HJR 18-CONST AM: PERMANENT FUND; POMV;EARNINGS  1:49:59 PM CHAIR CLAMAN announced that the next order of business would be HOUSE JOINT RESOLUTION NO. 18, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 1:50:26 PM REPRESENTATIVE JONATHAN KREISS-TOMKINS, Alaska State Legislature, said HJR 18 would do two things. First, he said, it would roll the Permanent Fund earnings reserve account (ERA) into the principal so that the entirety of the Alaska Permanent Fund is constitutionally protected. Second, he said, it would provide for an annual 5 percent of market value (POMV) draw from the new, combined, and constitutionally protected Permanent Fund that cannot be broken and cannot be overdrawn by the legislature. 1:51:10 PM KEVIN MCGOWAN, Staff, Representative Jonathan Kreiss-Tomkins, Alaska State Legislature, said it is worth noting that the Alaska Permanent Fund Corporation has issued four resolutions that mention support for a constitutionalized POMV: Resolutions 00-13, 03-05, 04-09, and 18-04. He quoted Resolution 04-09: "Now, therefore, be it resolved by the Board of Trustees that the Board reaffirms its commitment to a constitutional amendment that provides for protection of the Fund by application of a POMV payout mechanism." 1:51:56 PM REPRESENTATIVE EASTMAN asked why this is being presented as an amendment to the Constitution of the State of Alaska. REPRESENTATIVE KREISS-TOMKINS said there are two reasons, the first of which is that the current structure of the Permanent Fund is susceptible to risk. He said a "rough patch in the economy or the markets" could cause the ERA to dramatically contract and potentially hit zero. He noted that this nearly happened during the Great Recession. He said that, under Senate Bill 26 [Passed during the Thirtieth Alaska State Legislature], a zeroed-out ERA would mean an inability to fully distribute Permanent Fund dividends (PFDs) and/or pay for certain public services. He opined that HJR 18 would resolve the unnecessary risk of having a volatile ERA and simply hoping it can survive market downturns. He said the second reason for introducing a constitutional amendment is for the legislature to resolve never to draw more than a sustainable amount from the permanent fund. He said 5 percent would be the cap and this would forever protect the Permanent Fund. REPRESENTATIVE EASTMAN asked what he anticipates the impact of the constitutional amendment to be on the PFD. REPRESENTATIVE KREISS-TOMKINS said there would be no direct impact on the PFD and noted that the PFD is not mentioned in the amendment. He stated he does not mean to pretend that there are not indirect impacts to the PFD. He said, "When we talk about the Permanent Fund [and] ... the state budget, everything is interconnected." He said that, ultimately, HJR 18 would leave it to the Legislature to decide what the PFD should be. He said, if it were the will of the legislature, it could continue to pay the full statutory amount of the PFD. He noted that this year's dividend amount is approximately $1.9 billion and the 5 percent POMV draw is approximately $2.9 billion. He said HJR 18 intentionally does not address the question of the PFD. He stated it is not his intent to promote a dividend of a certain size through the amendment. He said his primary concern is that there might not be dividends in coming decades if the Permanent Fund is not fully constitutionally protected. 1:56:10 PM CHAIR CLAMAN opened public testimony on HJR 18. After ascertaining that no one else wished to testify, he closed public testimony. 1:57:05 PM REPRESENTATIVE EASTMAN highlighted language located in section 3 on page 2, line 8 of HJR 18. He observed that the proposed constitutional amendment would take the unencumbered balance of the ERA, which pays dividends, and deposit it in the corpus. He asked why. REPRESENTATIVE KREISS-TOMKINS said that section would effectively roll the ERA into the principal of the Permanent Fund. He said it is worth mentioning that the constitutional amendment proposed in HJR 18 would not take effect until June 30, 2022. He said this means the Permanent Fund would remain as currently structured for a few more years, so a future legislature could elect to transfer funds from the ERA to the principal or another account. REPRESENTATIVE EASTMAN said there is about $18.4 billion in the ERA. He asked, assuming that amount moves to the corpus and the state operating budget remains similar in size, whether the POMV draw restriction would effectively reduce the size of the PFD during a down year. REPRESENTATIVE KREISS-TOMKINS said there are two answers to that question: one political, the other mechanical. Mechanically, he said, the answer is no, as HJR 18 would do nothing to affect the size of the dividend. He noted that Representative Eastman's question is premised on the operating budget remaining unchanged. He said that is a question of what the legislature does and what Alaskans want. He spoke to the difference between his personal priorities and those of Governor Michael J. Dunleavy. "But," he continued, "nothing changes from present," as the legislature is currently determining how much money goes to state services and how much goes to PFDs. He stated that, should HJR 18 pass, it would mean that the legislature could not draw an unsustainable amount of money out of the Permanent Fund for any reason not for dividend funds and not for state services. He said HJR 18 is agnostic in its reasoning; it simply seeks to protect the Permanent Fund from an unsustainable draw. 2:02:11 PM REPRESENTATIVE EASTMAN said the PFD is currently calculated based on a 5-year rolling average so one bad year flanked by good years would be averaged out. He suggested that, should HJR 18 pass and PFDs be limited by a sustainable draw, then a down year could result in a small dividend or no dividend at all, regardless of political will, as the rolling average could not be factored. REPRESENTATIVE KREISS-TOMKINS deferred to Alexei Painter from the Legislative Finance Division. He said, "HJR 18 looks at a 5-year average ... [and would not] change the statutory formula for the dividend, so that would also remain a 5-year average." 2:04:48 PM ALEXEI PAINTER, Fiscal Analyst, Legislative Finance Division, Alaska State Legislature, said it is theoretically possible that the dividend calculation would exceed the 5-year moving average of 5 percent, though observed, "I think you would have to be stretching the bounds of realistic investment growth, so that you would have so much realized income that the dividend formula exceeded that 5 percent." He opined that it would be extremely difficult for the Permanent Fund to grow quick enough so that the 5-year average would be insufficient. He noted that previous down years caused the PFD to decrease much more drastically than the moving average of the balance. For example, he said, during the 2008-2009 recession, the dividend calculation decreased from approximately $1,800 to about $800 because the one bad year brought the average down so far. He noted that the value of the Permanent Fund decreased by less than 20 percent during that bad year, so a calculation based on the POMV would be more than adequate to pay for the PFD even if there was a down year. He observed that the dividend will be more volatile than the POMV will be, so bad market issues should not cause any issues. 2:06:23 PM REPRESENTATIVE EASTMAN established a hypothetical scenario in which a market crash results in no positive return on the Permanent Fund. He asked how much would be available for payment of a dividend and where the legislature would go for that money. MR. PAINTER asked him to clarify whether he is referring to the current constitutional construct or-- REPRESENTATIVE EASTMAN interjected that he meant his scenario to occur after the passage of HJR 18. MR. PAINTER said the 5-year average balance would still be a positive number even if there is one year with no earnings. He commented that changes in earnings should not significantly affect the POMV draw because the draw would be based on balances and not earnings. REPRESENTATIVE EASTMAN said, "Let's say we have a year like this year [except] we're not making any money because the market crashed." He asked how much would be available to the legislature to spend on the budget "and still draw a dividend from that amount." MR. PAINTER said, if HJR 18 were in effect, even if the earnings were zero, the POMV draw would be based on balances through the end of fiscal year 2018, so the full POMV draw of $2.9 billion could still be spent. He said that represents the stability of a POMV draw because there is still a balance available even if there is a downturn in earnings. 2:09:20 PM CHAIR CLAMAN asked for verification that HJR 18 would essentially eliminate the ERA and that earnings would simply roll into the Permanent Fund. He continued, "Then ... if there were $100 billion in the fund and the rate was 5 percent ... then there would be $5 billion for the legislature to appropriate as it sees fit." He added that the legislature would also have revenue to spend, and from that sum would issue dividends of a value based on its own determination. MR. PAINTER said that is correct. He said the earnings amount would not be the controlling factor, rather it would be the POMV calculation. CHAIR CLAMAN asked whether other accounts including the Constitutional Budget Reserve Fund (CBRF) and the Statutory Budget Reserve (SBR) Fund would be counted into the POMV calculation, or if the draw only relates to the funds in the Permanent Fund. MR. PAINTER said it would only be the balances in the Permanent Fund. CHAIR CLAMAN asked if it is true that the current POMV calculation includes the "amounts in some of those other funds that the Permanent Fund is managing" MR. PAINTER said no, Senate Bill 26 specifically excludes from the calculation "the Mental Health Trust money" and others that are managed by the Permanent Fund. 2:11:21 PM The committee took a brief at-ease from 2:11 p.m. to 2:12 p.m. 2:11:57 PM REPRESENTATIVE LEDOUX noted that she heard HJR 18 in the House State Affairs Standing Committee. She said she would not support any legislation relating to the Permanent Fund until the size of the dividend is determined. 2:12:25 PM REPRESENTATIVE EASTMAN opined that HJR 18 attempts to enshrine "budget strategy" and puts off determining the size of the dividend "until everything else has been decided." He said that is concerning to him, as it makes the dividend the lowest of the legislature's spending priorities. He stated that his constituents believe it should be a high priority. 2:13:14 PM REPRESENTATIVE Stutes moved to report HJR 18 out of committee with individual recommendations and the attached fiscal notes. REPRESENTATIVE EASTMAN objected. A roll call vote was taken. Representatives Shaw, Stutes, and Claman voted in favor of reporting HJR 18 out of committee. Representatives LeDoux and Eastman voted against it. [Lacking the required majority vote of the full committee membership, HJR 18 failed to move out of committee by a vote of 3-2; HJR 18 was brought before the committee again at timestamp 3:07:36 PM.] HJR 18-CONST AM: PERMANENT FUND; POMV;EARNINGS  3:07:36 PM REPRESENTATIVE STUTES moved to rescind the committee's previous action on HJR 18. REPRESENTATIVE EASTMAN objected. REPRESENTATIVE LEDOUX asked for clarification that rescinding action would mean the committee would vote again on HJR 18. CHAIR CLAMAN answered yes. REPRESENTATIVE EASTMAN removed his objection. There being no further objection, HJR 18 was before the committee. 3:08:36 PM REPRESENTATIVE STUTES moved to report HJR 18 out of committee with individual recommendations and the accompanying fiscal notes. REPRESENTATIVE EASTMAN objected. A roll call vote was taken. Representatives Stutes, Kopp, and Claman voted in favor of moving HJR 18 out of committee. Representatives LeDoux, Eastman, and Shaw voted against it. Therefore, HJR 18 failed to move out of committee by a vote of 3-3.