Legislature(2019 - 2020)SENATE FINANCE 532
04/10/2019 09:00 AM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| SB103 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 103 | TELECONFERENCED | |
| *+ | SB 104 | TELECONFERENCED | |
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.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 104 - Sponsor Statement.pdf |
SFIN 4/10/2019 9:00:00 AM SFIN 2/4/2020 9:00:00 AM |
SB 104 |
| SB 104 - Sectional Analysis.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 104 |
| 041019 SB104 Spending Cap Presentation.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 104 |
| SB 103 - Sectional Analysis.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 - Sponsor Statement.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 Presentation 041019.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |
| SB 103 Work Draft Version U.pdf |
SFIN 4/10/2019 9:00:00 AM |
SB 103 |