Legislature(2019 - 2020)GRUENBERG 120
04/25/2019 03:00 PM STATE AFFAIRS
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HB 132-PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS 3:32:41 PM CO-CHAIR FIELDS announced that the next order of business would be HOUSE BILL NO. 132, "An Act relating to the Alaska permanent fund; relating to the earnings reserve account; relating to the permanent fund dividend; relating to deposits into the permanent fund; relating to appropriations to the dividend fund and general fund; and providing for an effective date." 3:33:30 PM NATHANIEL GRABMAN, Staff, Representative Adam Wool, Alaska State Legislature, on behalf of Representative Wool, prime sponsor of HB 132, paraphrased from the sponsor statement, which read as follows [original punctuation provided]: HB 132 aims to maintain annual, oil-derived payments to Alaskans while reducing the uncertainty in government funding inherent in the status quo. This will be accomplished by calculating the PFD based on a percentage of oil revenues. The Alaska Permanent Fund (PF) is the repository for much of the state's mineral wealth, with most of that wealth originally derived from oil. Every year, funds are deposited into the corpus of the PF, and are then invested in stocks, bonds, real estate, and other financial instruments. Over time, this principal produces earnings from which Alaskans receive an annual Permanent Fund Dividend (PFD) check. Given the original source of the corpus funds, many Alaskans view the PFD as their share of the state's oil money. Historically, PFDs have been based on a 5-year rolling average of PF earnings. Gubernatorial vetoes and lower legislative appropriation have reduced the amount of the PFD from their statutory value in each of the last three years. Barring a change, it appears likely that the value of the PFD will continue to be debated annually by the legislature, with the proportion of the Percentage of Market Value (POMV) allocated to government services and the PFD constantly in flux. If passed, HB 132 would ensure steady funding for government services by leaving the POMV draw reserved for a specific purpose rather than split. Residents would continue to be paid, with the value of their annual royalty checks now tied directly to the state's mineral (oil) revenue. The value of the dividend would fluctuate along with the price and production of oil. This uncertainty is better sustained in the dividend check, as certainty and predictability are of paramount importance for planning government spending into the future. If the price or volume of oil production increased, so too would our checks. If oil taxes increased, so would the dividend. If new natural gas resources came online, dividends would rise. Increased dividends would also offset the negative effects (higher fuel, utilities, and shipping prices) caused when oil prices are high. MR. GRABMAN added that there is not a strong correlation between oil revenue each year and the historic PFD; in fact, they appear to be inversely correlated. The general trend has been that when the price of oil increases, the PFD decreases, and vice versa. MR. GRABMAN stated that with passage of Senate Bill 26 [during the Thirtieth Alaska State Legislature, 2017-2018, signed into law 6/27/18], a percentage of POMV draw is the state law; the proportion of the POMV that will be devoted to the PFD this year has already been the source of much discussion in both bodies of the legislature, and such discussions appear likely to continue on an annual basis moving forward. MR. GRABMAN relayed that although the principal of the permanent fund is primarily derived from oil wealth, the performance of the Permanent Fund Earnings Reserve ("earnings reserve"), and by extension, the value of the PFD, have arguably tracked more closely with stock market fluctuations than with the price or production of oil. He added that in the same way the taxpayers are more likely to pay attention to government spending than non-taxpayers. Tying the PFD directly to Alaska's oil revenue will ensure that residents remain informed and engaged with respect to the state's oil prices, production, and policies. 3:36:20 PM MR. GRABMAN referred to a PowerPoint presentation, entitled "HB 132: A New Approach to the PFD." Beginning with slide 2, entitled "What does HB 132 accomplish?", Mr. Grabman reviewed the following points: Stabilize government funding by dedicating the POMV draw for state services. Link the Dividend directly to oil revenues. Reduce need for recurrent legislative battle over PFD amount. REPRESENTATIVE WOOL explained that the state has been "breaking the law" in its method of paying out the PFD in the last several years; the statutory formula prescribes one method, and the state has been following another method. He offered that the proposed legislation would eliminate the old statute to avoid the state breaking the law, and a new statute would be enacted - one that would be more easily followed. He added that the "battle" that Mr. Grabman mentioned is the battle over the amount of the dividend; that battle never used to happen because the state followed the statute. He said that the extreme decline in revenue has caused fiscal realignment; HB 132 would attempt to eliminate that annual conflict. REPRESENTATIVE SHAW asked if the proposed legislation would give the state the flexibility to utilize the POMV as needed, separating the government services and the dividend. REPRESENTATIVE WOOL replied that HB 132 would retain the POMV draw from the permanent fund at the current 5.25 percent, and that draw would be transferred, in full, to GF. REPRESENTATIVE LEDOUX questioned, "Since the legislature has seen fit to not follow the law with respect to the current statute, what makes you think that ... we would be any better when it comes to following the formula that you've set out?" REPRESENTATIVE WOOL answered that the current situation came about when [Governor Bill Walker] vetoed half of the PFD amount in the budget [during the Twenty-Ninth Alaska State Legislature, 2015-2016], and it continued during following two years [the Thirtieth Alaska State Legislature, 2017-2018] when the legislature appropriated less than the statutory formula. He offered that this occurred because the state could not afford the larger payment. He further stated that a $3,000 statutory PFD would total about $1.9 billion. If the revenue from oil and POMV comes to $5 billion, and almost $2 billion is spent on PFD checks, Alaskans question, "Is that the best way to spend the limited revenue that we have?" REPRESENTATIVE WOOL continued by saying that HB 132 would link the PFD amount to the revenue: when oil revenue is down, the amount of the PFD would be lower; when oil revenue is up, the amount of the PFD would be higher. He offered that by statutory formula, the PFD amount is high, but the oil revenue to the state is not high, and this has caused the problems that the state is currently experiencing. 3:41:10 PM MR. GRABMAN continued with slide 3, entitled "Current flow of oil money and related funds." He explained that there two types of oil - leases that pre-date 1980 and leases that start in 1980. He referred the committee to Alaska Statutes (AS) 37.13.010(a) for greater detail. He stated that 25 percent of leases, royalties, royalty sales, bonuses, net profit shares, and federal mineral revenue from the "old" oil is put into the corpus; 50 percent of those revenue sources from the "new" oil is put into the corpus. He pointed out that the Alaska State Constitution, Article IX, Section 15, states that at least 25 percent of this revenue must be transferred to the corpus. He said that the remainder of the revenue, including all the production tax, currently flows into GF. Once the money is in the corpus, it is invested; the investment earnings flow into the earnings reserve, which by statute is inflation-proofed; and due to Senate Bill 26, there is a POMV draw, which goes into GF. He stated, "And we then have a long, bruising, drawn-out argument discussion to figure out what the PFD is going to be." MR. GRABMAN referred to slide 4, entitled "flow of oil money and related funds under HB 132," and said that under the proposed legislation, there would no longer be a distinction between old oil and new oil; 25 percent of leases, royalties, royalty sales, bonuses, net profit shares, federal mineral revenue would go into the corpus; the money flows within the permanent fund would be the same as described under the current system; and the question would be, What about the other 75 percent of those six categories from all the oil? He explained that under HB 132, 33 percent of the six revenue sources and production tax or the amount needed to distribute an $1,800 dividend would go to GF where it would be appropriated to the PFD fund and paid out as dividends. He said that if there is not enough revenue to afford an $1,800 dividend, then the remaining 42 percent of the six revenue sources would go into GF along with 67 percent of the production tax. MR. GRABMAN moved on to slide 5, entitled "HB 132 vs Actual PFD," and stated that the chart on the slide shows the actual PFDs since inception compared with what they would have been if HB 132 had been enacted throughout that time. He pointed out in the chart that the trends of the two lines are often in opposition; the amount of oil revenue has not correlated with the historical amounts of the PFD. MR. GRABMAN referred to slide 6, entitled "HB 132 (capped and uncapped PFD) vs. Actual PFD", which adds the trend line for an uncapped PFD under the scenario of HB 132 having been enacted. He pointed out that uncapped PFDs would have been like the actual PFDs most years; however, there would have been massive disparities between the two for a few years. There would have been $5,000 PFDs in the years that oil revenue spiked. Having the cap allows the state to "put more money away" in funds such as the Constitutional Budget Reserve (CBR) and other funds to save for the future. 3:45:24 PM MR. GRABMAN moved on to slide 7, entitled "PFD Values, HB 132 vs. Proposed POMV Splits," and explained that the POMV splits came from the Legislative Finance Agency and the statutory PFD came from the Office of Management & Budget (OMB). He pointed out the wide disparity between the trend lines in the graph. MR. GRABMAN turned to slide 8, entitled "FY202: HB 132 PFD check values, determined by per barrel oil cost and production levels." He explained that the chart demonstrates what the dividend amounts would be under HB 132 at different per-barrel oil costs. The chart compares the official production projections with the values determined for different production levels by linear extrapolation - at 90 percent of projected production, 95 percent, 105 percent, and 110 percent. He pointed out that the values at the top half of the chart - per barrel oil cost of $90 and above - are mostly above the $1,800 threshold. 3:46:40 PM REPRESENTATIVE VANCE stated her belief that linking the [PFD] directly to oil is counter to the intent of the permanent fund since the time of inception. She stated that the intent of the permanent fund was to take a non-renewable resource and turn it into a renewable resource to offset when Alaska's economy was down due to oil prices; a high [PFD] would balance out a low Alaska economy. She offered that under HB 132, both the state's economy and the PFD would be low at the same time, hurting Alaska's economy even more. REPRESENTATIVE WOOL agreed that the permanent fund was created for the intent that when oil prices were low, Alaska would have a vast fund from which to draw for operating. He maintained that under HB 132, that would not change; the structured POMV draw of 5.25 percent would fund government services; the revenue would be steady and not be "chipped away at year after year" for PFD checks. He maintained that under HB 132 the permanent fund would stay intact and, in some ways, be more robust. REPRESENTATIVE WOOL continued by saying that the PFD itself was not in the original conversation concerning the intent of the permanent fund. He stated his belief that the intent of the PFD has morphed from its original intent. He opined that the intent of the PFD was to give Alaskans a dividend from the oil wealth so that they would monitor the investments and spending of the state. He mentioned that the permanent fund has grown tremendously. The PFD checks began at about $300 - not a significant contribution to a person's budget - and varied from year to year. He mentioned that the PFD has become a guaranteed income. With the new structured draw and the size of the permanent fund, the checks could go to $4,000. He offered his belief that such a check defies the intent of the PFD. He concluded that under HB 132, the permanent fund would stay intact and would be used to fund government and services. 3:51:40 PM REPRESENTATIVE VANCE referred to the chart on slides 3 and 4. She asked whether reducing the percentage of new oil revenues going into the corpus from 50 percent to 25 percent under HB 132 would be detrimental to the corpus. REPRESENTATIVE WOOL responded that the combined percentage of old and new oil revenues is about 31 percent; therefore, the reduction is from 31 percent to 25 percent. He agreed that under the proposed legislation, less would go to the corpus. He added that HB 132 was introduced to adjust the PFD in response to the new POMV program. REPRESENTATIVE VANCE asked for the motivation behind HB 132, considering that less money would go into the corpus, less money would be introduced into Alaska's economy, the PFD checks would be fluctuating as much as it has historically, and only the POMV portion for government operations would be protected. REPRESENTATIVE WOOL answered that the model proposed under HB 132 would cause greater fluctuations in the PFD check. A $64 billion permanent fund, invested and producing an average of 8 percent annual return since inception, constitutes steady money regardless of the formula for the PFD. He said that his proposal would cause the check to fluctuate depending on the price and production of oil. He maintained his belief that some variability in the PFD check is acceptable. He stated that his preference is that the money for state government be steady and the payments to Alaskans be variable according to the oil industry market. He suggested that under his proposal there would be more incentive to produce more oil or produce natural gas. He declared that in the event that there is no more oil, or the oil market abates, relying on a POMV draw to pay the PFD check without oil revenue would create a huge problem for Alaska. Under HB 132, if there is no more oil revenue, Alaska is not committed to giving a large check in perpetuity. 3:56:53 PM REPRESENTATIVE LEDOUX asked for confirmation that the proposed legislation puts a cap on the PFD but no floor on the PFD. REPRESENTATIVE WOOL replied, "You are correct." He said that the cap could be raised or lowered, or a floor could be added. He reiterated that if the price of oil goes down to $15 per barrel and production goes down to 250,000 barrels per day, Alaska would have a difficult time operating. He maintained that the dividend under his proposed legislation would be like the dividend one gets with stock in Ford Motor Company: if the company has a good year, the investor gets a good dividend check; if the company loses money, the investor does not get a good check. He concluded that the PFD under HB 132 is tied more to performance of Alaska's number one resource. REPRESENTATIVE VANCE asked, "Who do you represent - the state or the people?" REPRESENTATIVE WOOL responded that he represents the people in the state of Alaska, and he believes that the state and the people of Alaska are inextricably entwined. He opined that a good state system that supports the people is desirable and, in turn, the people will support the state. He conceded that his proposed legislation is a different approach than has been considered. The previous administration introduced a PFD proposal that was complicated; however, there was a component of that formula that was dependent on oil. He mentioned that in 2008, Governor Sarah Palin proposed a bonus check of $1,200 due to abundant oil revenues to the state; it was an "energy" check due to the high cost of heating oil. When the price of oil is high, it is good for the state but bad for the residents; it is of no benefit to the average citizen. He maintained that when the price of oil is high, a larger PFD check can offset some of the other expenses incurred due to the high cost of oil. [HB 132 was held over.]