Legislature(2021 - 2022)GRUENBERG 120
04/20/2021 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing|| Department of Public Safety, Commissioner | |
| HJR7|| HB73 | |
| HB5 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HJR 7 | TELECONFERENCED | |
| *+ | HB 73 | TELECONFERENCED | |
| += | HB 5 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
HJR 7-CONST. AM: PERM FUND & PFDS
HB 73-PERM FUND; ADVISORY VOTE
3:53:29 PM
CHAIR KREISS-TOMKINS announced that the next order of business
would be HOUSE JOINT RESOLUTION NO. 7 Proposing amendments to
the Constitution of the State of Alaska relating to the Alaska
permanent fund, appropriations from the permanent fund, and the
permanent fund dividend and HOUSE BILL NO. 73 "An Act relating
to use of income of the Alaska permanent fund; relating to the
amount of the permanent fund dividend; relating to the duties of
the commissioner of revenue; relating to an advisory vote on the
permanent fund; providing for an effective date by repealing the
effective date of sec. 8, ch. 16, SLA 2018; and providing for an
effective date."
3:54:03 PM
BRIAN BREFCZYNSKI, Office of the Governor, relayed that securing
Alaska's fiscal future was the governor's top priority for the
state and its residents. The first step towards achieving that
goal, he said, was to protect the Alaska Permanent Fund and
ensure the continuation of the Permanent Fund Dividend (PFD) for
future generations of Alaskans. He pointed out that after years
of Constitutional Budget Reserve (CBR) and Statutory Budget
Reserve (SBR) spending, the Earnings Reserve Account (ERA) and
its potential depletion was a topic of discussion. He said the
governor recognized the risks associated with that conversation
and offered this legislation in response. HB 73 would establish
a statutory framework to protect the permanent fund and provide
for a sustainable annual draw; further, of the amount available
for appropriation, fifty percent would be designated for
dividends. He conveyed the governor's belief that the will of
the people must be included in this decision; therefore, the
proposed constitutional resolution [HJR 7] would require a vote
of the people. It would also require that any future change to
the dividend formula be approved by the voters. HB 73 would
further provide that a statewide election be held to take an
advisory vote on whether the statutory changes proposed in the
bill were favorable. In closing, he emphasized the governor's
desire for the public to be involved in this process of
protecting the permanent fund and the dividend.
3:57:20 PM
MIKE BARNHILL, Deputy Commissioner, Department of Revenue,
introduced a PowerPoint presentation, titled "HJR 7: Amending
Constitution re Permanent Fund; HB 73: statutory 50/50 PFD
Formula" [hard copy included in the committee packet]. He began
on slide 3, which outlined the objectives of HJR 7: protect the
permanent fund; constitutionally protect the PFD; adopt a one
account structure; preserve the ERA balance; and engage
Alaskans. To protect the fund [first bullet point], he
discussed aligning the permanent fund with a traditional
endowment fund by implementing management practices that would
protect the inflation adjusted value forever, thus balancing the
needs of both present and future generations and protecting
intergenerational equity. In regard to constitutionally
protecting the PFD [second bullet point], the resolution
required that a portion of funds withdrawn from the permanent
fund would be used for a dividend. He noted that the
legislature would control how much of the allocation went
towards the PFD. Adopting a one account structure [third bullet
point] would be more efficient from an investment perspective,
he said, and exhaustion of the fund's income account, the ERA,
would be avoided [fourth bullet point]. He explained that for a
number of years, the permanent fund's trustees had expressed
concern about potentially depleting the ERA. The amount of
distribution from the permanent fund for both the dividend and
the government spending had increased year over year, which
heightened the risk of prematurely exhausting the ERA. He
reiterated that transitioning to a one-account structure would
eliminate that risk. He reported that engaging Alaskans [fifth
bullet point] addressed the governor's desire to
constitutionalize the public's role in approving any changes to
PFD allocations.
4:01:49 PM
REPRESENTATIVE CLAMAN considered a scenario in which the
legislature approved a change to the dividend formula under this
proposal, but the voters did not approve the constitutional
change. He asked whether the formula change would take effect.
MR. BARNHILL believed that a formula change by the legislature
would be effective regardless of whether the constitutional
measure was enacted. He explained that an advisory vote did not
have legal implications and that a statutory change was still
the legislature's responsibility.
REPRESENTATIVE CLAMAN asked whether the advisory vote would be
required if the constitutional amendment did get the necessary
two-thirds vote in the legislature or was rejected by the
voters.
MR. BARNHILL said it would not be required; however, he noted
that the advisory vote was a provision in HB 73, so it would be
required if the bill were to pass.
4:03:58 PM
CHAIR KREISS-TOMKINS pointed out that slide 3 summarized several
points of agreement, including the notion that ad hoc draws were
bad; a one-account structure was better than the current two-
account structure; and to protect the permanent fund forever for
future generations of Alaskans. He asked whether the
administration was of the same opinions.
MR. BARNHILL confirmed and expressed appreciation for the
chair's acknowledgement. He believed that there were more
shared opinions than points of contention, adding that the
administration put forward these proposals in an effort to find
maximum consensus.
4:05:20 PM
REPRESENTATIVE EASTMAN questioned what "the time of adoption" on
page 3, line 8, of HJR 7 referred to.
MR. BARNHILL explained that the constitutional measure required
a two-thirds vote by each body of the legislature. It would
then be on the ballot for approval by voters at the next general
election - the earliest being November 2022. If it were to pass
by a majority vote, the measure would take effect 90 days from
the date of the election. He further noted that Representative
Eastman was referring to transitional language in Section 3 of
HJR 7, which would apply to the FY 24 budget.
4:07:20 PM
BILL MILKS, Assistant Attorney General, Department of Law,
directed Representative Eastman to Section 1 of [Article XIII]
in the Constitution of the State of Alaska, which specified that
a new amendment becomes effective 30 days after certification of
the election returns.
REPRESENTATIVE EASTMAN sought verification that an amendment was
"adopted" 30 days after the election certification.
MR. MILKS believed it would be reasonable to interpret that an
amendment would be adopted when it becomes effective.
REPRESENTATIVE EASTMAN proposed a scenario in which "the
legislature were to pass a law ... after the vote but before the
amendment [was] effective." He asked whether the amendment
would "tie back to" the newly passed legislation or the
legislation passed prior to the public vote.
MR. MILKS clarified that the only public vote that was legally
effective was the vote on a constitutional amendment. He
pointed out that HB 73 had a provision pertaining to an advisory
vote, which would not create law.
MR. BARNHILL resumed the presentation on slide 4, which reviewed
the mechanics of HJR 7. He explained that the proposed
resolution would transition the permanent fund to a single,
protected account. It would also add the percent of market
value (POMV) distribution method to the constitution. He noted
that in 2018, the legislature statutorily enacted a POMV formula
in Senate Bill 26, which applied the distribution percentage to
a lagging five-year market average of the permanent fund. He
defined a "lagging five-year average" as the first five of the
last six years. Further, under this proposal the legislature
would be responsible for specifying a distribution percentage;
the legislature would also have the authority to fix that
distribution percentage by statute. He added that ultimately,
enshrining that percentage in a constitutional measure could be
accomplished at the legislature's discretion. He conveyed that
HJR 7 would establish the PFD in the constitution by specifying
that a percentage of the POMV distribution must be allocated to
the dividend. He reiterated that the governor was proposing to
leave the specification of that percentage to the legislature to
enact by statute. Alternatively, in HB 73, the governor
proposed that the legislature enact a 50 percent allocation to
the PFD. He further noted that the proposed resolution [HJR 7]
would require a vote of the people to approve any change to the
PFD program.
4:12:35 PM
CHAIR KREISS-TOMKINS questioned whether DOL was of the opinion
that with passage of HJR 7 as written, the statutory formula,
whatever it may be, shall be appropriated and supersede the
legislature's "subjective desires for appropriation."
MR. BARNHILL deferred to Mr. Milks.
MR. MILKS remarked that as drafted, HJR 7 specified that a
portion of the appropriation from the permanent fund shall be
allocated for the PFD. Further, Section 2, subsection (c),
stated that the amount allocated for the dividend shall be
provided by law.
CHAIR KREISS-TOMKINS said he understood the language in the
proposed resolution. He asserted that he was looking for a
direct answer to a direct question: whether DOL was of the
opinion that the formula was constitutionally guaranteed and
effectively superseded the legislature's constitutional right to
appropriate an amount other than the formula.
MR. MILKS said, "that is what HJR 7 provides in Section 2."
CHAIR KREISS-TOMKINS asked for confirmation that Mr. Milks and
DOL believed that "that is what would happen constitutionally."
MR. MILKS replied that's how HJR 7 was drafted. He suggested
that it was consistent with Wielechowski v. State of Alaska, in
which the court decided that without a constitutional amendment,
the PFD amount would be decided by the legislature.
CHAIR KREISS-TOMKINS asserted that he had not heard a direct
answer to his question. He pointed out that the language in the
proposed resolution was not as specific as a constitutional
amendment that were to provide for the dividend formula. He
asked if the broader language in HJR 7 would constitutionally
guarantee whatever formula was in statute, thus superseding the
legislature's constitutional right to appropriation.
MR. MILKS answered yes, this constitutional [resolution]
(indisc.) the dividend and shall provide for a portion of the
amount to the dividend.
4:17:12 PM
REPRESENTATIVE VANCE, referring to the language "as provided by
law" in Section 2, subsection (c), asked whether that provision
would be satisfied "if the legislature chose to come up with a
number as an appropriation."
MR. MILKS explained that "by law" referred to a statute, not a
law that was enacted as an appropriation bill, as specified in
Section 3, subsection (d), of HJR 7.
4:18:45 PM
MR. BARNHILL continued the presentation on [slide 5] and
outlined considerations for a distribution percentage in regard
to HJR 7. He relayed that the permanent fund was "manually"
inflation proofed through an annual appropriation from the ERA
to the Principal, which was calculated by a statutory formula.
However, in a modern one-account structure, such as an
endowment, the inflation proofing would occur through a
distribution percentage. Slide 5 read as follows [original
punctuation provided]:
• Legislature establishes the distribution
percentage in statute
-POMV is currently 5% of the lagging 5-year
average market value
• Limits spending while allowing the fund to grow
to keep up with inflation
• Spend only the real return over time.
-Example:
square4 Total return: 7%
square4 Inflation: 2%
square4 Real return: 5%
• Liming spending to 5% inflation-proofs the
Permanent Fund.
MR. BARNHILL explained that the real return was calculated by
subtracting annual inflation from total return. In modern
institutional fund practice, inflation proofing was accomplished
by only spending the real return while retaining the inflation
return, thus preserving the growth associated with inflation.
He emphasized that inflation could change over time and returns
could be volatile. He reported that the permanent fund's real
return and spending rate varied over time; however, for most
years, the spending rate was less than the real return, which
indicated growth. He noted that in HJR 7, the governor proposed
that the distribution percentage could be statutorily adjusted
by the legislature to prevent overspending from the fund. He
pointed out that the inherent flexibility in HJR 7 was similar
to HJR 1, which used the phrased "not more than 5 percent."
That language would allow the legislature to monitor the rate of
spending versus the rate of return and prevent the fund from
erosion by inflation, he said.
4:23:50 PM
REPRESENTATIVE TARR, returning to Section 2, subsection (c),
inquired about the timing in which the legislature was relayed
the total return and inflation rates. She understood that those
rates were assessments of economic conditions that were
typically received "after the fact."
MR. BARNHILL indicated that there was an established practice of
using the lagging five-year market average; consequently, when
entering a budget cycle, it was clear what the formula was
proposing with respect to spending. He suggested that the
lagging five-year rolling return could be used to determine
whether it was under or over the spending level. He added that
his overarching recommendation was to keep an eye on things by
reporting these figures annually.
REPRESENTATIVE TARR observed that a reporting requirement, which
was absent from the current language, could which be a friendly
inclusion to strengthen the proposal.
MR. BARNHILL acknowledged that it could be included in statute.
He noted that the effective rate of spending had been presented
to the House Special Committee on Ways and Means. He maintained
that he was discussing these figures to emphasize to policy
makers that this was the method to avoid eroding the fund by
inflation.
4:26:59 PM
REPRESENTATIVE VANCE asked why five percent was the appropriate
POMV rate for the fund's long-term sustainability.
MR. BARNHILL conveyed that the governor proposed 5 percent as a
starting place with an expectation of continued discussion. He
explained that 5 percent was standard in the world of
endowments, institutional funds, and foundations. He noted that
in foundations, 5 percent was hardwired into the internal
revenue code to maintain tax exempt status. He understood that
5 percent was raising some anxiety because there was concern
that the current bull market would settle, and it could be
harder to accomplish a real return of 5 percent. He assured
members that 5 percent was currently sound and that investments
had been "phenomenal" this year.
REPRESENTATIVE VANCE inquired about 5 percent in relation to the
tax-exempt status.
MR. BARNHILL clarified that he did not intend to imply that the
permanent fund was subject to the internal revenue code laws on
foundations. He explained that the permanent fund was tax
exempt on the grounds of being a state fund. He noted that
there had been three opinions rendered by outside counsel in the
past 30 years, all of which had affirmed that tax exempt status.
4:30:47 PM
CHAIR KREISS-TOMKINS inquired about policy calls that could
jeopardize the permanent fund's tax-exempt status.
MR. BARNHILL offered to follow up with the requested
information. He recalled that the last opinion, which was
rendered in 2003 by the law firm of Steptoe & Johnson, indicated
that the permanent fund would be tax exempt as long as it was
managed as a state fund.
CHAIR KREISS-TOMKINS asked whether the administration would be
opposed to a lower POMV draw of 4.5 percent in statute or in the
constitution. He relayed that a more restrictive draw would
MR. BARNHILL declined to comment on behalf of the
administration. He recommended treating the present and the
future as equally as possible. Therefore, by growing the fund
at the rate of inflation, today's beneficiaries would have the
same access to the fund as the beneficiaries of tomorrow. He
emphasized that the the notion of intergenerational equity was
important to endowments and cautioned against anything that
would "hardwire" underspending of the fund to save for the
future.
4:34:46 PM
MR. MILKS, in response to a question from Representative
Eastman, said the process proposed in HJR 7 would provide for
one way in which the permanent fund distribution could be
changed: a law passed by the legislature that was then affirmed
by a majority of voters.
REPRESENTATIVE EASTMAN clarified that he was asking about
calculating the amount for the dividend amount and whether that
could be passed through a ballot measure.
MR. MILKS explained that [subsection (b)] in Section 2 of HJR 7
would set a POMV draw from the permanent fund, as provided by
law; subsection (c) of Section 2 specified that a portion of
that amount would be allocated for dividend payments, as
provided by law; subsection (d) of Section 2 further specified
that changing the amount allocated for dividend payments would
require a law passed by the legislature that must then be
approved by voters. He summarized that the proposed resolution
offered a unique process to change the allocation regarding
dividends involving legislation then confirmation by voters.
REPRESENTATIVE EASTMAN stated that his constituents periodically
suggested "[taking] the permanent fund and ... [paying] it out
to Alaskans and be done with the whole permanent fund and
dividends, etcetera." He asked if this resolution were to pass,
how that idea could be achieved.
MR. MILKS said that concept would still require a constitutional
amendment if HJR was adopted.
4:38:10 PM
REPRESENTATIVE EASTMAN considered a scenario in which 32
legislators voted to set the percentage at 100 percent and
designated the entirety to dividends. He questioned what would
stop that situation from happening.
MR. MILKS acknowledged the resolution provided that an amount of
the POMV may be appropriated and that the POMV would be set by
law. Additionally, it would require that an amount of that sum
be paid in dividends, as provided by law. He reiterated that a
change would require the voters' approval.
MR. BARNHILL in response to Representative Eastman, pointed out
that the constitution utilized the word "permanent," which must
mean something, he said. Secondly, he touched on the emerging
concept of prudent spending, noting that Representative
Eastman's suggestion would fall into the realm of imprudent
spending. He resumed the presentation on [slides 6] and
explained that HB 73 would implement HJR 7 by setting the
statutory POMV at 5 percent and the statutory PFD allocation at
50 percent. The bill would also schedule an advisory vote on
the PFD formula to be held 90-120 days after adjournment. He
noted that HB 73 would stand on its own without the passage of
HJR 7.
4:41:56 PM
REPRESENTATIVE VANCE returned to subsection (b) in Section 2 of
HJR 7, which stated that "the legislature may appropriate from
the permanent fund to the general fund an amount as provided by
law". She asked what would occur if the legislature chose not
to appropriate from the permanent fund to the general fund, as
subsection (c) specified that there "shall" be an allocation for
dividends.
MR. BARNHILL deferred to Mr. Milks. Nonetheless, he questioned
whether the legislature would ever find themselves in that
scenario.
MR. MILKS acknowledged that page 2, line 1, states that the
legislature "may" appropriate from the permanent fund while line
6 states that a portion "shall" be appropriated for dividend.
He concluded that if any money came from the permanent fund, a
portion shall be allocated for dividends.
CHAIR KREISS-TOMKINS understood that despite the unlikely
scenario, the administration had confirmed that it would be an
elective decision.
MR. BREFCYNSKI said despite the wording, it was not the
governor's intent that the dividend would be elective. He added
that the administration was fully prepared to engage in
conversations about amending that language if necessary.
4:44:56 PM
REPRESENTATIVE VANCE requested a fiscal model of the fund's
potential growth under this proposal to understand its economic
impact.
MR. BARNHILL said he would be happy to prepare that for the
committee.
4:45:55 PM
CHAIR KREISS-TOMKINS announced that HJR 7 and HB 73 were held
over.
| Document Name | Date/Time | Subjects |
|---|---|---|
| James Cockrell Resume_Redacted.pdf |
HSTA 4/20/2021 3:00:00 PM |
|
| HJR 7 Fiscal Note - 1-2-021821-GOV-N.PDF |
HSTA 4/20/2021 3:00:00 PM |
HJR 7 |
| HJR 7 Transmittal Letter - 01.19.21.pdf |
HSTA 4/20/2021 3:00:00 PM |
HJR 7 |
| HJR 7 Version A.PDF |
HSTA 4/20/2021 3:00:00 PM |
HJR 7 |
| HB 73 Fiscal Note - 1-2-021821-REV-N.PDF |
HSTA 4/20/2021 3:00:00 PM |
HB 73 |
| HB 73 Fiscal Note - 2-2-021821-GOV-Y.PDF |
HSTA 4/20/2021 3:00:00 PM |
HB 73 |
| HB 73 Fiscal Note - 3-2-021821-GOV-Y.PDF |
HSTA 4/20/2021 3:00:00 PM |
HB 73 |
| HB 73 Transmittal Letter - 01.19.21.pdf |
HSTA 4/20/2021 3:00:00 PM |
HB 73 |
| HB 73 Version A.PDF |
HSTA 4/20/2021 3:00:00 PM |
HB 73 |
| HJR 7 and HB 73 Hearing Request Memo.pdf |
HSTA 4/20/2021 3:00:00 PM |
HB 73 HJR 7 |
| HJR 7 and HB 73 PowerPoint - Dept of Revenue 041921 - Final.pdf |
HSTA 4/20/2021 3:00:00 PM |
HB 73 HJR 7 |