SENATE BILL NO. 103 "An Act relating to deposits into the dividend fund and appropriations from the earnings reserve account; and providing for an effective date." 10:08:15 AM Senator Micciche MOVED to ADOPT the committee substitute for SB 103, Work Draft 31-LS0654\U (Nauman, 4/9/19). Co-Chair von Imhof OBJECTED for discussion. 10:08:35 AM CO-CHAIR BERT STEDMAN, SPONSOR, explained the committee substitute. Co-Chair von Imhof WITHDREW the OBJECTION. There being NO OBJECTION, it was so ordered. 10:10:23 AM Co-Chair Stedman said that the bill would take the percent of market value and adjust the split, or which portion went to the PFD, and which portion went to other expenditures or was reinvested back in the fund. Co-Chair Stedman explained the Sectional Analysis (copy on file): Sec. 1 & 2: Removes from AS 37.13.140(a) the 1982 formula for calculating the amount available for distribution and leaves the Net Income language for accounting purposes. Adds language to AS 37.13.140(b), the Percent of Market Value (POMV) calculation for the Permanent Fund draw, stating that the amount for appropriation cannot exceed the balance of the Earnings Reserve Account (ERA). Section 1 inserts the language into current statute; Section 2 is necessary to accommodate the delayed effective date of the same statute when the POMV draw rate "steps down" effective July 1, 2021 (Fiscal Year 2022). Sec. 3: Amends AS 37.13.145(b) to enact the "split" of the POMV draw: 50 percent to dividends and 50 percent to the general fund. Sec. 4: Conforming: AS 37.13.145(c) states that inflation proofing payments may not be used to increase the value of Amerada Hess subaccount. Sec. 4 makes technical changes in this statute to conform with changes made by this bill. Sec. 5: Conforming: AS 37.13.145(d) states that funds from the Amerada Hess settlement cannot be used for dividends. Section 5 makes technical changes in this statute to conform to changes made by this bill. Sec. 6: Conforming: AS 37.13.300(c) states that net income from the Mental Health Trust Fund is not included in calculations for the Permanent Fund. Section 6 makes technical changes in this statute to conform to changes made by this bill. Sec. 7: Conforming: AS 37.14.031(c) states that the computation of net income of the Mental Health Trust Fund shall be computed in the same way as the Permanent Fund. Since the POMV split makes the net income calculation for the Permanent Fund obsolete, section 7 replaces the reference with a net income calculation. Sec. 8: Conforming: AS 43.23.025(a) defines the formula for calculating individual dividends once the amount available for appropriation is known. Section 8 makes technical changes to conform to changes made by section 3 of this bill. Sec. 9: Conforming: Repeals statutes that are no longer needed: AS 37.13.145(e) & (f), which limit the draw to the net income calculation being repealed in this bill. Sec. 10: Effective date for Section 2 of this bill. 10:15:29 AM Senator Wilson asked about the language in Section 3, and the use of the work may rather than shall. 10:16:03 AM Co-Chair Stedman replied that the language was suggested language, and that the committee could weigh in on how restrictive or broad the language should be. 10:16:30 AM Senator Wilson felt that stronger language would assure that the rules were followed. 10:17:13 AM Co-Chair von Imhof interjected that the work shall could connotate a dedicated fund, which was potentially unconstitutional. 10:17:25 AM Senator Wielechowski was curious about the 2018 effective date. 10:17:39 AM Co-Chair Stedman said that the effective date concept considered budget cycles. He relayed that he was open to all discussions and possible committee changes. 10:18:40 AM Co-Chair Stedman discussed the presentation, "Senate Bill 103; Senate Finance Committee; April 10, 2019" (copy on file). He looked at Slide 2: The Permanent Fund was established in 1976 by a vote of the people to save a portion of Alaska's mineral wealth for future generations and limit overspending by the legislature. 10:19:14 AM Co-Chair Stedman highlighted Slide 3: The Permanent Fund is an Alaska success: current value of $64 billion from a total contribution of $40.4 billion. Co-Chair Stedman said that chart sowed the growth of the permanent fund overtime. The top bar represented the ERA. He shared that the state has a formula driven dividend, established when the portfolio was smaller. The portfolio had grown overtime to over $60 billion. The formula took the 5-year average of gains and losses and net income to pay out a dividend to every resident of the state. He said that the passage of SB 26 had created a linking problem between how the dividend was calculated and how the POMV was drawn. A Strong bull market resulted in bigger dividends and currently the formula targeted a $3000 dividend, which took a substantial percentage of the POMV draw. He said that the dividend today, after a decade long bull market, took a bigger portion. He directed committee attention to 2008, 2009, 2010, and recalled conversations then over concern about the declining financial markets and possible politics involved in the management of the PFD at that time. He noted that in 2003 the gold bar on the chart nearly disappeared. He stated that looking over the past several years, a historical distortion could be seen of a massive ERA driving a large dividend. He shared that the hope was to create a smoothing of the dividends and the cash flow to the general fund, when it was needed. He said that the smoothing mechanism looked back over the past 5 years, averaged the market value, then took 5.25 percent to pay out dividends and or state core services. He said that stretching out 5 years helped reduce volatility in the cash flow. He said that the smoothing made the dividend more stable. 10:25:17 AM Co-Chair Stedman addressed Slide 5, "The ERA is variable and uncertain. By its nature it lacks the stability to be relied upon for budget stabilization." Co-Chair Stedman pointed to 2009, when there was $420 million in the ERA, $29.5 constitutionally prote4cted. He lamented that $420 million would not meet the states current obligations. He noted that under POMV, in 2003 the entire ERA would have to be used to pay dividends. He stressed that the dividend calculation needed to be modified to coincide with the POMV structure. He noted the targeted numbers for 2019 and warned that the legislature needed to deal with the massive growth in the ERA. He warned that the ERA should not be relied on for both dividends to residents and any operational assistance to the state. He said that even if there was no operation assistance to the state the dividend was in peril by being focused in the ERA. 10:27:23 AM Co-Chair Stedman discussed Slide 4, "SB 103 Protects the Permanent Fund." The slide offered the basic layout of the draw and the split. He hoped that the final bill would be transparent and understandable by the citizens of the state; the people of Alaska are the collective owners of the entire portfolio. The slide reflected a 50/50 split, which Co-Chair Stedman said was a proposal for the purpose of discussion only. 10:30:19 AM Co-Chair Stedman discussed Slide 6, "SB 103 Doesn't Alter the Fund's Principles; Save and Grow": SB 103 limits any draw from the Fund to a maximum 5 percent of its 5-year average value. This draw limit is conservative and sustainable. 5 percent is comfortably under the Fund's growth performance. Co-Chair Stedman shared that the 5 percent long-term was a reasonable target and was set in statute. This percentage could be higher or lower and would be under discussion. He said that when the distribution rate was set at 5 percent it was driven by the asset allocation and performance of the PFD and a deliberate effort had been made not to distort and push the PFD asset allocation; the draw rate should not be so high that APFC had to chase risky assets to produce the return, or so low that the sharing of the wealth was inequitable for future generations. He said that SB 26 recognized APFC was a separate entity that knew the cashflow that needed to be produced to the treasury in advance and prepare their portfolio prepared accordingly. 10:32:45 AM Co-Chair von Imhof noted that the bill did not address the draw rate in SB 26 but reiterated the draw rate as 5 percent starting in 2021 and addressed the split of that 5 percent. 10:33:12 AM Co-Chair Stedman agreed. 10:33:31 AM Co-Chair Stedman looked at Slide 7, "SB 103 Protects the Permanent Fund; Let's Talk Dividends": The dividend (est. 1982) has disbursed $22b to  Alaskans.    It is an equitable distribution of resource wealth to those who own the resources. SB 103 provides a predictable and transparent dividend via a 50/50 formula. Dividends will once again be reliable and linked to the value of the fund. 10:34:12 AM Co-Chair Stedman addressed Slide 8, "Comparison of 1982 Formula and SB 103." Co-Chair Stedman noted that the chart offered a linear interpretation and reminded committee members that the market was anything but linear. He said that the draw rate on the first row and relayed that the long-term objective was to get to 5 percent. He spoke to the second row, which showed the total POMV draw and was the total amount of money that could be drawn from the PFD in any given year. He moved to the 1982 formula, which was the current dividend calculation, $3332 per resident in FY 2020. He stated that in SB 103, the transfer dropped from $1.9 billion to $1.5, the split would be 50/50 and the PFD would be $2285. He related that the numbers depended on the strength of the ERA and the financial markets; a ten-year bull market was hard to beat. He pointed to FY 2028 and noted that the dividend would be reduced to $2600, but there would be more stability. He hoped for input from committee members to craft the legislation to ensure the long-term survival of the PFD and to restrict the ability of the governor and the legislature to overdraw the PFD and reduce purchasing power; net real losses in market value would destabilize the PDF for future generations. 10:38:56 AM Senator Micciche requested a graph like the one on Slide 8 beginning in 2000. He wondered whether income was currently calculated excluding unrealized gains and losses. Co-Chair Stedman replied in the negative. He said that current income used realized gains and losses in income for the dividend formula. He deferred to Angela Rodell, Executive Director, Alaska Permanent Fund Corporation for more information. 10:40:56 AM Senator Olson asked whether the APFC Director and Board of Trustees had weighed in on the legislation. 10:41:06 AM Co-Chair Stedman deferred to Ms. Rodell. 10:41:31 AM Co-Chair von Imhof said that how the money was spent was the per view of the legislature. She asked why the presenter had landed on the 50/50 split. 10:42:12 AM Co-Chair Stedman stated that he had tried to gauge where there would be public support. He thought that the 50/50 split was a good starting point for discussions. He added that a 50/50 split would take time to implement and that the state may need financial assistance from the APFC to meet its obligations without massive budget cuts. 10:44:32 AM Senator Bishop spoke to Slide 3. He stressed that small dividend payments had gone out in the past, without public outcry, and felt that the 50/50 split was a good idea. He believed that the effective rate could be lowered to 4.5 percent. 10:46:35 AM Co-Chair von Imhof agreed that the 50/50 split was a good place to start. She pointed out to the committee that it would require, based on the current budget, over $800 million in cuts. She argued that a 50/50 split may seem fair, but that there were many factors that needed to be discussed. 10:48:30 AM Senator Wilson said that people had been happy with lower dividends in the past because they knew what was happening. He suggested that people did not become outraged until the government began messing with the formula. He said he was in favor of a 50/50 plan. He thought the constitution should be changed with a vote of the people. He worried about tinkering with the formula to feed the appetite of government. 10:50:59 AM Co-Chair Stedman thought that the predictability of the PFD payout and the cashflow to the treasury would be best for the state. He believed that the decision was a multi-decade one. He added that LFD would be working to provide the historical data requested by Senator Micciche. 10:51:55 AM Senator Shower noted that the original language in SB 26 had a 70/30 split. He said that the narrative had been driven that the money belonged to the government, and the public as being allowed a portion. He thought the 50/50 seemed like an equitable split. He lamented that the public did not trust the legislature to follow statute. He offered an analogy about a fish countered by one involving Caesar. 10:54:40 AM Senator Wielechowski stressed that the maximum benefit of the resource should be provided to the people. He felt that government had received its fair share; the peoples share was a tiny fraction of the total value of the oil produced in the state. He expressed concern with changing the language from shall transfer to may appropriate because it could lead an even smaller share going to Alaskans. 10:57:07 AM Co-Chair von Imhof discussed housekeeping. SB 103 was HEARD and HELD in committee for further consideration.