Legislature(2019 - 2020)GRUENBERG 120

04/25/2019 03:00 PM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
*+ HB 139 AK PERM. FUND CORP. PROCUREMENT EXEMPTION TELECONFERENCED
Heard & Held
*+ HB 132 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
*+ HJR 6 CONST. AM.:PERMANENT FUND & DIVIDEND TELECONFERENCED
Heard & Held
*+ HJR 18 CONST AM: PERMANENT FUND; POMV;EARNINGS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
          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.]                                                                                                         

Document Name Date/Time Subjects
HB139 ver A 4.17.19.PDF HSTA 4/25/2019 3:00:00 PM
HB 139
HB139 Sponsor Statement 4.17.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 139
HB139 Supporting Document - APFC Statement 4.17.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 139
HB139 Fiscal Note DOR-APFC 4.19.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 139
HB132 ver A 4.23.19.PDF HSTA 4/25/2019 3:00:00 PM
HB 132
HB132 Sponsor Statement 4.23.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 132
HB132 Sectional Analysis 4.23.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 132
HB132 Witness List 4.23.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 132
HB132 Presentation 4.25.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 132
HJR006 ver A 2.20.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Sectional Analysis ver A 3.21.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Transmittal Letter 1.29.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Supporting Document - Letter of Support.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Fiscal Note GOV-DOE 2.20.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR018 ver S 4.24.19.PDF HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Sponsor Statement 4.24.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Sectional Analysis 4.24.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Supporting Document - APFC Resolution 4.25.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Fiscal Note OOG-DOE 4.26.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Supporting Document - Letter of Support 4.30.19 #2.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HJR018 Supporting Document - Letter of Support 4.30.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 18
HB139 Supporting Document - Letter of Support 4.30.19.pdf HSTA 4/25/2019 3:00:00 PM
HB 139
HJR006 Opposing Document - Letter of Opposition 4.26.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Opposing Document - Letter of Opposition 4.30.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6
HJR006 Supporting Document - Letters of Support 4.2.19 - 4.30.19.pdf HSTA 4/25/2019 3:00:00 PM
HJR 6