HOUSE BILL NO. 306 "An Act relating to deposits into the dividend fund and income of and appropriations from the earnings reserve account; establishing a permanent fund dividend task force; and providing for an effective date." 1:33:04 PM REPRESENTATIVE JENNIFER JOHNSTON, shared that the bill built on the work done by the Permanent Fund Working Group and continued a conversation seeking a sustainable Permanent Fund for future generations. She shared that it had been an honor to serve as co-chair of the working group with Senator Click Bishop. The group was comprised of four members of the House and four members of the Senate and included House Finance Committee members Representative Merrick and Representative Wool. She reported that while the working group had not come to an agreement on the ideal Permanent Fund Dividend (PFD) amount, they all agreed the Permanent Fund needed to grow and be protected from effects of inflation. Co-Chair Johnston elaborated that the majority of the working group agreed on the need to live within the framework of SB 26 [Permanent Fund legislation passed in 2018] or the percent of market value (POMV). She referenced slide 5 of a presentation to the committee given by Department of Revenue Deputy Commissioner Mike Barnhill on the afternoon of March 9 [titled "HB 259 Supplemental Permanent Fund Dividend"(copy on file)]. She read the third bullet point on slide 5: "Structured (i.e., statutory) solution to the PFD is important to reducing annual fiscal uncertainty." She relayed that HB 306 started the conversation on how to address the structure and move away from the uncertainty that had existed for a number of years. Co-Chair Johnston relayed that the Permanent Fund Working Group had modeled many different scenarios, none of which had completely eliminated the deficit. The scenario proposed in HB 306 had come the closest [to eliminating the deficit] at the time. She highlighted that the current fiscal outlook for world markets had changed dramatically over the past couple of days. She looked forward to the committee's conversations that would account for the current market and looking into the future. She stated that like recent conversations on the House floor regarding HCR 13, common ground was most often found on the topic of ensuring the Permanent Fund was protected for future generations. Co-Chair Foster handed the gavel to Co-Chair Johnston. 1:37:06 PM REPRESENTATIVE CHUCK KOPP, introduced a PowerPoint presentation titled "HB 306: A Path Forward" (copy on file). He began on slide 2 and expressed gratitude to the Permanent Fund Working Group. He detailed that the group's work over the interim had brought them to the current point and showed that the legislature could reach consensus on an important topic like protecting the Permanent Fund. He moved to shared goals for Alaska on slide 3 including healthy and safe communities, a thriving private sector, an efficient government that upheld the law, and a strong, growing Permanent Fund. Representative Kopp moved to slide 4 titled "Why Protect the Permanent Fund." He detailed that historic investments in the fund had allowed it to grow from the initial $734,000 deposit to $68 billion as of several days earlier. He noted an update was likely needed. He elaborated that there had been recent discussion on the House floor about the growth of the fund, a sustainable draw, fiscal solvency, and the state's creditworthiness. He noted that the fund could be ephemeral at times, but it could be helpful to discuss the ways it had played into the state's shared history, outside of paying a PFD. He believed it was an opportunity to celebrate the fund's success, recognizing that the Permanent Fund would continue to have a major impact on Alaskan life. 1:39:17 PM Representative Kopp addressed goals for Alaska and how the Permanent Fund supported the goals on slide 5. He believed the outcomes listed on the slide were useful whenever concerns were vocalized about the POMV being a raid or theft. He expounded that fund earnings had helped the state respond to the opioid epidemic, the rise in crime, the 2018 earthquake, and the 2019 wildfire season. He continued that earnings had allowed Alaskans' tax burden to remain low despite the drop in oil prices. Additionally, the POMV had acted as the most effective spending cap in decades. He stated that the accomplishments further underscored the need to keep the fund strong. Representative Kopp moved to slide 6 and addressed how the state had been funding its services. The slide began with 1912 through statehood and present day and highlighted how the fund's earnings had become integral to running the state over time. In 1912, funding had come from industry taxes and an income tax. By 1977, significant oil revenue began to flow into Alaska. The income tax had been repealed in 1980 and in 2013 when oil prices dropped dramatically, the state had responded by cutting billions in the operating budget. The state's need to address the mathematical tension in its budget with the dividend and the POMV was continuing. Representative Kopp moved to slide 7 and discussed that deposits into the Permanent Fund had allowed the fund to grow. He detailed that deposits into the fund including a combination of mineral royalties and non-royalty legislative appropriations plus inflation proofing, had caused the fund to grow to roughly $66.7 billion. He pointed out that previous legislatures had understood the importance of growing the fund in the long-term, which had been done at the expense of short-term benefits through appropriations. 1:41:34 PM Representative Kopp reviewed how the POMV worked on slide 8. He explained that the Alaska Permanent Fund Corporation (APFC) calculated the total value of the Permanent Fund (principal and earnings) and then calculated 5.25 percent of the fund's value over the first five of the last 6 years. He noted the draw was set at 5.25 percent for FY 19 through FY 21 and 5 percent thereafter. The result became the maximum amount the state could spend from the Earnings Reserve Account (ERA). Lastly, the legislature appropriated the specified amount to pay for dividends and state services. Representative Kopp turned to slide 9 and discussed how to keep the Permanent Fund strong. He stated that in addition to the appropriations made to the fund's principal, there was more that could be done to support the fund's strength. Other ways to keep the fund strong included supporting and abiding by the POMV structure, paying out an affordable dividend, and supporting APFC's work to recruit and retain great investors. He acknowledged Co-Chair Johnston for her work helping APFC with its ability to recruit and retain some of the best investors in the country, which Alaska had benefitted from. 1:42:52 PM Representative Kopp turned to slide 10 titled "Why Act Now?" He believed the legislature had kicked the can down the road long enough. He clarified he was not laying the blame on anyone. He continued that the state's savings were nearly exhausted and with oil at such low prices, oil could not be expected to bail the state out of the $1.5 billion structural deficit. He highlighted that any new revenues would not solve the deficit in the current year. He noted that oil was currently around $34 per barrel and the forecast indicated prices heading into the $20s. Representative Kopp reviewed a slide addressing the need to change state statutes on slide 11. He explained there was a mathematical tension between revenues and costs. The change in statute was needed due to the gap illustrated on the slide. The slide showed the revenue picture paired with the state's expense picture in the governor's FY 21 budget and the size of the gap necessary to pay the statutory dividend. He continued that the gap caused unnecessary stress and uncertainty across the state. He noted that attempts to reduce the gap with $1.5 billion in cuts and cost shifting had not worked well. He detailed that legislators had heard from all of their communities on the devastating effects of absorbing the costs or having their share of petroleum property tax or fisheries tax clawed back to the state (actions taken to pay the whole dividend). He pointed out that if the gap occurred again in the following year, the state would have no savings to fill it. He expressed gratitude to Mr. Barnhill for underscoring the issue in his presentation the previous day. Representative Kopp shared that according to Fitch ratings (one of the three largest credit rating agencies in the U.S. other than Moody's and Standard and Poor's), the state's desire to pay a full statutorily calculated PFD elevated the state's fixed cost burden and reduced its ability to respond to future economic weakness, as revenue growth was expected to be modest. He stated the Coronavirus and downward spiral of oil were contributing to a state of future economic weakness. He noted that Fitch had made the statement five or six months back. 1:45:25 PM Representative Kopp turned to a graph showing the UGF revenue/budget status quo on slide 12. The graph illustrated the amount left unknown if no change was made in the current year. The top dotted line represented a budget with a statutory PFD and the gap between the budget, less dividends. He noted the gap was significant and $1.5 billion would be required to balance the budget. He highlighted that in the following year, the legislature could spend the remaining $500 million in savings and still have a deficit exceeding $1 billion. He reported that under the status quo, the annual gap would exceed the state's savings and would result in a crippling tax burden. Representative Kopp moved to slide 13 and addressed the two elements of the HB 306 plan, including an 80/20 split of the POMV and the review of the plan's effectiveness by the Permanent Fund Task Force within six years. He explained that the timeframe had been selected because it had taken since 2014 to present day to evaluate the situation. He detailed that under the 80/20 split, of the $3.1 billion in FY 21, 80 percent would go to fund state obligations (education, public safety, transportation) and 20 percent went to dividends. Representative Sullivan-Leonard looked at slide 13. She was trying to determine how the 80/20 formula had been decided upon. She believed the task force had received many different proposals. Co-Chair Johnston clarified that the Permanent Fund Working Group was different than the Permanent Fund Task Force that would review the plan's effectiveness in six years under the proposed legislation. Representative Sullivan-Leonard asked if the 80/20 POMV split was a result of the working group or had been formed independently. Representative Kopp answered that much of the working group's effort was incorporated in the bill. He elaborated that the 80/20 split was a starting point for the conversation as laid out by Co-Chair Johnston. He shared that the committee would be presented with different modeling scenarios - it was possible to look at the split in many different ways. He explained that the bill began with the 80/20 split because it worked the best for Alaska out of the scenarios that had been available at the time of the bill's introduction, which the modeling would show. Representative Sullivan-Leonard noted that the proposal brought forward by her Mat-Su representative was very different from the bill's proposal. She was trying to figure out who the author of the proposal was. She asked if Co-Chair Johnston had proposed the 80/20 split in the bill. Co-Chair Johnston that she had been a co-chair on the Permanent Fund Working Group, and the 80/20 split had been one of the scenarios the group had modeled. She elaborated that it was one of the few scenarios that provided a glidepath of sustainability. Representative Sullivan-Leonard asked who had brought the proposal forward. 1:49:28 PM Co-Chair Johnston answered that the House Rules Committee had brought the bill forward via herself as the vice-chair and the committee chair Representative Kopp. Representative Sullivan-Leonard shared that she was trying to determine who brought the proposal forward. She asked if it had been Senator Bishop or another group. She noted there had been people tasked to work on different modeling. Co-Chair Johnston answered that she, Representative Kopp, and the majority of the House Rules Committee had brought the proposal forward. She detailed that two things had been brought forward with the Permanent Fund Working Group: 1) the need to maintain the structured draw and 2) agreement on the modeling presented to the group. She added that it was possible to use numbers from the past week in modeling, but it may not contain all of the nuances currently occurring in the world markets. Representative Kopp added that the bill was informed by the working group but authored by himself with the assistance of Co-Chair Johnston. He added that he was proud to be the author of the legislation. He turned to slide 15 and detailed that under the bill, a Permanent Fund Task Force would review and evaluate the Permanent Fund and PFD after six years. The task force would include three House members, three Senate members, and an appointee by the governor. He elaborated that the task force was charged with giving Alaskans a performance review for HB 306 and the Permanent Fund. The task force would consider the effectiveness of the plan and determine whether the Permanent Fund continued to be sustainable. The goal was for the task force to evaluate whether a change was necessary (the same thing legislators had been evaluating since 2014). He stated that 2026 had been chosen in order for legislators to have a full two-year legislature to consider the recommendations (the 35th legislature). 1:51:40 PM Representative Kopp turned to a graph on slide 16 and discussed the impact of the plan on UGF revenue/budget. He noted the graph had been produced by LFD to illustrate the plan's performance under the FY 21 budget. He relayed that LFD would provide testimony to the committee regarding the bill and could address impacts on a more detailed level. He pointed to the significant difference between the budget gap under the status quo compared to the bill. He pointed out that while a modest draw from savings would need to occur, the gap would be far more easily filled with reductions or revenues than the $1.5 billion gap under the status quo. He continued that state savings also had a much longer life under the proposed scenario. 1:52:43 PM Representative Kopp advanced to slide 17 and spoke to the impacts of state savings. The slide included a bar chart showing the ERA growth under HB 306. He highlighted that under the bill proposal the ERA grew and the CBR provided a glidepath of about six years to allow the legislature to look at new revenues/spending reductions. 1:53:16 PM Representative Kopp looked at slide 18 that illustrated the difference between the traditional statutory PFD and the PFD under the proposed scenario in HB 306. Under the legislation, the PFD was roughly $900. He turned to slide 19 to show how the amount compared to historical PFDs. He pointed to the black line reflecting the PFD (in nominal dollars) and noted the volatility over time. The slide also showed the average dividend over time. Representative Kopp moved to slide 20 and highlighted that the average past PFD amount was $1,170 and under the legislation, the 2020 PFD would be $900. He remarked that it was popular to use the numbers based on the statutory PFD formula, but he believed it was more realistic to compare the amount to PFDs previously given to Alaskans. He noted there was a $270 difference between the number in the bill and the historical average. Representative Kopp turned to slide 21 titled "HB 306 Moves Us Forward." He detailed that the bill provided a path toward being able to plan for the state's future instead of living in a crisis mode. He elaborated that the bill would unlock the ability for the state to improve its credit ratings, stabilize PFD amounts, stabilize the budget process, and ultimately assist with gaining a true understanding of the budget picture. He stated that the legislature had begun every budget process in near bedlam since the drop in oil prices. He stressed that nobody won when every year was met with the possibility of a government shutdown, mass layoffs, or new taxes. The bill would provide a built-in baseline to work from. Additionally, the bill would provide a set of shared facts about the budget outlook. He clarified that the bill did not take anything off the table except the overspending of the ERA and eroding the future of the state's children. 1:55:32 PM Representative Kopp turned to decisions to be made on slide 22 including spending priorities, sustainability of the PFD and Permanent Fund, and other revenue options. He stated that the options accurately reflected the current fiscal options. He questioned whether the legislature was willing to continue the budget debate year after year. He wondered if the legislature was interested in raising taxes to pay for dividends, which would become necessary as soon as 2021 due to minimal savings. Alternatively, he wondered if the legislature was willing to make difficult decisions at present that would allow for the preservation of the Permanent Fund and PFD and would provide economic stability and community security. The question was what the highest and best use of the fund was. He asked if the fund was to be used as an ATM when the state needed money and whether it was considered as a legacy to be left to future Alaskans. 1:56:28 PM Co-Chair Johnston recognized that Representative Knopp had joined the meeting. Vice-Chair Ortiz thanked the sponsor for bringing the bill forward that started a much needed conversation. He asked if there had been any consultation with economists on how a smaller PFD may impact the state's economy. Representative Kopp answered that he was well aware of reports that had been authored and given to the legislature showing what a reduced dividend amount could mean across Alaska. He noted that some of the reports did not include increased state services. There were many small communities in Alaska and the numbers of people collectively accounted for a very small percent of the state services received; however, in order to pay a full PFD, it would be necessary to wipe out the services the small communities were receiving. He confirmed that he had considered the information that had already been put on the record in terms of what the dividend meant to the economy. Co-Chair Johnston noted Vice-Chair Ortiz's an ISER report. She shared that the report had been done before the massive growth in the Permanent Fund and PFD had occurred. She believed it was something that was forgotten. Representative LeBon asked if the bill intended for the legislature to fund the PFD first with 20 percent of the POMV and all other funding decisions would follow. Representative Kopp answered that the formula would provide a baseline to start from. He explained that the legislature would know the money available for state services and what would go to the dividend. He reasoned that the absence of a resolution on the PFD and trying to reconcile the plummeting energy market and oil prices seemed to be what kept the legislature in session for five to six months of the year. Structurally, the bill would tackle the most difficult thing - the PFD - first, which would free up bandwidth to address the entire budget and determine the true deficit. He elaborated that the $1.5 billion deficit was only related to the statutory PFD. He clarified that the deficit was tied into state agency spending; however, the dividend was nearly twice as large as the largest state agency. The PFD was a significant cost factor, which was addressed by the bill. 2:00:55 PM Representative LeBon considered the perfect economic storm taking place that was associated with the decline in oil prices and production. He asked if a $900 PFD and a state income tax was a realistic possibility given the current economic climate. Representative Kopp answered that the state could be in trouble in any scenario where it was paying a dividend without adequate funding. He elaborated that there was no safe formula that could predict what was currently taking place in the market. He referenced the current PFD calculation by APFC that was based on an average of five of the previous six years. He remarked that the current year would likely shape up to be tough. He highlighted the difficulty in coming up with a formula that could accurately predict the current market. He relayed that if a dividend was paid base on the state's ability to pay, it would have to be done with the current legislative appropriation approach. 2:02:16 PM Representative LeBon could see the day coming where the legislature may be faced with overdrawing the POMV if it was locked into using 20 percent of the 5 percent POMV draw [for the PFD] and/or incorporating a state income tax to fund the PFD. He believed if the PFD was paid first, as under the bill proposal, it would be necessary to figure out a way to make that happen. He furthered that the PFD would be put at the tip of the mountain if paying it first meant the possibility of instituting a tax, overdrawing the ERA, or cutting agency spending. Co-Chair Johnston added that model scenarios would be presented the following day and committee members would have the opportunity to ask more in depth questions. Representative Carpenter looked at slides 12 and 16 that showed revenue versus spending projections. He pointed to a handout in members' packets generated by the Legislative Finance Division that included multiple charts (copy on file). He asked what forecast had been used to generate the revenue bars on slides 12 and 16. Representative Kopp answered that the graphs used the forecast that had been available when the information had been compiled about two weeks earlier. He noted that oil prices had been higher and in the mid-$50s. Representative Carpenter noted that one of the slides showed the fall forecast had been used. He asked for the percent increase used over time in the solid black line reflecting the budget less dividends. Representative Kopp deferred to his staff. GRACE IRVINE, STAFF, REPRESENTATIVE CHUCK KOPP, relayed that LFD would present to the committee the following day. She recognized that the slides compiled as recently as one week earlier no longer reflected the reality of the budget and updated forecasts. She deferred the questions until the LFD presentation. Representative Carpenter referenced the LFD handout in members' packets that listed the annual increase as the rate of inflation at 2.25 percent. He noted that he was looking at his own chart and believed revenue for FY 21 would be about $700 million. He remarked that the change was drastic from the current projection. 2:05:06 PM Co-Chair Johnston agreed that there was a new day coming. Representative Carpenter referenced discussion on the need to pay a PFD the state could afford. He pointed out that the same logic applied to state spending. He highlighted the need for affordable state spending levels. He believed the discussion about new revenue and eating up a PFD needed to include a discussion about spending levels. Representative Kopp thanked Representative Carpenter for his comments. He recognized that Representative Carpenter and Representative LeBon had both touched on an important issue. He highlighted that the bill was only one important piece of a sustainable fiscal plan that involved controlling state spending and looking at new revenues. HB 306 was HEARD and HELD in committee for further consideration.