Legislature(2019 - 2020)GRUENBERG 120
04/23/2019 03:00 PM STATE AFFAIRS
Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 31-APPROP: EARNINGS RESERVE TO PERM FUND 3:14:56 PM CO-CHAIR KREISS-TOMKINS announced that the next 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." 3:15:23 PM REPRESENTATIVE VANCE asked how much currently is in the earnings reserve account (ERA). 3:15:38 PM KEVIN MCGOWAN, Staff, Representative Jonathan Kreiss-Tomkins, Alaska State Legislature, on behalf of Representative Kreiss- Tomkins, prime sponsor of HB 31, answered $18.4 billion. To a follow-up question, he said there is $46.1 billion in the corpus. REPRESENTATIVE VANCE asked how HB 31 would affect the governor's ability to pay back the permanent fund dividends (PFDs) that previously were not paid in full. MR. MCGOWAN answered, "The $5.5 billion transfer would ... [leave] about $12.9 in the earnings reserve account." CO-CHAIR KREISS-TOMKINS added that that would be "ample cash on the table to backpay PFDs," should that be the will of the legislature and the governor. REPRESENTATIVE VANCE asked what the motivation is for moving $5.5 billion from the ERA when the legislature has not yet finished discussing the budget, including crime reform. CO-CHAIR KREISS-TOMKINS answered that he cannot foresee any scenario in which the legislature needs more than $12-$13 billion in the ERA, and historically, that amount is "north of norms." He said he is "trying to get some of that excess cash protected in the corpus." REPRESENTATIVE VANCE asked, "Why put it in the permanent fund ... versus the [capital budget reserve] (CBR) that we have a mandate to repay?" CO-CHAIR KREISS-TOMKINS answered because the corpus of the permanent fund "is constitutionally protected and will be there in perpetuity for future generations." He said historically, the CBR "is not the same." 3:18:55 PM REPRESENTATIVE LEDOUX asked Co-Chair Kreiss-Tomkins if he thinks this would "hamstringing the legislature" into having to "make draconian cuts" or reduce the permanent fund dividend. CO-CHAIR KREISS-TOMKINS answered no. If more money were transferred out, thus leaving less, then that might happen; however, leaving $12-$13 billion would not hamstring anybody. REPRESENTATIVE LEDOUX asked if that means Co-Chair Kreiss- Tomkins thinks the state is "so flush right now" that legislators do not need to be concerned about cuts or a reduced dividend. CO-CHAIR KREISS-TOMKINS answered as follows: If the legislature wishes to balance the budget with a mixture of permanent fund earnings and revenues that it currently receives, it can do so. But that's sort of a question for the Finance Committee and all of us on the operating budget. ... I think the sort of underlying principle of this bill is not spending more out of the permanent fund in a year than is sustainable and putting cash safely in the bank to ... protect from the temptation of overdrawing .... 3:20:38 PM REPRESENTATIVE WOOL noted that Co-Chair Kreiss-Tomkins had previously stated that the $12 billion left after taking out the $5.5 billion would be enough. He asked, "For what would you need a reserve of $12 billion for, that $18 [billion] is too much $7 [billion] is not enough?" 3:22:17 PM ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund Corporation (APFC), mentioned the ERA, Senate Bill 26 [passed during the Thirtieth Alaska State Legislature and signed into law on 6/27/18], and percent of market value (POMV), and she said the draw for fiscal year 2020 (FY 20) will be $2.9 billion. She explained that the corporation knows the amount, because the figures lag by a year, so "it closed off with the closure of FY 18." She then related that APFC forecasts the draw for FY 21 will be approximately $3.1 billion. She said that barring anything happening, $12 billion equates to approximately four years' worth of POMV draws, "assuming that there is no statutory net income made to replenish the draw amount" in the ERA. She noted that there had been a proposal in one iteration of Senate Bill 26 that would have provided to keep four years' worth of POMV draw amounts in the ERA at any one time and put anything over that back into the corpus. She concluded, "And so, I think that this is a reflection of some of that ... activity in there." REPRESENTATIVE WOOL reiterated that after accruing $3 billion per year for four years - or $12 billion - the rest could be transferred to the corpus. He asked whether the ERA grows when earnings are realized in the permanent fund through sales of stocks or through earnings from stocks. MS. RODELL replied, "Both." She stated that the ERA has assets that grow, and "it gets everything that the corpus owns when we realize it." She clarified, "So, the earnings reserve account gets all of the unrealized gain from principle and earnings reserve account, plus the cost basis from the earnings reserve account." REPRESENTATIVE WOOL asked for confirmation that the only way a 5.25 percent POMV draw can be made is with realized earnings - either those realized from sales within the corpus of the fund or those realized from sales within the ERA - "sort of cash on hand." MS. RODELL answered that is correct. The corporation monitors the amounts realized; it tries not to sell assets to make payments to the state if it does not have to do so. She said APFC works with the Department of Revenue (DOR) "to optimize the investment profile for the fund." 3:26:41 PM REPRESENTATIVE LEDOUX asked how a four-year bear market would affect the liquidity of the ERA. MS. RODELL answered, "This isn't going to impact the liquidity of the earnings reserve account." She explained: What's going to happen is your POMV valuation is going to change, because that reduced market value from the market losses is going to reduce how much you can draw when those years roll into the calculation. So, if you have four years of market losses, those are going to start coming to you in two, three, four years; you're going to know that this is coming; you're going to see the reduction in the draw amount; and you're going to be able to plan accordingly around that. REPRESENTATIVE LEDOUX surmised that in a bear market, and following the law under Senate Bill 26, there either would have to be "fairly hefty cuts to state government" or a smaller PFD. MS. RODELL responded no. She explained, "This is not money being spent out of the entirety of the fund. So, this $5.5 billion goes into the corpus. It's still part of the $64.5 billion that you calculate the draw amount off of, and then we work with [the Department of] Revenue to make sure that the 5.25 percent - in this case $2.9 billion for FY 20 - is free and available to be spent as cash." She explained the reason for the one-year lag is to ensure the amount is known. 3:29:29 PM REPRESENTATIVE STORY asked whether APFC has an opinion on HB 31. MS. RODELL answered that the board has not taken a position on the bill. REPRESENTATIVE STORY asked if putting money into the corpus was a way of inflation-proofing the fund. MS. RODELL agreed that "in some ways this ... acts similar to inflation proofing." She said the inflation-proofing calculation happens every year based on actual inflation. She said there were three years when inflation proofing was not appropriated into the corpus of the fund. She said the board feels strongly that inflation proofing needs to continue, because that is how the purchasing power for future generations of Alaskans is protected. 3:30:45 PM REPRESENTATIVE LEDOUX asked, if the concern is "money tempting the legislature," what the advantage is with "this scenario" over establishing a spending cap in statute or constitutional amendment. CO-CHAIR KREISS-TOMKINS replied, "I think we'll probably be seeing that discussion on those measures potentially later this session." REPRESENTATIVE LEDOUX questioned why the bill sponsor would choose to address the issue with HB 31 rather than with a spending cap. CO-CHAIR KREISS-TOMKINS answered that the only spending cap that would be unbreakable would be that done via a constitutional amendment, and "there's no way that that would be enacted before the voters have an opportunity to ratify any such constitutional amendment, which would be in the 2020 election." That would leave a year and a half without a hard spending cap. He called HB 31 "an interim measure" that would keep the ERA flush and roll over excess cash from the ERA into the corpus to be protected for future generations "and use it at the four times or so of draw." 3:32:43 PM CO-CHAIR KREISS-TOMKINS opened public testimony on HB 31. After ascertaining no one wished to testify, closed public testimony. 3:34:13 PM REPRESENTATIVE VANCE expressed concern that HB 31 would take away the flexibility of the legislature to be able to fund "the many areas of our government that we haven't had the full discussion of." She offered her understanding that currently the CBR has only enough money for "one good natural disaster." She advocated for having the ability to utilize funds in the ERA for unforeseen circumstances and to address crime reform issues. She clarified that she is not a proponent of "spending down the ERA," but indicated that HB 31 would take away the flexibility for options before a full discussion has been held. She said she does not want to "reduce the ERA down to a number that provides just enough of a cushion for our PFDs in the future." She stated that she would not be able to support HB 31 at this time. 3:35:49 PM REPRESENTATIVE LEDOUX expressed that she has "the same concerns with this bill." She said while she has not seen a constitutional amendment relating to a spending cap, she presumes that "those bills, resolutions might have something in them allowing for truly emergency situations." She gave a recent earthquake as an example. She said the proposed legislation does not provide for emergency situations. She said she cannot support HB 31. 3:37:09 PM REPRESENTATIVE WOOL asked how money gets back into the CBR and how a slush fund for a major catastrophe would be set up. In other words, he asked, "How does the CBR get funded?" CO-CHAIR KREISS-TOMKINS answered that there are funds available for the legislature to move around as it sees fit. When there is unexpected money due to increase in oil revenue, for example, that money can be put into the CBR as savings. He said that is what the legislature did from 2006-2011. REPRESENTATIVE WOOL explained he wanted to know the actual mechanics of handling the money. He asked whether money comes in through the ERA and then gets put into the CBR or whether it goes into the general fund (GF) and then any surplus then gets put into the CBR. He explained, "I'm sort of interested in how we get money back in the CBR to build it up again if that's sort of our checking account." CO-CHAIR KREISS-TOMKINS responded, "The latter. It all goes in general fund, and then the legislature can replenish funds as it sees fit." 3:39:24 PM REPRESENTATIVE STORY expressed her hope never to "go into" the ERA. She said, "We cannot go into the corpus." She said she knows the interest is based on the ERA and corpus of the fund. She said she would support moving HB 31 to the next committee of referral, because she wants to protect the permanent fund. She expressed concern that "if we use up the earnings reserve, we will not have a dividend in future years," and she asked if she is correct in thinking that if [the ERA] diminishes, there will not be a dividend. She said she understands there will be fluctuations in the amount of the dividend based on the market. CO-CHAIR KREISS-TOMKINS confirmed that if the legislature overspends and the ERA "bottoms out," Representative Story is correct that there would be no money available for the PFD. CO-CHAIR KREISS-TOMKINS told Representative LeDoux that her point was well-taken regarding emergencies. He said his working assumption is that $12 billion in the ERA provides plenty of liquidity with which to handle emergencies. He said it is a scenario to keep in mind. 3:42:50 PM REPRESENTATIVE WOOL moved to report HB 31 out of committee with individual recommendations [and the accompanying fiscal notes]. REPRESENTATIVE VANCE objected. A roll call vote was taken. Representatives Shaw, Story, Wool, and Kreiss-Tomkins voted in favor of the motion. Representatives LeDoux and Vance voted against it. Therefore, HB 31 was reported out of the House State Affairs Standing Committee by a vote of 4-2.