 114
SHORT TITLE: PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
SPONSOR(s): MCGUIRE
04/18/15 (S) READ THE FIRST TIME - REFERRALS
04/18/15 (S) STA, FIN
02/01/16 (S) SPONSOR SUBSTITUTE INTRODUCED-REFERRALS
02/01/16 (S) STA, FIN
02/04/16 (S) STA AT 9:00 AM BUTROVICH 205
02/04/16 (S) Scheduled but Not Heard
02/09/16 (S) STA AT 9:00 AM BUTROVICH 205
02/09/16 (S) Heard & Held
02/09/16 (S) MINUTE(STA)
02/16/16 (S) STA AT 9:00 AM BUTROVICH 205
02/16/16 (S) Heard & Held
02/16/16 (S) MINUTE(STA)
02/16/16 (S) STA AT 6:00 PM BUTROVICH 205
02/16/16 (S) Heard & Held
02/16/16 (S) MINUTE(STA)
02/23/16 (S) STA AT 9:00 AM BUTROVICH 205
BILL: SJR 1
SHORT TITLE: CONST AM: GUARANTEE PERM FUND DIVIDEND
SPONSOR(s): WIELECHOWSKI
01/21/15 (S) PREFILE RELEASED 1/9/15
01/21/15 (S) READ THE FIRST TIME - REFERRALS
01/21/15 (S) STA, JUD, FIN
02/23/16 (S) STA AT 9:00 AM BUTROVICH 205
WITNESS REGISTER
CRAIG RICHARDS, Attorney General
Office of the Attorney General
Department of Law
Juneau, Alaska
POSITION STATEMENT: Presented information on SB 128.
THOMAS PRESLEY, Staff
Senator Bill Wielechowski
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented the sectional analysis for SJR 1
on behalf of the sponsor.
ACTION NARRATIVE
9:01:21 AM
CHAIR BILL STOLTZE called the Senate State Affairs Standing
Committee meeting to order at 9:01 a.m. Present at the call to
order were Senators Coghill, McGuire, Wielechowski, Huggins, and
Chair Stoltze. He noted there were three bills related to the
Permanent Fund Dividend before the committee.
SB 128-PERM. FUND: DEPOSITS; DIVIDEND; EARNINGS
9:02:34 AM
CHAIR STOLTZE announced the consideration of SB 128.
9:02:49 AM
CRAIG RICHARDS, Attorney General, Office of the Attorney
General, Department of Law, presented information on SB 128.
CHAIR STOLTZE asked Attorney General Richards to address the
title of bill, "The Dividend Protection Act."
9:04:14 AM
ATTORNEY GENERAL RICHARDS stated that the governor's bill, SB
128, is not the only bill that aims to protect the Permanent
Fund Dividend (PFD), but a bill like it is critical. He pointed
out that by FY24 the Department of Revenue (DOR) predicts that
there will be insufficient funds in the Constitutional Budget
Reserve (CBR) and the Earnings Reserve Account (ERA) to pay for
continued payments of dividends. It could happen as soon as FY
21 if there is no change to having to spend the state's savings
to balance the budget. The bill will protect the PFD, as well as
change the way that it is paid.
ATTORNEY GENERAL RICHARDS said that was the logic behind the
title of SB 128. He added that FY22 is when the ERA is expected
to be depleted if the state spends at the current rate through
the CBR, however, it could be even sooner. There is not exact
certainty about the date that would occur.
CHAIR STOLTZE inquired how budget cuts are figured in the
formula. He noted concerns by Alaskans regarding budget cuts.
9:07:22 AM
ATTORNEY GENERAL RICHARDS replied that he does not have DOR's
revenue calculations under different scenarios. He concluded
that the more the state closes the budget gap, through
additional revenues or through additional budget cuts, the
longer it will take to spend out the CBR and the ERA.
He stressed that the Governor is looking forward to working with
the House and the Senate on a budget package, including budget
cuts, and is available to have that discussion with the
legislature and individual legislators.
He began a presentation in direct response to a request from the
State Affairs Committee about how the PFD would look under
different scenarios. The presentation is DOR's view of what it
looks like under the status quo dividend and under SB 128, and
potentially what it looks like under SB 114. He said they did
not model Representative Hawker's bill.
9:09:20 AM
He explained how to read the box plots in the charts in his
presentation. He showed how the PFD is calculated under the
status quo and as proposed in SB 128 and SB 114. Both bills
allow calculations of dividends where, if the amount of the
dividend is increased, the amount from a fixed payment or
percent of market value (POMV) to the general fund is decreased.
The goal is to figure out the balance between what should be
paid as PFD's and what should stay in the Permanent Fund and be
paid out to government operation year to year.
9:11:48 AM
ATTORNEY GENERAL RICHARDS explained that under SB 128, this
year's PFD would be a flat $1,000 paid out of the $1.4 billion
appropriated last year. In the future, all royalties would be
deposited in the Permanent Fund and 50 percent of that amount
would pay the PFD every year.
He understood that under SB 114, 75 percent of royalties
collected by the state each year would go to the PFD, but there
would be a floor of $1,000. If the floor is not met, the
additional amounts needed would come out of the ERA.
SENATOR MCGUIRE said that was correct.
ATTORNEY GENERAL RICHARDS related that under the status quo, the
PFD is based upon 21 percent of half of the earnings over a
five-year average. It amounts to 21 percent of last year's
realized earnings. He noted the importance of understanding that
the formula uses realized earnings, not 50 percent of the
Permanent Fund every year.
9:13:53 AM
He showed a slide of projected dividend appropriations over the
next eleven years. In about FY22 - FY24 it is likely there will
not be sufficient funds under the status quo to pay dividends.
He offered several low probability scenarios where this would
happen. He added that the dividend is projected to grow on a
real basis because the fund grows under the current formulation.
It is slightly higher than actual inflation, but it will also
experience volatility.
9:16:31 AM
He showed a slide depicting projected dividends per person based
on the current status quo. There will be limited funds available
after using the ERA to cover the deficit once the CBR is
depleted.
He highlighted the projected dividend appropriation and
projected PFDs per person under SB 128. The PFD would stay at
about $1,000 for the next decade and then decrease to under $500
by 2040. He noted dividends would increase or decrease with the
success or failure of resource development. The graph does not
capture future production of oil and is conservative in nature.
9:20:57 AM
ATTORNEY GENERAL RICHARDS showed the projected dividend
appropriation and dividend per person under SB 114. This formula
results in dividends that are 50 percent higher than those in SB
128. SB 114 also has a $1,000 floor, so additional funds needed
will come out of the ERA.
SENATOR MCGUIRE said that was correct.
9:22:37 AM
ATTORNEY GENERAL RICHARDS explained more about the consequence
of the dividend floor in SB 114. He predicted that additional
funds will be needed from the ERA given the oil production
forecast. He addressed consequences with having a floor and
giving up the "upside" to guarantee the "downside."
9:24:45 AM
CHAIR STOLTZE asked if SB 114 protects the PFD too much.
ATTORNEY GENERAL RICHARDS replied it is a policy decision. The
Governor thought having a dividend cap was a decent approach and
tying it to royalties was a good approach, but combining the two
was not a way the Governor wanted to go.
He highlighted graphs that included projected dividends per
person with a gas line - under SB 128 and SB 114. If there was a
gas line there would be higher royalties under both scenarios.
9:26:54 AM
He showed an analysis of potential increases in North Slope
production in rate-comparable pools, using the 50 percent
royalty dividend, under SB 128, and the impact per person.
CHAIR STOLTZE thanked Attorney General Richards.
9:29:22 AM
SENATOR MCGUIRE agreed with Attorney General Richards'
assumptions.
[SB 128 was held in committee.]
9:29:52 AM
At ease.
SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS
9:31:15 AM
CHAIR STOLTZE announced the consideration of SB 114.
SENATOR LESIL MCGUIRE, sponsor of SB 114, related that the chair
wishes to have a new committee substitute (CS) and she would
talk about the points she would like to be included in that CS.
She began by revisiting the five principles she had in mind when
crafting SB 114: the solution should retain a dividend, reduce
the volatility in the state budget, clearly expose the size and
cost of government, create an enduring solution, and be simple
and easy to implement.
She noted that SB 114 is the only bill that guarantees a $1,000
dividend. It strikes a balance between the amount that goes into
the general fund versus the amount that goes into dividends and
benefits the people the most. She said SB 128 reduces volatility
and does not purport to fill the $5.3 budget gap. She concluded
that the bill is understandable.
9:36:13 AM
She showed a graph depicting Alaska's fiscal situation comparing
spending with how the state is paying for government. Most of
the $5.2 billion in government costs is being paid for by
savings. She highlighted the fiscal gap, noting that only $1.8
in revenue is being earned.
9:38:08 AM
She listed the three proposals that have been introduced to the
legislature, all of which use Permanent Fund earnings.
CHAIR STOLTZE asked about a House version of SB 114.
SENATOR MCGUIRE replied that HB 303 was introduced in the House.
She noted that another option to access the corpus of the
Permanent Fund is to offer a Constitutional Amendment, but it
requires a vote in the next general election. Other options are
to reduce spending and size and cost of government or to raise
new revenue. She cautioned that the people will be angry if it
comes to this process.
9:41:40 AM
CHAIR STOLTZE commented that a Constitutional Amendment would be
putting a legal structure on the process.
SENATOR MCGUIRE concurred with Senator Stoltze. She said the
discussion about the constitutionally-provided Permanent Fund
and the statutorily-enacted ERA has been on-going for two
decades. The legislature has declined to go into the ERA,
however, there are differences about whether the fund and the
ERA should be enshrined together in the constitution. She
emphasized that there are only a few ways to reach a government
above the size of $1.8 billion and the state cannot wait until
the CBR and ERA are depleted to decide which ways to use.
CHAIR STOLTZE said voters might be more inclined to vote for
something after budget cuts are made first.
SENATOR MCGUIRE emphasized the consequences of waiting.
9:45:12 AM
She discussed other methods of reducing spending, size, and cost
of government to match current revenues and raise new revenue,
comparing current revenues and those raised under SB 128. She
pointed out that there are limits to the amount raised and costs
in setting up new taxes. She summarized that $3 billion in cuts
would still be needed.
She shared that all three proposals have been vetted in the
Callen Report to the APFC Board, which analyzed the impact of
the proposals to the Permanent Fund. Callen does not recommend
needing major asset reallocations for the Permanent Fund for any
of the three proposals and they predict that the fund should
remain viable.
CHAIR STOLTZE noted that the information was provided at the
request of Senator McGuire.
SENATOR MCGUIRE said the information lets everyone know that the
plans do not erode the value of the fund.
9:47:51 AM
She reviewed graphs of cash flow regarding how government is
funded currently and how it would be funded under SB 114. She
emphasized the simplicity of SB 114.
CHAIR STOLTZE asked if SB 114 has had legal questions.
SENATOR MCGUIRE noted no legal concerns with SB 114. She
emphasized that every plan has pros and cons. She reiterated
that SB 114 guarantees a $1,000 dividend, contains the potential
upside of 75 percent of royalties, and is simple.
9:50:06 AM
CHAIR STOLTZE pointed out that SB 128 requires a 3/4 vote to
drain the CBR to protect it.
SENATOR MCGUIRE agreed. She added that it also purports to
create a new general fund, which is untested and has "sweep
ability" and "retrieve ability" issues. She noted the
legislature has generously inflation-proofed the corpus a total
of $16 million.
9:52:10 AM
She addressed how SB 114 guarantees the $1,000 dividend. She
showed a graph of the history of PFDs.
She highlighted what happens to the dividend if none of the
Permanent Fund bills are adopted.
She explained how the Percentage of Market Value (POMV) approach
reduces the amount of volatility in the commodity of oil. She
suggested including a spending cap of 120 percent and said she
will offer it as an amendment.
9:54:33 AM
She showed how the legislature has addressed inflation proofing
by transferring a total of $16,235.5 million. She said under SB
114 there would be an additional 1.9 percent and it is a policy
call whether or not to divide it between dividends and the cost
of government or transfer it back to the corpus. She said she
will propose an amendment such that when the total value of the
ERA exceeds the target amount of four times the current year's
transfer, the excess shall be transferred to the principle of
the fund for inflation proofing.
9:56:01 AM
She summarized the cost of doing nothing and how the PFD would
be affected and what the budget reserves would look like. In
FY19 - FY21 the legislature would have to make the decision
whether to continue to pay a dividend or fund government. She
opined that the legislature will act with a combination of
budget cuts, changes to oil tax credits, and new revenues, as
well as with a bill such as SB 114.
SENATOR MCGUIRE concluded that SB 114 will add up to $2 billion
to the general fund. It guarantees an annual $1,000 dividend,
reduces volatility in the budget, grows the Permanent Fund,
maintains buying power in the corpus of the fund, and maintains
downward pressure on state spending.
9:59:20 AM
CHAIR STOLTZE stated that the budget reduction should happen
first before any of the plans are adopted.
[SB 114 was held in committee.]
10:00:07 AM
At ease.
SJR 1-CONST AM: GUARANTEE PERM FUND DIVIDEND
10:01:19 AM
CHAIR STOLTZE announced the consideration of SJR 1.
10:01:34 AM
SENATOR BILL WIELECHOWSKI, sponsor of SJR 1, introduced the
resolution. He called SJR 1 a historic debate. He said Alaskans
have always been wary about what the government does with their
money. He revisited the reasons the Permanent Fund was set up in
the first place, which was to provide future generations a share
in Alaska's wealth and to protect it. He stated that the
dividend is critically important to Alaskans and they want to
continue to receive it.
10:03:32 AM
He specified what SJR 1 does. It would put the earnings reserve
calculation of the dividend directly into the constitution. The
House and Senate would have to vote, it would have to pass by a
2/3 majority, and then the people would vote on it for it to
become law.
He noted that a significant number of public testimonies have
said not to touch the PFD. Those who want to use the earnings
reserve also recognize the importance of the PFD; very few
Alaskans are in favor of getting rid of it.
10:05:05 AM
SENATOR WIELECHOWSKI said SJR 1 proposes to use current PFD
calculations to enshrine it in the constitution; however, he
stated that the rate of return is negotiable. He said historic
returns have been 8.9 percent. He provided rough numbers for
calculating the rate of return, noting that the resolution does
not mean that the earnings reserve is unavailable.
10:07:25 AM
He discussed market rates and maintained that there is a self-
correcting mode available regarding PFDs. He emphasized that SJR
1 is a means of gaining the trust of Alaskans. He compared
impacts to the state from cutting dividends as similar to taxes
on mining or fishing. He stated that cutting dividends would
take between $700 million and $1 billion out of Alaska's
economy.
10:10:29 AM
THOMAS PRESLEY, Staff, Senator Wielechowski, Alaska State
Legislature, presented the sectional analysis of SJR 1 on behalf
of the sponsor. He said that SJR 1 puts a question to the people
of Alaska asking them whether or not the PFD program should be
put into the constitution. He explained that Section 1
establishes the Earnings Reserve Account (ERA) in the
constitution in order to keep the current transfer of money the
same as it is now.
He related that Section 2 (b) transfers monies from the ERA to
the dividend account and calculates a 5-year average. Subsection
(c)establishes the calculation for dividing up the amount
available for dividends
He said Section 3 replaces the current statutory ERA with the
constitutional ERA, and Section 4 places the resolution before
the voters in the next general election.
10:12:06 AM
He highlighted Permanent Fund returns. He noted, as of February
19, 2016, the principle of fund was about $50 billion. Over the
31.5 years of the life of the fund, there has been an annualized
return of about 8.9 percent. He showed the annual dividend
payouts from 1982 to 2015.
He explained the steps required to calculate the PFD for FY14
and the total amount available. He said the balance in the ERA,
as of December 31, 2015, is about $6.7 billion. Even if SJR 1
was approved by voters, the legislature would still have access
to other income in the ERA above the necessary amount for the
PFD.
10:13:58 AM
MR. PRESLEY addressed the great economic impacts of the PFD,
which is uniquely Alaskan. He emphasized that the PFD is well
spent by Alaska residents, largely within the state. Dr.
Goldsmith 2010 study of the PFD found that the purchasing power
of the PFD equated to about 10,000 additional jobs, 15,000 to
20,000 additional residents, and $1.5 billion in personal
income.
He related that a more recent report by Gunnar Knapp found that
reducing the deficit by $100 million and reallocating the PFD
accordingly would lead to a loss of about 728 jobs.
10:15:21 AM
He shared that Dr. Goldsmith's study reinforced previous
findings, including the ways in which the PFD was spent and the
impacts on the economy when spent by residents and not the
government. He credited much of the 80s boom to the spending
power of the PFD. He found out that the 2009 dividend added
about $900 million in purchasing power to the economy, roughly
equivalent to the total wages of state government or the retail
trade sector.
He listed the effects of the dividend: it created a constituency
to watch over government expenditures of the fund, allowed for
individual Alaskans to invest their oil wealth any way they
choose, though often back into the Alaskan economy, and reduced
the gap between income levels in Alaska. It has had a tremendous
impact on rural communities.
10:16:59 AM
He concluded that SJR 1 is only a resolution to put the question
before the people of whether the current dividend program should
be enshrined in the constitution. It does not bar the
legislature from appropriating excess income from the fund for
other purposes. It has become a significant economic force in
Alaska. If approved by the voters, it would be a promise to
every Alaskan that their constitutionally protected mineral
rights will be protected from government in perpetuity.
SENATOR MCGUIRE asked if Senator Wielechowski was open to
including stabilization of government at certain trigger points,
such as with a POMV approach.
SENATOR WIELECHOWSKI specified that SJR 1 is a constitutional
amendment and it would be challenging to include spending. He
was open to the idea.
10:18:59 AM
SENATOR MCGUIRE suggested guaranteeing a dividend and allowing
for a percentage going to the government.
SENATOR WIELECHOWSKI thought there was a great deal of concern
among people about losing their dividends and enshrining
something in the constitution will go a long way toward easing
their concerns.
10:20:09 AM
CHAIR STOLTZE noted reluctance by the administration to discuss
programs that are funded by the dividend. He appreciated the
discussion about the dividend's impacts on Alaska's economy.
SENATOR COGHILL agreed it was an appropriate conversation. He
opined that the ability of the government to use the ERA becomes
more difficult if the PFD is enshrined. It also brings up taxing
concerns.
10:23:14 AM
SENATOR WIELECHOWSKI recalled that in the past, Senator Green
proposed a similar resolution. He said he would confer with
legislative legal about the tax ramifications. He noted that
legal determined that the ERA could be accessed for government
purposes under this resolution. He believed the ERA would have
the same impact on dividends as it does currently.
SENATOR MCGUIRE concurred, but specified that the legislature
has declined to access the ERA. She asked if enshrining the
payment of the PFD out of the ERA would change the flexibility
of the government to use ERA funds.
10:24:59 AM
SENATOR WIELECHOWSKI deferred to his staff to comment.
MR. PRESLEY explained that legal found that the nature of
changing the ERA to more of a general account was not an issue
in SJR 1, and paying out the PFD, constitutionally, out of the
ERA does not change the nature of the account.
SENATOR WIELECHOWSKI concluded that it is a policy call.
CHAIR STOLTZE noted the state's dependency on the PFD. He wished
to have more discussion on the impacts of the PFD on the private
sector.
10:28:01 AM
SENATOR MCGUIRE noted similar principles at stake in both SJR 1
and SB 114. She commented on the importance of allowing Alaskans
a part in determining how their share of wealth will be used.
She pointed out that the question is what should the size and
cost of government, which also contribute to Alaskan's lives,
be.
CHAIR STOLTZE said Hammond's noble experiment has worked
effectively. He noted there are pros and cons of a
constitutional approach. He was looking forward to public
testimony on the issue.
10:30:42 AM
SENATOR HUGGINS commented on bills that are attempting to take
money out of the pockets of Alaskans. He feels that the proposed
state budget is too large and he is opposed to picking Alaskan's
pockets.
10:32:49 AM
CHAIR STOLTZE held SJR 1 in committee.
10:32:55 AM
There being no further business to come before the committee,
Chair Stoltze adjourned the Senate State Affairs Standing
Committee at 10:32 a.m.