Legislature(2009 - 2010)BELTZ 105 (TSBldg)
03/23/2010 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB282 | |
| SB249 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 282 | TELECONFERENCED | |
| *+ | SB 249 | TELECONFERENCED | |
| + | TELECONFERENCED |
SB 282-PERMANENT FUND DIVIDEND AMOUNT FOR 2010
9:01:57 AM
CHAIR MENARD announced the first order of business to come
before the committee would be SB 282.
SENATOR WIELECHOWSKI, sponsor of SB 282, said Alaskans have
relied on their annual Permanent Fund Dividend (PFD) checks
since 1977. Many Alaskans are relying more heavily on this
year's PFD due to the economic downturn. SB 282 will ensure that
Alaskans receive a full dividend this year.
SENATOR MEYER joined the meeting.
SENATOR WIELECHOWSKI explained that the PFD is calculated by a
formula that considers the average amount the fund's investments
have earned over the past five years. A current statute
preventing the PFC from paying out more than 50 percent of the
fund's earnings reserve in any given year could be invoked for
the first time ever this year due to the market downturn over
the last couple years. This means the full calculated amount
could not legally be appropriated from the earnings reserve even
though sufficient funds exist. When SB 282 was initially filed,
enough money was in the earnings reserve to pay out the full
dividend; however, considering the 50 percent limitation, the
account was several hundred million short of the necessary
amount. That gap is now smaller but still exists.
SB 282 addresses only 2010 by transferring one half of 21
percent of the net income of the five year dividend average
calculated for fiscal years 2006-2010 from the earnings reserve
account to the dividend account.
9:04:58 AM
This issue should not be a problem in 2011 because inflation
proofing is expected to be zero. Alaskans deserve to receive the
full benefit from the state's oil revenue during these tough
economic times. SB 282 will ensure Alaskans receive their full
dividend for 2010 in the event that earnings fall below the
threshold required for a full payout.
SENATOR KOOKESH joined the meeting.
CHAIR MENARD asked if Senator Wielechowski was concerned that a
precedent would be set for future similar situations.
SENATOR WIELECHOWSKI replied that ultimately the way in which
the PFD is paid out needs to change. "We have enough money to
pay out the full dividend, however the way the law is written,
we can't pay out the full dividend". With oil high, and costs
and expenses high, Alaskans will not be happy if they do not get
their full dividend.
SENATOR PASKVAN asked what the loss per PFD might be.
SENATOR WIELECHOWSKI replied that when SB 282 was initially
filed, the fund was short over $100 million, equaling several
hundred dollars to PFD's. The gap has closed to $50 million,
roughly equaling an $80 shortfall per PFD. Whether the gap will
open or close between now and June is unknown.
SENATOR MEYER said a lot of things can happen between now and
June 30th. In 2003, the same concern existed but the market
improved. He is concerned about tinkering with a system that has
been working for nearly 30 years.
9:08:58 AM
SENATOR WIELECHOWSKI replied that oil prices are high, a $10
million savings account and $2.2 billion surplus exist. It will
be difficult to tell Alaskans they do not get their full PFD
this year because of a provision that the fund must have twice
as much as the payout amount.
SENATOR MEYER said he warns people that the PFD fluctuates and
not to count on it. He has been telling his constituents, "It's
out of our hands; we have a system set up. You don't want us to
intervene because we'll screw it up". He understands Senator
Wielechowski's purpose, especially considering the economy, but
it is a slippery slope.
9:11:55 AM
SENATOR FRENCH asked about the policy debate or rationale behind
the statute that no more than 50 percent of the money in the
earnings reserve account be paid out.
LAURA ACHEE, director of communications, Permanent Fund
Corporation (PFC), replied that she does not know what the
legislative intent was for the 50 percent limitation. That
section of statute has not been altered since the 1980's.
SENATOR FRENCH clarified that the 50 percent limitation is the
rule that would prevent a full payout of the dividend this year.
MS. ACHEE replied yes. The ultimate point of the statute is that
no more than 50 percent of the balance of the earnings reserve
may go to the PFD in any given year.
SENATOR FRENCH suggested that part of the rationale was to
ensure that money was available for inflation proofing which is
paid from the same account.
MS. ACHEE agreed and said that statute stipulates the next step
after paying the PFD is to calculate and pay inflation proofing.
SENATOR FRENCH said 2010 is a year of historically low inflation
and little demand for inflation proofing. He asked what amount
might be appropriated for inflation proofing this fiscal year.
MS. ACHEE replied that the rate used for this year is zero; the
PFC will not make an inflation proofing transfer on June 30th of
this year.
9:16:00 AM
SENATOR FRENCH summarized that plenty of money is in the
earnings reserve account to pay the PFD but the 50 percent rule
is holding this up. Paying out the full PFD would not result in
any loss to the permanent fund because no money from that
account is needed for inflation proofing this year.
MS. ACHEE said that is correct.
CHAIR MENARD said the PFD is upmost on all constituents' minds
and the Legislature should look at getting the full PFD to
constituents.
SENATOR MEYER asked what year the same situation existed
previously.
MS. ACHEE replied 2003. She said, "the cupboard was bare" and
paying the dividend at all was a concern. The issue was solved
by early 2003 after markets recovered dramatically.
SENATOR MEYER asked if 2010 is similar to 2003. He said these
past five years seem to be doing better than the tech bubble
bursting in 2001-2003.
9:18:35 AM
MS. ACHEE replied that the dividend calculation has two parts:
the five year average calculation, and the presence of the money
to pay it. In 2003, regardless of the five year calculation, the
earnings reserve was empty. In 2010, regardless of the
calculation, the earnings reserve account, according to statute,
does not have enough money to pay the projected dividend amount.
Since 2003, the Attorney General (AG) has issued an opinion that
moved unrealized gains and losses out of the earnings reserve to
principle. In 2003, unrealized gains would have been part of the
earnings reserve and would have caused that dramatic swing. Now,
only realized gains and losses are booked to the earnings
reserve, meaning the balance of that fund is more stable.
CHAIR MENARD asked if the dividend calculation is still six or
seven months away.
MS. ACHEE said it's about four months away.
SENATOR MEYER asked if the PFC has any projections.
MS. ACHEE replied that the dividend is probably calculated at
$791 million, based in part on a stream of regular income every
month and not including any gains from selling an asset. In
November, that stream of regular income was not going to add up
to be enough. Since then, movement in the portfolios has
resulted in some gain and the account is now short only $50
million. The CFO thinks that gap is or will be closed; that
information will not come until the end of the month.
9:22:58 AM
SENATOR PASKVAN said inflation proofing is expected to be zero.
The law, with respect to inflation proofing, is not being
changed; the cap at 50 percent is the problem. The earnings
reserve account is $50 million short of being able to pay out
the full PFD. He asked what percentage, above the 50 percent
cap, does would the additional pay out constitute.
MS. ACHEE said the PFC is projecting a $790 million dividend and
ending the year at $1.5 billion. $790 million is more than half
of $1.5 billion. The $50 million shortfall is about 3 percent,
or a small percentage, of the overall earnings reserve.
9:25:35 AM
SENATOR PASKVAN said the permanent fund now is $35 billion. He
asked what a 1 percent inflation protection would calculate out
to.
MS. ACHEE replied that historically, when inflation has been in
the 2 and 3 percent range, about $800 million to $1 billion has
been paid to inflation proofing. When considering inflation
proofing in the future, she suggested looking at the total
volume of the principle because the percentage is multiplied
against that principle, which has grown huge. Going forward,
bigger and bigger numbers will be thrown off on inflation
proofing even if we stay in a stationary environment. Any
positive percentage is going to throw off a big number for
inflation proofing.
SENATOR PASKVAN said the gap between the $791 million and the
forecasted $1.5 billion is $700 million or 2 percent of the $34
billion. There is enough for a 2 percent inflator if needed, but
this year it is zero.
MS. ACHEE said even if a full dividend is paid this year, over
$700 million will be left in the earnings reserve.
CHAIR MENARD asked if Ms. Achee felt this legislation was a mute
point.
MS. ACHEE replied that creating the dividend and the 50 percent
rule were the Legislature's call. Whether or not to put this
mechanism in place is also. The PFC is neutral.
9:29:08 AM
MS. ACHEE said Mr. Burns, executive director of the PFC, felt
that letting the Legislature know about the gap was crucial even
though he felt confident that the gap would be made up.
SENATOR MEYER read from SB 282 and asked if one-half of 21
percent of the net income is the right number to get us to where
we want to be.
MS. ACHEE replied that the dividend calculation is one-half of
21 percent of the net income. SB 282 says you will pay out the
calculated dividend regardless of what statutes say.
9:31:17 AM
CHAIR MENARD closed public testimony.
SENATOR FRENCH moved to report SB 282 from committee with
individual recommendations and attached fiscal note(s). There
being no objection, the motion carried.
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