Legislature(2019 - 2020)GRUENBERG 120
04/30/2019 03:00 PM House STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| HJR18 | |
| HJR5|| HJR6|| HJR7 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HJR 18 | TELECONFERENCED | |
| *+ | HJR 5 | TELECONFERENCED | |
| += | HJR 6 | TELECONFERENCED | |
| *+ | HJR 7 | TELECONFERENCED | |
| + | TELECONFERENCED |
HJR 18-CONST AM: PERMANENT FUND; POMV;EARNINGS
3:05:29 PM
CO-CHAIR FIELDS announced that the first order of business would
be HOUSE JOINT RESOLUTION NO. 18, Proposing amendments to the
Constitution of the State of Alaska relating to the Alaska
permanent fund and to appropriations from the Alaska permanent
fund.
3:05:57 PM
CO-CHAIR KREISS-TOMKINS, as prime sponsor of HJR 18, stated that
he was available for questions.
REPRESENTATIVE WOOL asked whether the Alaska State Constitution
could be amended under the proposed resolution or whether a
constitutional convention would be required to revise the
constitution.
CO-CHAIR KREISS-TOMKINS responded that there is limited case law
on the question of amendment versus revision. He cited the
Alaska Supreme Court decision Bess v. Ulmer [1999]. He stated
that there are differing perspectives for "constitutionalizing"
the permanent fund dividend (PFD) itself and whether doing so
would constitute a revision as opposed to an amendment. He
expressed his belief that the amendment proposed under HJR 18 is
clearly just an amendment, because it would change the structure
of the permanent fund, combine the earnings reserve fund (ERA)
into the principle, and add a constitutional cap [on
appropriations from the permanent fund]; it would not
effectively add new content into the constitution that might be
considered a revision. He suggested asking for an opinion from
Legislative Legal Services.
3:08:11 PM
EMILY NAUMAN, Deputy Director, Legislative Legal Services,
Legislative Affairs Agency, responded that it was a difficult
question to answer because there is only one case to depend on
to parse out the difference between an amendment and a revision.
She said that of the four resolutions to be considered by the
committee, HJR 18 is the most innocuous; it proposes to make a
small number of changes and would not have a sweeping effect on
the balance of power between the three branches of government.
She relayed that the best test for determining the difference is
two-pronged: 1) looking at the number of changes, and 2)
looking at the type of changes. She offered that Representative
Kreiss-Tomkins's representation of the changes proposed in HJR
18 is accurate: the changes are minor quantitatively and do not
tip the scale qualitatively as far as balance of power or other
constitutional authority of the government.
REPRESENTATIVE LEDOUX asked for a quick synopsis of HJR 18.
CO-CHAIR KREISS-TOMKINS answered that HJR 18 would roll the ERA
into the principle of the permanent fund, effectively creating
an endowment governed with a hard cap - a draw of 5 percent of
the average of its market value - for the first five of the
preceding six fiscal years.
REPRESENTATIVE LEDOUX asked whether that amount is less than
what the state is currently drawing from the fund.
CO-CHAIR KREISS-TOMKINS responded that under Senate Bill 26
[passed during the Thirtieth Alaska State Legislature, 2017-
2018, and signed into law 6/27/18], 5.25 percent of market value
(POMV) will be drawn from the permanent fund for the current
fiscal year [fiscal year 2018 (FY 18)] and the next two fiscal
years [FY 19 and FY 20] to be available for appropriation, if
the legislature follows statute; thereafter, the POMV would be
reduced to 5 percent. He pointed out that after the next two
fiscal years, HJR 18 would mirror what is already in law.
REPRESENTATIVE LEDOUX asked if the motive for HJR 18 is to
prevent the legislature from "getting its hands on money."
CO-CHAIR KREISS-TOMKINS stated that the primary goal of HJR 18
is to protect the permanent fund forever; ensure that it cannot
be spent down but will remain permanent. He described a
secondary benefit: As the permanent fund is presently
structured, even if the legislature is restrained in its
spending, the ERA could bottom out in an extreme [stock] market
downturn. This almost occurred in 2009. He expressed that the
ERA could drop to $0, and money would not be available for
dividends or public services. He maintained that HJR 18 would
effectively prevent that from happening.
3:13:20 PM
REPRESENTATIVE VANCE asked for confirmation that HJR would
enshrine the POMV and supersede the statutory PFD formula.
CO-CHAIR KREISS-TOMKINS answered, "That's incorrect." He stated
that there would be no mathematical conflict between having a
statutory POMV and a statutory PFD. He relayed that under HJR
18, there would be enough money for the legislature to draw a 5
percent POMV and pay out $3,000 dividends.
REPRESENTATIVE VANCE expressed her understanding that
historically the PFD was calculated from the 5-year average.
Under HJR 18, a 5 percent POMV would be transferred to the
general fund (GF), and from that draw the legislature would
dispense PFD checks based on historical calculations. She
referred to page 1, line 15, of HJR 18, which read in part,
"Each fiscal year, the legislature may appropriate from the
permanent fund to the general fund an amount that is not more
than five percent..." and added that the POMV would then be
transferred from the corpus to GF. Subsequently, the
legislature could distribute a dividend based upon the statutory
formula.
3:16:00 PM
KEVIN MCGOWAN, Staff, Representative Jonathan Kreiss-Tomkins, on
behalf of Representative Kreiss-Tomkins, prime sponsor of HJR
18, responded that HJR 18 would not affect how the legislature
decides to allocate the 5 percent draw.
CO-CHAIR KREISS-TOMKINS added that the answer to the question
is, Yes, that money can be distributed for dividends.
REPRESENTATIVE VANCE expressed that the bigger issue for the
public is "where funding starts." She said, "We all agree that
... the 50-50 statutory formula, but where do you implement it
into the math equation and come out with a different amount?
And this puts it in after the POMV draw, whereas historically it
was directly from the average of the earnings, and this, I
think, would shift a lot of the conversation of what the public
is trying to have in light of the governor's constitutional
amendments as well." She continued by stating, "I'm not there
yet. I know that the winds are ... blowing that way with SB 26,
but I don't ... think I'm there yet because the public wants to
have a fuller conversation on the possibility of PFD paybacks
with the ERA, of how the dividend should be formulated in the
future; and I agree that we need to look on the overall effects
of the future, but I'm just not there with your amendment at
this time."
REPRESENTATIVE STORY expressed her understanding that [HJR 18]
follows best practices for big endowments in setting their
investment earnings for the year.
CO-CHAIR KREISS-TOMKINS agreed that most endowments and most
sovereign wealth funds are managed in the manner contemplated by
HJR 18, with a POMV taken out every year and one combined fund
for which the principle is protected.
REPRESENTATIVE LEDOUX expressed her concern that under HJR 18,
the PFD will take "second place"; it will be taken from the
amount that is remaining. She referred to Senator Peter
Micciche's comment in the Senate Finance Standing Committee
meeting that a $3,000 PFD would probably exceed the limits of
Senate Bill 26. She said that he pointed out that legislators
would need to decide which of the statutes to violate. She
concluded that in the scenario under HJR 18, the PFD would "be
the stepchild."
CO-CHAIR FIELDS offered that $3 billion is enough to pay out a
statutory dividend. It is the decision of the legislature
whether to do that, raise revenue to pay the dividend and
maintain government services, or pay out a massive dividend and
annihilate government services within the POMV framework. All
of these are options.
3:20:56 PM
CO-CHAIR FIELDS asked for confirmation that since the current
statutory formula was put in place, the permanent fund has grown
steadily over time considering bull and bear markets.
3:21:20 PM
PAULYN SWANSON, Communications Manager, Alaska Permanent Fund
Corporation (APFC), Department of Revenue (DOR), responded that
the permanent fund has certainly grown a great deal over time
since inception - from the initial deposit of $734,000 to the
$64.5 billion as of March 31 [2019].
CO-CHAIR FIELDS asked whether nominal and real value PFDs have
generally grown over time.
MS. SWANSON offered that DOR could better answer the question
regarding the PFD. She stated that up until the past few years,
the PFD was based on the statutory net income from the fund
averaged over years. She relayed that HJR 18 speaks to the
amount of money that could be spent off the fund on an annual
basis; it does not speak to the dividend.
CO-CHAIR FIELDS asked for confirmation that nothing in the
constitutional amendment under HJR 18 would limit the dividend
or nullify the current statute with respect to disbursement of
the dividend.
MS. SWANSON confirmed that nothing within the proposed
resolution speaks to the dividend.
REPRESENTATIVE WOOL maintained that the proposed resolution
specifies the amount of revenue that may be taken from the fund
and does not address the statutory formula for the PFD at all.
MS. SWANSON answered, "That's absolutely correct."
REPRESENTATIVE WOOL expressed his understanding that the ERA is
the account used to pay the PFD via GF; in other words, it is
the source of expendable cash in the permanent fund.
MS. SWANSON stated that with the implementation of Senate Bill
26, FY 19 was the first year that funds were distributed
directly to GF as a revenue source. Up until then, the ERA had
been used historically to pay dividends, pay for APFC operations
and management, and to support the Department of Law (DOL) and
Department of Natural Resources (DNR) regarding the work they do
to bring in royalties.
REPRESENTATIVE WOOL relayed that the ERA was used to pay the PFD
checks. He asked what the changes would be under Senate Bill
26.
MS. SWANSON answered that with Senate Bill 26 in place, there is
a statutory rule limiting the draw to 5.25 percent for FY 19, FY
20, and FY 21; in FY 22, the draw goes to 5 percent. She stated
that it is the responsibility of the legislature to appropriate
the money from the ERA to GF following the statutory rule;
further distribution of that money is the policy call of the
legislature.
REPRESENTATIVE WOOL stated that prior to Senate Bill 26, funds
needed for the PFD checks were taken directly from the ERA.
MS. SWANSON said, "Historically ... that is correct."
REPRESENTATIVE WOOL offered that now the 5.25 percent draw goes
to GF, funds for the PFD checks come from GF.
MS. SWANSON answered yes, the current construct of the FY 20
budget is that the 5.25 percent goes directly to GF and is
further distributed to the PFD fund from GF.
CO-CHAIR FIELDS recalled that $1.9 billion would be needed to
pay a $3,000 PFD in the current year.
MS. SWANSON concurred.
3:26:33 PM
CO-CHAIR FIELDS relayed that under HJR 18, a [5.25] percent draw
would be $3 billion - vastly more than enough to pay a $3,000
PFD; HJR 18 would not limit the size of the PFD; the size of the
PFD is a legislative decision.
REPRESENTATIVE WOOL asked whether APFC has a position on the
concept behind what HJR 18 attempts to accomplish.
MS. SWANSON responded that the APFC board of trustees has no
position on this resolution specifically. Historically the
board has supported the POMV and classic endowment concepts.
Resolution 1804, passed by the board, speaks to the importance
of having a rules-based structure regarding withdrawals from the
fund, and HJR 18 reflects a rules-based structure regarding
withdrawals from the fund for ongoing sustainability.
REPRESENTATIVE VANCE referred to testimony that ERA funds were
used by DNR to collect royalties. She asked what mechanism is
in place under Senate Bill 26 to support DNR.
MS. SWANSON answered that the funds for DNR is an appropriation
in the operating budget. Within the operating budget, the ERA
currently funds the APFC operating budget for the investment and
management of the permanent fund. There is a specific
appropriation to DNR regarding royalty work. She stated that
combined, DOL and DNR receive about $8 million to support their
activities in generating royalties.
3:29:10 PM
REPRESENTATIVE SHAW expressed that HJR 18 appears to put all the
ERA into the principle of the fund. He cited page 1, line 10,
of HJR 18, which read in part, "Except as provided in (b) and
(c) of this section, all income...." He said that the rationale
given for HB 31 was that there needed to be a "cushion" in the
ERA. He asked if HJR 18 would provide a cushion or is a cushion
not needed.
CO-CHAIR KREISS-TOMKINS answered that HB 31 works within the
current structure of the permanent fund in the constitution,
whereas HJR 18 would change that very structure. He said that
in the current structure, as long as there is an ERA - which is
subject to volatility with markets or the spending of the
legislature - it is advisable to have a "shock-absorber" - some
liquidity - in the ERA; if the ERA goes to zero, there is no
means to pay dividends or for public services. Under HJR 18,
combining the ERA into the principle and operating under the
POMV structure eliminates the need for liquidity in the ERA. He
added that HJR 18 would solve the problem at its root.
REPRESENTATIVE SHAW commented that part of the hardship in the
committee and in the public view is that the issues have become
so confusing, and there are so many bills, resolutions, and
amendments dealing with the permanent fund, the PFD, and the
earnings that it is difficult to "get a bite on anything in
particular." He maintained that Representative Kreiss-Tomkins's
explanation confused him more. He said that he sees a conflict
between HB 31 and HJR 18, yet he doesn't know if there is one.
He mentioned the difficulty of messaging these concepts to his
constituents.
CO-CHAIR FIELDS gave an example as an explanation: HJR 18
passes. Alaska loses $5-10 billion from the fund due to a bad
market year. Because the ERA and the principle are combined and
Alaska is using a POMV draw, there would still be adequate money
to pay out PFDs from that one integrated fund, just as there
would be if the ERA money was adequate. He maintained that
under HJR 18, the funds for payouts are "safer," because the
money would be taken from a larger fund, which constitutes less
risk in a terrible market; in a terrible market the likelihood
of the ERA being drawn down is greater.
CO-CHAIR KREISS-TOMKINS added that currently the permanent fund
has two accounts: the principle and the ERA. Since the ERA was
created, it was necessary to have liquidity in the ERA. Under
HJR 18, the two would be combined.
REPRESENTATIVE SHAW offered that HJR 18 provides no cushion,
since the resolution states that all income [from the permanent
fund shall be retained in the GF].
CO-CHAIR FIELDS responded that HJR 18 provides the largest
cushion possible for paying out dividends and for services
within the context of the POMV.
3:33:46 PM
REPRESENTATIVE WOOL referred to testimony that the legislature
has a mixed history on following its own rules. He opined that
these statements bother him. There are some examples of that
being true: the legislature not following the 90-day session
and the PFD formula being ignored during the past three years.
He asked, "Do you really think that we're going to just start
... digging through the crates and pulling cash out because we
need it above and beyond the 5.25 percent? Is that your fear?"
CO-CHAIR KREISS-TOMKINS replied that it is impossible to know;
however, there is enough probability or risk that it could
happen and, therefore, warrants fully protecting the permanent
fund. He stated that in this first year of the rules-based
framework for the permanent fund, one legislative body is
potentially on the verge of passing a budget that exceeds the
5.25 percent draw.
REPRESENTATIVE WOOL asked what the state would do in the
following scenario: the oil revenue goes to almost nothing for
any number of reasons; the stock market and economy are booming;
the permanent fund is growing; the expense of operating the
state is substantial; however, Alaska is locked into the 5
percent draw in the constitution.
CO-CHAIR KREISS-TOMKINS replied that the State of Alaska would
have to do what the other 49 states in the country do, which is
cut the budget, raise revenues, or execute some balance of both.
3:37:22 PM
REPRESENTATIVE LEDOUX offered that the corpus of the permanent
fund is already protected without the proposed amendment to the
constitution; the legislature cannot access the corpus without a
vote of the people. She suggested that HJR 18 relates to
protecting the ERA - a subaccount of the permanent fund.
CO-CHAIR KREISS-TOMKINS answered that her question gets to the
"heart of the matter," which is, "Do we as the legislature - do
Alaskans - consider the ERA part of the permanent fund ... as in
something that should be protected forever, managed for the
benefit of future generations, or is this ... a pot of cash akin
to the statutory budget reserve, the constitutional budget
reserve, that's available to be spent down because we want to
pay down unfunded liability, we want to build a bridge, we want
to have an amazing foster care system, whatever?" He maintained
that the premise of HJR 18 is that the ERA is part of the
permanent fund - which is supported by history and by law - and
should be likewise protected and managed.
CO-CHAIR FIELDS opened public testimony on HJR 18.
3:39:15 PM
JUSTIN PARISH testified that he supports the resolution and
believes that it will provide protection for the real value of
the [permanent] fund. Currently, protection for only the corpus
does not protect the real value of the corpus; if the earnings
are spent down, because of inflation or market losses, the
corpus would be steadily depleted year after year. He
maintained that only a constitutional amendment such as under
HJR 18, which follows best practices of fund management, would
be enough to protect the fund into the future.
3:40:36 PM
LYNN WILLIS testified that he is opposed to amending the
constitution, because it will constrain the legislature in doing
its job regarding stewardship of fiscal resources. He
maintained that the legislature needs every option available to
solve the budget crisis and expressed that he doesn't want the
public blamed if the state cannot pay out a massive PFD or levy
taxes. He stated that he opposes the constitutional amendment
approach and supports addressing changes during the
constitutional convention.
3:41:58 PM
LAURA BONNER testified that the resolution is confusing. She
said that she supports protecting the permanent fund. She
stated that she supports eliminating the ERA and putting the
POMV draw into the GF.
3:43:32 PM
JAMES SQUYRES testified that he supports the original
calculation of the PFD, and HJR 18 would remove that
calculation. He opined that eliminating the ERA and the
statutory income would ultimately reduce the PFD on which
Alaskans depend and eliminate the PFD payback. He said Alaskans
have ceased to trust the legislature's actions regarding the
PFD. He maintained that HJR 18 would obstruct [Governor Michael
J. Dunleavy's] agenda and hearten Senate Bill 26.
3:44:51 PM
BERT HOUGHTALING testified that under HJR 18, the legislature
would continue to use the permanent fund and ERA to fund
government expenses and continue its theft [of the PFD money].
He maintained that no resolution is worth passing if it doesn't
seek to amend the constitution to protect the PFD in its
original formula.
3:46:25 PM
INGRID PETERSON, Fox Creek Canyon Landowners Association,
testified that the association objects to the lack of
information and short timeline for testimony on HJR 18. She
opined that more explanation and public input is needed when
suggesting changes to the Alaska State Constitution.
3:49:16 PM
PAM GOODE testified that she and many others did not support
Senate Bill 26; she does not support the POMV philosophy; and
she does not support putting the ERA into the permanent fund.
She stated that since the voters would have to approve the
constitutional amendment under HJR 18, they would need to
understand not only the original practices but the proposed
practices, which would be a challenge. She maintained that the
problem is not the permanent fund and the ERA but overspending
by legislators. She offered that only the inflation-proofing of
the fund needs attention.
3:52:09 PM
TRISHA PEARSON testified that she has many questions about the
proposed resolution and expressed her belief that more education
of the public is needed before passing a resolution calling for
a constitutional amendment.
3:53:33 PM
VIKKI JO KENNEDY testified that she opposes the passage of any
confusing resolutions for constitutional amendments.
3:54:59 PM
ADAM HYKES testified that it would be an accounting blunder to
think that Alaska can spend down the permanent fund to fix a
spending problem. He expressed that "Alaska voted loud and
clear on the PFD issue," and members lost their seats in the
legislature because of it. He stated, "We want our PFD back,
and it was taken from us, and there is no trust between us and
government until that is paid back and trust is restored."
3:56:08 PM
LARRY SLONE testified that he supports locking up the ERA into
the permanent fund and, thereby, making it inaccessible to the
legislature. It would prevent the legislature from depleting
the permanent fund; a 5 percent POMV draw would still provide a
reasonable dividend. If the government needs more money, it
would just have to go through the process of taxing individual
citizens, and consequently it would be more difficult for the
legislature to waste money.
3:57:25 PM
GARY MCDONALD expressed that the legislators should leave the
permanent fund alone and "give us what we deserve."
3:58:07 PM
CO-CHAIR FIELDS closed public testimony on HJR 18. He explained
that HJR 18 would not change the statute with respect to
disbursement of PFDs; it does not limit or change the
legislature's ability to raise revenue; it does protect the
value of the permanent fund and, therefore, the ability to pay
out PFDs indefinitely into the future by preventing the
liquidation of a significant part of the permanent fund.
REPRESENTATIVE STORY commented that each year every $1 billion
invested yields Alaska about $100 million; therefore, being able
to build and preserve the ERA along with the corpus would keep a
long-term permanent fund and ultimately the statutory formula
PFD.
CO-CHAIR FIELDS added that draining the permanent fund locks
Alaska into a death spiral in which the state could only pay out
smaller and smaller PFDs over time.
[HJR 18 was held over.]