Legislature(2019 - 2020)GRUENBERG 120

03/26/2019 03:00 PM STATE AFFAIRS

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          HB 31-APPROP: EARNINGS RESERVE TO PERM FUND                                                                       
4:26:06 PM                                                                                                                    
CO-CHAIR FIELDS announced that the  final order of business would                                                               
be HOUSE BILL  NO. 31, "An Act making a  special appropriation to                                                               
the Alaska permanent fund; and providing for an effective date."                                                                
4:26:08 PM                                                                                                                    
CO-CHAIR KREISS-TOMKINS, as prime sponsor,  relayed that HB 31 is                                                               
identical  to an  amendment to  the operating  budget [introduced                                                               
during the  Thirtieth Alaska  State Legislature,  2017-2018] with                                                               
ten co-sponsors  from both caucuses  and both  political parties;                                                               
however, it  was never  put to  a vote  on the  House floor.   He                                                               
maintained  that  the  impetus   for  the  amendment  is  greater                                                               
currently than last year.                                                                                                       
CO-CHAIR KREISS-TOMKINS  relayed that he joined  the Alaska State                                                               
Legislature in  2013; that year was  the first in some  time that                                                               
Alaska had  a budget deficit.   In  the ensuing years,  the state                                                               
had  a multibillion-dollar  deficit, cut  spending slightly,  did                                                               
not raise  revenues, and spent down  $14 billion in savings.   He                                                               
referred  to  a  PowerPoint  presentation  on  HB  31,  slide  1,                                                               
entitled  "If  the deficits  continue,  the  CBR is  most  likely                                                               
gone."   The chart  on the  slide demonstrates  by bar  graph the                                                               
decline in  the funds  over the years,  2014-2019.   He expressed                                                               
that  these  actions  have been  immensely  frustrating  to  him,                                                               
especially considering the earning  potential of the $14 billion.                                                               
He maintained  that regardless of  one's views on  permanent fund                                                               
dividends  (PFD) payments  and  level of  state services,  Alaska                                                               
would be in a better position if it had invested that amount.                                                                   
CO-CHAIR  KREISS-TOMKINS  stated that  there  is  still a  budget                                                               
deficit.  There  are many competing visions  for Alaska regarding                                                               
PFD payments  and public services.   The impetus  of HB 31  is to                                                               
ensure that  Alaska's intergenerational financial assets  and the                                                               
permanent  fund  itself  are  protected  from  the  "tugging  and                                                               
pulling" of the political priorities  for spending.  He expressed                                                               
his  grave concern  that  the legislature,  which  has spent  $14                                                               
billion in  the past  4-5 years, is  equally capable  of spending                                                               
down some  fraction of  the $17 billion  in the  Earnings Reserve                                                               
Account (ERA)  over the  coming years,  if the  political climate                                                               
was conducive to  doing so.  He maintained that  he is cautiously                                                               
optimistic  that  this  would  not   happen  during  the  current                                                               
legislative session; however, he  is concerned about it happening                                                               
in future  years.  He offered  that spending the account  down in                                                               
an  unsustainable  manner,  that  is, spending  faster  than  the                                                               
permanent fund is  generating earnings, is the  most perilous and                                                               
concerning  outcome  as far  as  bankrupting  the future  of  the                                                               
4:30:53 PM                                                                                                                    
KEVIN  MCGOWAN,  Staff, Representative  Jonathan  Kreiss-Tomkins,                                                               
Alaska  State Legislature,  on behalf  of Representative  Kreiss-                                                               
Tomkins,  prime sponsor  of HB  31, referred  to slide  2 of  the                                                               
PowerPoint   presentation,  entitled   "Permanent  Fund   Account                                                               
Structure," which  illustrates the two accounts  of the permanent                                                               
fund  -  the  Principal  and  the   ERA.    The  Principal  is  a                                                               
constitutionally  established and  permanently protected  savings                                                               
account  that can  never  be spent.   The  ERA  is available  for                                                               
appropriation by a simple majority of the legislature.                                                                          
MR. MCGOWAN moved on to slide  3, to discuss the calculation used                                                               
last year [2018]  in determining the amount needed in  the ERA to                                                               
maintain the  percent of  market value (POMV)  annual draws.   He                                                               
said  that under  Senate  Bill 26  [passed  during the  Thirtieth                                                               
Alaska State  Legislature, 2017-2018]  the formula  used required                                                               
the ERA to  be four times the  POMV draw to maintain the  ERA.  A                                                               
POMV draw  of $2.5 billion would  require an ERA of  $10 billion.                                                               
This amount would need to remain  in the account in order to make                                                               
PFD payments or state service appropriations.                                                                                   
REPRESENTATIVE KREISS-TOMKINS  explained that when  the operating                                                               
budget was discussed  in 2018, the minimum  sufficient balance of                                                               
the ERA was viewed as a  "shock absorber," because the ERA is the                                                               
account  from which  all PFD  payments are  made and  - with  the                                                               
passage of  Senate Bill 26 -  from which payments for  some state                                                               
services  are   made.     The  ERA  is   where  market   risk  is                                                               
consolidated, and unrealized earnings  are represented.  If there                                                               
is  a  severe  market  downturn or  a  [calamitous]  geopolitical                                                               
event, the ERA could contract  rapidly.  Even though $2.5 billion                                                               
may  be all  that  is  needed annually,  having  four times  more                                                               
provides the buffer to absorb financial shocks.                                                                                 
REPRESENTATIVE LEDOUX  asked what the  benefit of HB 31  would be                                                               
as  opposed  to  the  constitutional   amendment  that  has  been                                                               
proposed creating a spending cap.                                                                                               
REPRESENTATIVE KREISS-TOMKINS  replied that although the  two are                                                               
interrelated, the  proposal under HB  31 - moving funds  from the                                                               
ERA into the Principal - does  not mention how much or how little                                                               
spending is appropriate.                                                                                                        
REPRESENTATIVE LEDOUX  maintained that, in effect,  it does limit                                                               
the amount which can be expended.                                                                                               
REPRESENTATIVE KREISS-TOMKINS agreed.  He  said that if there was                                                               
a  constitutional spending  cap in  place -  like what  [Governor                                                               
Michael J. Dunleavy] has proposed  or the Senate of the Thirtieth                                                               
Alaska  State  Legislature  proposed,   there  would  be  certain                                                               
enhanced levels created for the permanent  fund.  He said that if                                                               
the  spending cap  were in  excess of  state revenues,  "it would                                                               
help  but it  wouldn't entirely  solve it  depending on  what the                                                               
spending cap  ultimately was."   He added  that there  is another                                                               
political consideration:   the spending  cap may not pass  in the                                                               
legislature;  passing  a  spending cap  constitutional  amendment                                                               
requires  a  high  threshold  -  two-thirds of  each  body.    He                                                               
believes that there  are more permanent fixes  for protecting the                                                               
state's assets, but currently, there is  a great deal of money in                                                               
the  ERA that  could be  liquidated  [by the  legislature].   The                                                               
proposed  legislation offers  a  short-term ability  to put  some                                                               
money into savings.                                                                                                             
4:36:47 PM                                                                                                                    
REPRESENTATIVE  STORY  opined  that  HB  31  appears  to  provide                                                               
inflation proofing.  She asked  what the state is currently doing                                                               
to inflation  proof the fund and  what the state's history  is on                                                               
inflation proofing.                                                                                                             
REPRESENTATIVE  KREISS-TOMKINS  said   that  currently  inflation                                                               
proofing under  the statutory  formula is about  $1 billion.   He                                                               
stated that the amount of money  that HB 31 would transfer - $5.5                                                               
billion -  is like  an inflation proofing  amount.   He mentioned                                                               
that under  present market conditions,  the transfer could  be as                                                               
large as  $7 billion;  the ERA  amount this  year is  larger than                                                               
last  year when  a transfer  was considered  under the  operating                                                               
budget.  He maintained that  the amount that would be transferred                                                               
under HB 31  is very similar in principle  to inflation proofing;                                                               
however, because  the legislature  has failed to  inflation proof                                                               
in a couple  previous years, because there is a  bull market, and                                                               
because the ERA  has rapidly grown, even  inflation proofing like                                                               
has been  done in the past  would not move the  excess money from                                                               
the ERA.                                                                                                                        
4:38:37 PM                                                                                                                    
REPRESENTATIVE   VANCE   relayed  that   Representative   Kreiss-                                                               
Tomkins's  presentation sounds  like he  supports protecting  the                                                               
states  funds from  excessive spending  by balancing  the budget.                                                               
She  mentioned  that  the  legislature   has  rapidly  spent  $14                                                               
billion; however, there continues to  be spending, and one way to                                                               
avoid  that is  to reduce  spending.   She expressed  her concern                                                               
that the  intent of HB  31 - moving  funds from  the ERA -  is to                                                               
remove  it  from the  conversation  regarding  restoring the  PFD                                                               
payments of  the past few  years.   She maintained that  the 2018                                                               
elections  demonstrate that  Alaskans  want to  be  part of  that                                                               
conversation.  She stated that  her constituents support having a                                                               
conversation  about  restoring the  PFD  payments  that were  not                                                               
fully  paid,  and  not  moving  the excess  ERA  money  into  the                                                               
[Principal].  She  maintained that her constituents  have not had                                                               
the opportunity to have this conversation.                                                                                      
REPRESENTATIVE  KREISS-TOMKINS  responded  that  he  has  a  deep                                                               
cynicism about  legislature's ability  to restrain  its spending.                                                               
He  suggested that  he and  Representative  Vance have  different                                                               
perspectives about  the solution.   He  mentioned that  his first                                                               
two years  in office were  under a Republican  administration and                                                               
Republican majorities  in both chambers  of the  legislature, and                                                               
the savings were  liquidated.  He stated that  his solution would                                                               
have been to cut spending a  little and raise revenues; there was                                                               
a small  cut in spending  and no new  revenues.  He  continued by                                                               
saying  that  in  subsequent  years  there  was  mixed  political                                                               
control.   He opined that  to some extent political  control does                                                               
not matter;  the state has  not been able to  sustainably balance                                                               
its budget.  He maintained that  the state is closer to balancing                                                               
its  budget  than  ever  before; however,  until  the  state  can                                                               
balance its budget, there is a  lot of risk with large amounts of                                                               
money available for appropriation,  especially when only a simple                                                               
majority vote of 21-11 is required.                                                                                             
CO-CHAIR  KREISS-TOMKINS offered  that regarding  the backpay  of                                                               
PFDs, it never occurred to  him before Representative Vance asked                                                               
the question that HB 31 would  be considered a way to preempt the                                                               
ability to do  that.   He maintained that  the proposal [under HB
31]  was  first introduced  last  year  before there  was  public                                                               
dialogue  on backpay  of  the PFDs.   He  added  that there  were                                                               
concerns  voiced  during  the previous  administration  that  the                                                               
funds would  be spent down to  pay for the natural  gas pipeline;                                                               
another time it  could be another project  that people supported.                                                               
He  said  that  such  proposals   are  concerning;  for  example,                                                               
building a giant  bridge from Baranof Island  to Admiralty Island                                                               
would be  a multi-billion-dollar project  and a  tremendous waste                                                               
of state  money.    He asserted  that Alaska should  spend within                                                               
its means  and have  a balanced  budget; having  a great  deal of                                                               
available funds presents risks.                                                                                                 
4:43:19 PM                                                                                                                    
REPRESENTATIVE  WOOL  relayed  that  the argument  last  year  is                                                               
different from the  argument this year.  In past  years the state                                                               
drafted a budget, didn't have the  revenue to pay for the budget,                                                               
and took the money out  of the Constitutional Budget Reserve Fund                                                               
(CBRF).  The  CBRF represented a liquid savings  account that was                                                               
easy  to  access.    He  said that  currently  the  state  has  a                                                               
structured  draw  out of  the  entirety  of the  permanent  fund;                                                               
therefore, the  revenue - from  the draw and the  other revenues,                                                               
such as oil taxes - could pay  for the budget.  He suggested that                                                               
the intent  of HB 31  is to protect against  the draw on  the ERA                                                               
outside of the structure.                                                                                                       
REPRESENTATIVE KREISS-TOMKINS  answered, "Effectively, yes."   He                                                               
said that if the legislature  had forever abided by the framework                                                               
of Senate Bill 26 and never  drew from the Permanent Fund greater                                                               
than 5 percent of the  permanent fund's market value, there would                                                               
effectively be  no risk of  unsustainably spending down  the real                                                               
fund  of  the  Permanent  Fund.    It  is  possible  that  should                                                               
political or economic conditions shift,  there may be a situation                                                               
in  which the  legislature  would  want to  draw  greater than  a                                                               
sustainable  amount  from the  Permanent  Fund  as set  forth  in                                                               
Senate  Bill 26,  regardless  of  how the  money  is  spent.   He                                                               
maintained that HB 31 would control for that risk.                                                                              
REPRESENTATIVE LEDOUX  asked if  HB 31 would  have the  effect of                                                               
avoiding a three-quarter vote [of  the legislature] to draw money                                                               
from  the CBR.    She suggested  that  if the  ERA  were below  a                                                               
certain amount, a three-quarter vote  would not be needed to draw                                                               
from the CBR.                                                                                                                   
4:47:21 PM                                                                                                                    
ANGELA  RODELL, Chief  Executive Officer,  Alaska Permanent  Fund                                                               
Corporation (APFC),  answered that  traditionally there  has been                                                               
language  associated with  the CBR  that  if the  level of  total                                                               
savings of  the state reaches  a certain threshold then  the need                                                               
to repay  the CBR is  negated.  She added  that she did  not know                                                               
what  the  threshold  was  but currently  there  is  a  repayment                                                               
obligation for the CBR for the current balance.                                                                                 
REPRESENTATIVE LEDOUX  stated that her  concern was not  with the                                                               
necessity of  repaying the CBR;  her recollection is that  if the                                                               
amount of  money in ERA is  less than a certain  amount, than the                                                               
requirement for  a three-quarter  vote to take  money out  of the                                                               
CBR would be negated.                                                                                                           
4:49:14 PM                                                                                                                    
ALEXI  PAINTER,  Fiscal  Analyst, Legislative  Finance  Division,                                                               
stated that under the constitution, the  CBR can be accessed by a                                                               
simple majority  vote, if the amount  available for appropriation                                                               
is  less than  the  previous year's  budget.   He  said that  the                                                               
courts have  interpreted that  to include the  ERA as  the amount                                                               
available  for  appropriation;  it  also  includes  that  current                                                               
year's  revenue.   For  fiscal  year 2020  (FY  20), the  current                                                               
year's revenue is  about $2.5 billion in  traditional revenue and                                                               
$2.7 billion  from the permanent  fund.   In order to  access the                                                               
CBR with  a simple majority  vote, the  balance in the  ERA would                                                               
have to be under $1  billion, requiring a $17.5 billion transfer;                                                               
currently the amount is far too small for that to occur.                                                                        
MS.  RODELL, in  answer to  Representative Story,  said that  the                                                               
original legislation 40 years ago  included inflation proofing as                                                               
a second  draw after the draw  for PFD payments.   The [inflation                                                               
proofing]  calculation is  based on  consumer price  index (CPI).                                                               
Each year there has been  an appropriation for inflation proofing                                                               
up  until 2010;  that  year the  appropriation  was zero  because                                                               
inflation was zero.  The calculation  is based on the most recent                                                               
calendar  year's CPI  and is  calculated off  the balance  in the                                                               
Principal of the [permanent fund]  account only; therefore, it is                                                               
not calculated on  the total of the Principal plus  the ERA.  She                                                               
said that in FY  16, FY 17, and FY  18, the  decision was made to                                                               
not appropriate for  inflation in any of those  three years; that                                                               
amount would  have totaled $1.4 billion  had those appropriations                                                               
occurred.   An appropriation  was included in  the FY  19 budget;                                                               
that money  will be moved  at the  conclusion of the  fiscal year                                                               
once Alaska  has received  all the  royalties into  the Principal                                                               
and APFC  is able  to do  the calculation.   She added  that this                                                               
usually occurs in July of every  year; the amount is estimated to                                                               
be about  $942 million.  She  continued by saying that  in the FY                                                               
20  budget proposal,  there is  an  estimated inflation  proofing                                                               
calculation of about $982 million.                                                                                              
CO-CHAIR  FIELDS  asked for  the  amount  each $1  billion  earns                                                               
Alaska on average per year;  that is, what earning opportunity is                                                               
lost for each $1 billion that Alaska spends down.                                                                               
MS.  RODELL  replied  that  since inception  40  years  ago,  the                                                               
earning rate has  been 8.9 percent; rounded up to  9 percent, the                                                               
amount lost would be about $90 million.                                                                                         
CO-CHAIR FIELDS stated that HB 31 would be held over.                                                                           

Document Name Date/Time Subjects
HB096 Bill Version A 3.25.19.PDF HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Sponsor Statement 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SFIN 3/9/2020 9:00:00 AM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Sectional Analysis 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Fiscal Note DHSS-APHPA 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Fiscal Note DHSS-PH 3.26.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Supporting Document Alaska Pioneer Homes Advisory Board Report 2018 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Supporting Document Consumer Price Index in AK Statutes 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Supporting Document-PPT Presentation 3.5.19 HSS Finance Subcommittee, 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Supporting Document DHSS Budget Subcommittee Amendment No. 1 PASSED 3.26.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Letters of Support 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB096 Supporting Document AK Dept of Labor Consumer Price Index 2018 3.25.19.pdf HHSS 4/9/2019 3:00:00 PM
HHSS 4/23/2019 3:00:00 PM
HSTA 3/26/2019 3:00:00 PM
SHSS 2/12/2020 1:30:00 PM
HB 96
HB071 ver A 3.19.19.PDF HSTA 3/26/2019 3:00:00 PM
HB 71
HB071 Sponsor Statement 3.19.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 71
HB071 Minimum Qualifications SOP04 3.19.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 71
HB071 DOA Fiscal Note 3.19.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 71
HB031 ver U 3.25.18.PDF HSTA 3/26/2019 3:00:00 PM
HB 31
HB031 Sponsor Statement 3.25.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 31
HB031 Sectional Analysis ver U 3.25.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 31
HB031 Presentation 3.26.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 31
HB071 Supporting Document - Letter of Support 3.28.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 71
HB031 Opposing Document - Letter in Opposition 4.24.19.pdf HSTA 3/26/2019 3:00:00 PM
HB 31