Legislature(2019 - 2020)GRUENBERG 120
04/25/2019 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HB139 | |
| HB132 | |
| HJR18 | |
| HJR6 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 139 | TELECONFERENCED | |
| *+ | HB 132 | TELECONFERENCED | |
| *+ | HJR 6 | TELECONFERENCED | |
| *+ | HJR 18 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 132-PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS
3:32:41 PM
CO-CHAIR FIELDS announced that the next order of business would
be HOUSE BILL NO. 132, "An Act relating to the Alaska permanent
fund; relating to the earnings reserve account; relating to the
permanent fund dividend; relating to deposits into the permanent
fund; relating to appropriations to the dividend fund and
general fund; and providing for an effective date."
3:33:30 PM
NATHANIEL GRABMAN, Staff, Representative Adam Wool, Alaska State
Legislature, on behalf of Representative Wool, prime sponsor of
HB 132, paraphrased from the sponsor statement, which read as
follows [original punctuation provided]:
HB 132 aims to maintain annual, oil-derived payments
to Alaskans while reducing the uncertainty in
government funding inherent in the status quo. This
will be accomplished by calculating the PFD based on a
percentage of oil revenues.
The Alaska Permanent Fund (PF) is the repository for
much of the state's mineral wealth, with most of that
wealth originally derived from oil. Every year, funds
are deposited into the corpus of the PF, and are then
invested in stocks, bonds, real estate, and other
financial instruments. Over time, this principal
produces earnings from which Alaskans receive an
annual Permanent Fund Dividend (PFD) check. Given the
original source of the corpus funds, many Alaskans
view the PFD as their share of the state's oil money.
Historically, PFDs have been based on a 5-year rolling
average of PF earnings. Gubernatorial vetoes and lower
legislative appropriation have reduced the amount of
the PFD from their statutory value in each of the last
three years. Barring a change, it appears likely that
the value of the PFD will continue to be debated
annually by the legislature, with the proportion of
the Percentage of Market Value (POMV) allocated to
government services and the PFD constantly in flux.
If passed, HB 132 would ensure steady funding for
government services by leaving the POMV draw reserved
for a specific purpose rather than split. Residents
would continue to be paid, with the value of their
annual royalty checks now tied directly to the state's
mineral (oil) revenue. The value of the dividend would
fluctuate along with the price and production of oil.
This uncertainty is better sustained in the dividend
check, as certainty and predictability are of
paramount importance for planning government spending
into the future.
If the price or volume of oil production
increased, so too would our checks.
If oil taxes increased, so would the dividend.
If new natural gas resources came online,
dividends would rise.
Increased dividends would also offset the
negative effects (higher fuel, utilities, and
shipping prices) caused when oil prices are high.
MR. GRABMAN added that there is not a strong correlation between
oil revenue each year and the historic PFD; in fact, they appear
to be inversely correlated. The general trend has been that
when the price of oil increases, the PFD decreases, and vice
versa.
MR. GRABMAN stated that with passage of Senate Bill 26 [during
the Thirtieth Alaska State Legislature, 2017-2018, signed into
law 6/27/18], a percentage of POMV draw is the state law; the
proportion of the POMV that will be devoted to the PFD this year
has already been the source of much discussion in both bodies of
the legislature, and such discussions appear likely to continue
on an annual basis moving forward.
MR. GRABMAN relayed that although the principal of the permanent
fund is primarily derived from oil wealth, the performance of
the Permanent Fund Earnings Reserve ("earnings reserve"), and by
extension, the value of the PFD, have arguably tracked more
closely with stock market fluctuations than with the price or
production of oil. He added that in the same way the taxpayers
are more likely to pay attention to government spending than
non-taxpayers. Tying the PFD directly to Alaska's oil revenue
will ensure that residents remain informed and engaged with
respect to the state's oil prices, production, and policies.
3:36:20 PM
MR. GRABMAN referred to a PowerPoint presentation, entitled "HB
132: A New Approach to the PFD." Beginning with slide 2,
entitled "What does HB 132 accomplish?", Mr. Grabman reviewed
the following points:
Stabilize government funding by dedicating the POMV
draw for state services.
Link the Dividend directly to oil revenues.
Reduce need for recurrent legislative battle over PFD
amount.
REPRESENTATIVE WOOL explained that the state has been "breaking
the law" in its method of paying out the PFD in the last several
years; the statutory formula prescribes one method, and the
state has been following another method. He offered that the
proposed legislation would eliminate the old statute to avoid
the state breaking the law, and a new statute would be enacted -
one that would be more easily followed. He added that the
"battle" that Mr. Grabman mentioned is the battle over the
amount of the dividend; that battle never used to happen because
the state followed the statute. He said that the extreme
decline in revenue has caused fiscal realignment; HB 132 would
attempt to eliminate that annual conflict.
REPRESENTATIVE SHAW asked if the proposed legislation would give
the state the flexibility to utilize the POMV as needed,
separating the government services and the dividend.
REPRESENTATIVE WOOL replied that HB 132 would retain the POMV
draw from the permanent fund at the current 5.25 percent, and
that draw would be transferred, in full, to GF.
REPRESENTATIVE LEDOUX questioned, "Since the legislature has
seen fit to not follow the law with respect to the current
statute, what makes you think that ... we would be any better
when it comes to following the formula that you've set out?"
REPRESENTATIVE WOOL answered that the current situation came
about when [Governor Bill Walker] vetoed half of the PFD amount
in the budget [during the Twenty-Ninth Alaska State Legislature,
2015-2016], and it continued during following two years [the
Thirtieth Alaska State Legislature, 2017-2018] when the
legislature appropriated less than the statutory formula. He
offered that this occurred because the state could not afford
the larger payment. He further stated that a $3,000 statutory
PFD would total about $1.9 billion. If the revenue from oil and
POMV comes to $5 billion, and almost $2 billion is spent on PFD
checks, Alaskans question, "Is that the best way to spend the
limited revenue that we have?"
REPRESENTATIVE WOOL continued by saying that HB 132 would link
the PFD amount to the revenue: when oil revenue is down, the
amount of the PFD would be lower; when oil revenue is up, the
amount of the PFD would be higher. He offered that by statutory
formula, the PFD amount is high, but the oil revenue to the
state is not high, and this has caused the problems that the
state is currently experiencing.
3:41:10 PM
MR. GRABMAN continued with slide 3, entitled "Current flow of
oil money and related funds." He explained that there two types
of oil - leases that pre-date 1980 and leases that start in
1980. He referred the committee to Alaska Statutes (AS)
37.13.010(a) for greater detail. He stated that 25 percent of
leases, royalties, royalty sales, bonuses, net profit shares,
and federal mineral revenue from the "old" oil is put into the
corpus; 50 percent of those revenue sources from the "new" oil
is put into the corpus. He pointed out that the Alaska State
Constitution, Article IX, Section 15, states that at least 25
percent of this revenue must be transferred to the corpus. He
said that the remainder of the revenue, including all the
production tax, currently flows into GF. Once the money is in
the corpus, it is invested; the investment earnings flow into
the earnings reserve, which by statute is inflation-proofed; and
due to Senate Bill 26, there is a POMV draw, which goes into GF.
He stated, "And we then have a long, bruising, drawn-out
argument discussion to figure out what the PFD is going to be."
MR. GRABMAN referred to slide 4, entitled "flow of oil money and
related funds under HB 132," and said that under the proposed
legislation, there would no longer be a distinction between old
oil and new oil; 25 percent of leases, royalties, royalty sales,
bonuses, net profit shares, federal mineral revenue would go
into the corpus; the money flows within the permanent fund would
be the same as described under the current system; and the
question would be, What about the other 75 percent of those six
categories from all the oil? He explained that under HB 132, 33
percent of the six revenue sources and production tax or the
amount needed to distribute an $1,800 dividend would go to GF
where it would be appropriated to the PFD fund and paid out as
dividends. He said that if there is not enough revenue to
afford an $1,800 dividend, then the remaining 42 percent of the
six revenue sources would go into GF along with 67 percent of
the production tax.
MR. GRABMAN moved on to slide 5, entitled "HB 132 vs Actual
PFD," and stated that the chart on the slide shows the actual
PFDs since inception compared with what they would have been if
HB 132 had been enacted throughout that time. He pointed out in
the chart that the trends of the two lines are often in
opposition; the amount of oil revenue has not correlated with
the historical amounts of the PFD.
MR. GRABMAN referred to slide 6, entitled "HB 132 (capped and
uncapped PFD) vs. Actual PFD", which adds the trend line for an
uncapped PFD under the scenario of HB 132 having been enacted.
He pointed out that uncapped PFDs would have been like the
actual PFDs most years; however, there would have been massive
disparities between the two for a few years. There would have
been $5,000 PFDs in the years that oil revenue spiked. Having
the cap allows the state to "put more money away" in funds such
as the Constitutional Budget Reserve (CBR) and other funds to
save for the future.
3:45:24 PM
MR. GRABMAN moved on to slide 7, entitled "PFD Values, HB 132
vs. Proposed POMV Splits," and explained that the POMV splits
came from the Legislative Finance Agency and the statutory PFD
came from the Office of Management & Budget (OMB). He pointed
out the wide disparity between the trend lines in the graph.
MR. GRABMAN turned to slide 8, entitled "FY202: HB 132 PFD check
values, determined by per barrel oil cost and production
levels." He explained that the chart demonstrates what the
dividend amounts would be under HB 132 at different per-barrel
oil costs. The chart compares the official production
projections with the values determined for different production
levels by linear extrapolation - at 90 percent of projected
production, 95 percent, 105 percent, and 110 percent. He
pointed out that the values at the top half of the chart - per
barrel oil cost of $90 and above - are mostly above the $1,800
threshold.
3:46:40 PM
REPRESENTATIVE VANCE stated her belief that linking the [PFD]
directly to oil is counter to the intent of the permanent fund
since the time of inception. She stated that the intent of the
permanent fund was to take a non-renewable resource and turn it
into a renewable resource to offset when Alaska's economy was
down due to oil prices; a high [PFD] would balance out a low
Alaska economy. She offered that under HB 132, both the state's
economy and the PFD would be low at the same time, hurting
Alaska's economy even more.
REPRESENTATIVE WOOL agreed that the permanent fund was created
for the intent that when oil prices were low, Alaska would have
a vast fund from which to draw for operating. He maintained
that under HB 132, that would not change; the structured POMV
draw of 5.25 percent would fund government services; the revenue
would be steady and not be "chipped away at year after year" for
PFD checks. He maintained that under HB 132 the permanent fund
would stay intact and, in some ways, be more robust.
REPRESENTATIVE WOOL continued by saying that the PFD itself was
not in the original conversation concerning the intent of the
permanent fund. He stated his belief that the intent of the PFD
has morphed from its original intent. He opined that the intent
of the PFD was to give Alaskans a dividend from the oil wealth
so that they would monitor the investments and spending of the
state. He mentioned that the permanent fund has grown
tremendously. The PFD checks began at about $300 - not a
significant contribution to a person's budget - and varied from
year to year. He mentioned that the PFD has become a guaranteed
income. With the new structured draw and the size of the
permanent fund, the checks could go to $4,000. He offered his
belief that such a check defies the intent of the PFD. He
concluded that under HB 132, the permanent fund would stay
intact and would be used to fund government and services.
3:51:40 PM
REPRESENTATIVE VANCE referred to the chart on slides 3 and 4.
She asked whether reducing the percentage of new oil revenues
going into the corpus from 50 percent to 25 percent under HB 132
would be detrimental to the corpus.
REPRESENTATIVE WOOL responded that the combined percentage of
old and new oil revenues is about 31 percent; therefore, the
reduction is from 31 percent to 25 percent. He agreed that
under the proposed legislation, less would go to the corpus. He
added that HB 132 was introduced to adjust the PFD in response
to the new POMV program.
REPRESENTATIVE VANCE asked for the motivation behind HB 132,
considering that less money would go into the corpus, less money
would be introduced into Alaska's economy, the PFD checks would
be fluctuating as much as it has historically, and only the POMV
portion for government operations would be protected.
REPRESENTATIVE WOOL answered that the model proposed under HB
132 would cause greater fluctuations in the PFD check. A $64
billion permanent fund, invested and producing an average of 8
percent annual return since inception, constitutes steady money
regardless of the formula for the PFD. He said that his
proposal would cause the check to fluctuate depending on the
price and production of oil. He maintained his belief that some
variability in the PFD check is acceptable. He stated that his
preference is that the money for state government be steady and
the payments to Alaskans be variable according to the oil
industry market. He suggested that under his proposal there
would be more incentive to produce more oil or produce natural
gas. He declared that in the event that there is no more oil,
or the oil market abates, relying on a POMV draw to pay the PFD
check without oil revenue would create a huge problem for
Alaska. Under HB 132, if there is no more oil revenue, Alaska
is not committed to giving a large check in perpetuity.
3:56:53 PM
REPRESENTATIVE LEDOUX asked for confirmation that the proposed
legislation puts a cap on the PFD but no floor on the PFD.
REPRESENTATIVE WOOL replied, "You are correct." He said that
the cap could be raised or lowered, or a floor could be added.
He reiterated that if the price of oil goes down to $15 per
barrel and production goes down to 250,000 barrels per day,
Alaska would have a difficult time operating. He maintained
that the dividend under his proposed legislation would be like
the dividend one gets with stock in Ford Motor Company: if the
company has a good year, the investor gets a good dividend
check; if the company loses money, the investor does not get a
good check. He concluded that the PFD under HB 132 is tied more
to performance of Alaska's number one resource.
REPRESENTATIVE VANCE asked, "Who do you represent - the state or
the people?"
REPRESENTATIVE WOOL responded that he represents the people in
the state of Alaska, and he believes that the state and the
people of Alaska are inextricably entwined. He opined that a
good state system that supports the people is desirable and, in
turn, the people will support the state. He conceded that his
proposed legislation is a different approach than has been
considered. The previous administration introduced a PFD
proposal that was complicated; however, there was a component of
that formula that was dependent on oil. He mentioned that in
2008, Governor Sarah Palin proposed a bonus check of $1,200 due
to abundant oil revenues to the state; it was an "energy" check
due to the high cost of heating oil. When the price of oil is
high, it is good for the state but bad for the residents; it is
of no benefit to the average citizen. He maintained that when
the price of oil is high, a larger PFD check can offset some of
the other expenses incurred due to the high cost of oil.
[HB 132 was held over.]