Legislature(2019 - 2020)GRUENBERG 120

03/12/2020 03:00 PM STATE AFFAIRS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Bill Hearing Canceled>
Moved CSHB 307(STA) Out of Committee
-- Public Testimony --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved HB 285 Out of Committee
-- Public Testimony --
         HJR 31-CONST AM: PERMANENT FUND; POMV;EARNINGS                                                                     
3:22:43 PM                                                                                                                    
CO-CHAIR FIELDS announced that the  final order of business would                                                               
be HOUSE  JOINT RESOLUTION  NO. 31,  Proposing amendments  to the                                                               
Constitution  of  the State  of  Alaska  relating to  the  Alaska                                                               
permanent fund  and to appropriations  from the  Alaska permanent                                                               
3:22:57 PM                                                                                                                    
CO-CHAIR  KREISS-TOMKINS, as  prime  sponsor of  HJR 31,  relayed                                                               
that the  proposed resolution is  for a  constitutional amendment                                                               
pursuant  to   a  resolution  from  the   Alaska  Permanent  Fund                                                               
Corporation  (APFC)  board of  trustees  stating  support for  an                                                               
endowment  model,   which  would  constitutionally   protect  the                                                               
entirety of the permanent fund  under the percent of market value                                                               
(POMV)  structure.   It  would protect  the  permanent fund  from                                                               
being overspent unsustainably.                                                                                                  
CO-CHAIR KREISS-TOMKINS  mentioned the committee  substitute (CS)                                                               
for HJR 31,  which contains some language  changes recommended by                                                               
APFC  and includes  an "escape  hatch" allowing  an unsustainable                                                               
amount  of money  -  greater than  the  5 percent  POMV  - to  be                                                               
withdrawn in one  year with a five-sixths  "super majority" vote.                                                               
The  motive  behind that  provision  is  that  in only  the  most                                                               
extraordinary  and   exceptional  of  circumstances   should  the                                                               
legislature be allowed to overspend.                                                                                            
CO-CHAIR FIELDS  confirmed for Representative  Vance that  the CS                                                               
is Version 31-LS1566\S, Nauman, 3/11/20.                                                                                        
3:25:28 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
3:27:48 PM                                                                                                                    
CO-CHAIR FIELDS  moved to adopt  the CS  for HJR 31,  Version 31-                                                               
LS1566\S, Nauman, 3/11/20, as the  working document.  There being                                                               
no objections, Version S was before the committee.                                                                              
CO-CHAIR  KREISS-TOMKINS  confirmed for  Representative  Thompson                                                               
that   the   intent   of   the    proposed   resolution   is   to                                                               
constitutionally protect the whole permanent fund, and a five-                                                                  
sixth vote  would be needed to  withdraw more than the  5 percent                                                               
POMV in exceptional circumstances.                                                                                              
REPRESENTATIVE  THOMPSON  expressed   that  in  Alaska's  present                                                               
fiscal  situation,  he  does  not want  to  see  the  legislature                                                               
prevented  from   providing  public   safety  and  health   by  a                                                               
requirement of 34  House members and 17 Senate  members voting to                                                               
withdraw funds.                                                                                                                 
CO-CHAIR  KREISS-TOMKINS   responded  that  the   alternative  is                                                               
spending down the  permanent fund itself -  the ultimate "kicking                                                               
the  can  down  the  road."     In  the  present  situation,  the                                                               
legislature has  a variety of  options available to it  - cutting                                                               
the budget,  raising revenues,  or through a  bond.   He declared                                                               
that  the issue  is whether  the  permanent fund  is regarded  as                                                               
permanent or whether it is regarded  as a saving account that can                                                               
be  spent  down.    Unless   the  legislature  decides  that  the                                                               
permanent  fund is  not a  savings account  that can  spent down,                                                               
then it  probably will be.   Future generations of  Alaskans will                                                               
be in a far worse position than current Alaskans.                                                                               
REPRESENTATIVE  THOMPSON  stated  that  there are  ways  for  the                                                               
permanent fund corpus  to be drawn down.   The federal government                                                               
could require  the state pay  retirement to employees  and, thus,                                                               
demand that the state pay it  out of the principle.  He expressed                                                               
that the  voting threshold  would be  a "steep  climb" in  a dire                                                               
CO-CHAIR KREISS-TOMKINS  responded that even providing  an escape                                                               
hatch  as  described in  Version  S  is  very  lenient.   In  his                                                               
discussions with APFC, the preference  is that there be no escape                                                               
hatch  and  that  the  permanent  fund  be  regarded  as  a  true                                                               
endowment to be managed for intergenerational equity for long-                                                                  
term  benefit to  the state.    He maintained  that the  proposed                                                               
constitutional amendment  would force the legislature  to balance                                                               
the state  budget with  some combination  of cuts,  spending, and                                                               
raising revenues, but not with the permanent fund.                                                                              
3:33:45 PM                                                                                                                    
CO-CHAIR FIELDS asked whether the  proposed amendment would put a                                                               
strict spending cap in the constitution.                                                                                        
CO-CHAIR KREISS-TOMKINS  answered that it would  be a supply-side                                                               
spending cap  instead of the  permanent fund being a  "spigot" of                                                               
cash to  be opened unsustainably.   It would put  the legislature                                                               
within  the confines  of a  sustainable draw  from the  permanent                                                               
fund.   He added,  "Two-thirds to  three-quarters of  all general                                                               
fund (GF)  revenue, it  already is  at present,  at least  in the                                                               
current operating  budget, so it  effectively would  constitute a                                                               
spending  cap  for  that  two-thirds  to  three-quarters  of  the                                                               
3:35:06 PM                                                                                                                    
REPRESENTATIVE VANCE  cited the  APFC resolution  [Resolution 20-                                                               
01, 2a],  which read  in part:   "The  Board recommends  having a                                                               
mechanism  built  into  state  law that  would  require  APFC  to                                                               
revisit  this  return  assumption  every few  years  ...."    She                                                               
maintained  that  locking  the  5  percent  POMV  draw  into  the                                                               
constitution  would ignore  the  request of  the  APFC and  raise                                                               
concerns over the sustainability of the fund over the long term.                                                                
CO-CHAIR  KREISS-TOMKINS  questioned  the  understanding  of  the                                                               
legislature  of  "real  value"  versus  "nominal  value"  of  the                                                               
state's funds and management of those  funds.  He said that the 5                                                               
percent  POMV draw  reflects the  preponderance  of analysis  and                                                               
legislator and public comment.   He noted that the legislature is                                                               
not  required to  draw the  full 5  percent, but  probably always                                                               
will do so  to balance the budget.  He  stated that nominally the                                                               
value of the  fund grows, but in  real terms - in  2020 dollars -                                                               
it shrinks  over time.   He maintained that the  legislature must                                                               
confront the  question:   "Are we going  to manage  the permanent                                                               
fund for growth  - for real growth, not just  nominal growth - or                                                               
are  we, the  legislature,  going  to manage  the  fund and  just                                                               
maintain  it?"    He  said  that   the  5  percent  draw  is  the                                                               
"maintenance"  option;  a  lower  draw,  such  as  4.75  percent,                                                               
provides for growth in real terms.   He expressed that he prefers                                                               
short-term pain  and long-term gain,  that is, a smaller  draw to                                                               
manage the fund for growth in the long term.                                                                                    
CO-CHAIR  KREISS-TOMKINS pointed  out  that  the APFC  resolution                                                               
addresses  earnings reserve  account (ERA)  shortfalls under  the                                                               
current  fund structure;  the  proposed constitutional  amendment                                                               
would  collapse the  ERA and  the principle  together; therefore,                                                               
there would be no more ERA shortfalls.                                                                                          
3:41:14 PM                                                                                                                    
REPRESENTATIVE VANCE  referred to page  1, lines 5-6, of  HJR 31,                                                               
which read:                                                                                                                     
     At  least  twenty-five  percent of  all  mineral  lease                                                                    
     rentals,  royalties,  royalty  sale  proceeds,  federal                                                                    
     mineral  revenue sharing  payment and  bonuses received                                                                    
     by the State shall be placed in a permanent fund.                                                                          
REPRESENTATIVE  VANCE asked  whether the  sponsor had  considered                                                               
statutory royalty or  any other percentage going  into the corpus                                                               
for the long-term growth of the fund.                                                                                           
CO-CHAIR  KREISS-TOMKINS  answered  that the  management  of  the                                                               
permanent fund  has evolved  tremendously in  the 40  years since                                                               
inception.  When the fund  was first created, investment was very                                                               
conservative  and  restrictive;  only  investment  in  bonds  was                                                               
allowed.   Over the next  40 years, investments began  to include                                                               
stocks  and private  equity,  and currently  it  has a  massively                                                               
diversified portfolio.  With  the initial investment constraints,                                                               
having  a principle  and  an  ERA made  sense.    In the  current                                                               
context of how the APFC invests  the money, that structure - of a                                                               
principle and  an ERA - no  longer makes sense, which  is why the                                                               
APFC trustees passed Resolution 20-01.                                                                                          
CO-CHAIR  KREISS-TOMKINS, in  response to  Representative Vance's                                                               
question  about   depositing  other  revenue  streams   into  the                                                               
permanent fund, stated he has  not explored that possibility.  He                                                               
suggested  that  the  question   relates  to  the  larger  issue:                                                               
diverting  funds  from  GF  into   the  permanent  fund  presents                                                               
challenges  for funding  education  and public  safety but  would                                                               
enhance the permanent fund and its  growth.  It is a decision for                                                               
the legislature.                                                                                                                
3:44:39 PM                                                                                                                    
CO-CHAIR FIELDS  offered that the  declining oil revenue  and the                                                               
transition  from  oil  revenue  to revenue  from  permanent  fund                                                               
earnings  presents a  strong argument  for growing  the permanent                                                               
fund  now.   He asked  whether that  assessment is  a fundamental                                                               
calculation  in  considering  the   POMV  rate  in  the  proposed                                                               
CO-CHAIR  KREISS-TOMKINS suggested  that the  "maintenance versus                                                               
growth" conversation  has not occurred;  the emphasis  during the                                                               
Thirtieth Alaska  State Legislature [Senate Bill  26, signed into                                                               
law  6/13/18] was  to establish  a POMV.   He  expressed that  he                                                               
subscribes  to the  approach that  it  is better  to suffer  from                                                               
austerity in  the short term  for greater prosperity in  the long                                                               
term; therefore, a lower draw makes sense.                                                                                      
CO-CHAIR FIELDS  expressed his preference  that the fund  grow to                                                               
$100 billion  in real  terms, recognizing that  the share  of the                                                               
budget  currently  funded  by the  earnings  would  require  that                                                               
amount  for Alaska  to be  fiscally  independent.   He posed  the                                                               
question:  "How do you grow  to that rate with the least economic                                                               
damage  now, maximizing  the revenue  potential now,  which isn't                                                               
intimately related to the oil  industry?"  He cited the declining                                                               
oil industry and stated that  Alaska's traditional revenue stream                                                               
will not be available in 40  years; therefore, Alaska needs to be                                                               
fiscally independent in  40 years.  He  mentioned the possibility                                                               
of raising revenues  from high-earning people now  so that Alaska                                                               
can be  fiscally independent  in the  not-so-distant future.   He                                                               
suggested that as the oil  industry declines, so do other revenue                                                               
options such as income taxes.                                                                                                   
CO-CHAIR KREISS-TOMKINS  relayed that  his outlook  - independent                                                               
of restructuring  the permanent fund  as recommended in  the APFC                                                               
resolution  - is  that  "things are  quite a  bit  worse than  we                                                               
think"  as  far  as  production from  Alaska's  oil  fields,  the                                                               
uncertainty regarding  the price of  oil, the performance  of oil                                                               
stocks, and  the emergence  of renewable energy.   He  added that                                                               
the state  has been  subsidizing the  [operating] budget  for the                                                               
past six years  by not passing a capital budget,  which is wholly                                                               
unsustainable  in a  state that  is so  infrastructure dependent.                                                               
When the state again has  capital expenditures, that will present                                                               
another  cash  demand  that  the  state has  been  evading.    He                                                               
concluded that it is a  difficult "math problem" which emphasizes                                                               
the importance of taking a long-term view of the state's assets.                                                                
3:50:18 PM                                                                                                                    
CO-CHAIR  FIELDS  agreed  with  the  importance  of  growing  the                                                               
permanent fund; it was set up  to be the "renewable energy source                                                               
for  Alaska when  oil was  gone."   That industry  is aging,  and                                                               
Alaska has  a dwindling number of  years to build up  the fund to                                                               
provide fiscal sustainability.  He  mentioned two questions to be                                                               
asked:   Do we need the  structure proposed under HJR  31 and can                                                               
Alaska afford to pay any permanent fund dividend (PFD)?                                                                         
REPRESENTATIVE  HOPKINS stated  that Resolution  20-01 from  APFC                                                               
presented  two  options  and  asked  why  Representative  Kreiss-                                                               
Tomkins chose option  1 over option 2.  The  first option was the                                                               
constitutional  amendment  [described  under  1a  of  the  [APFC]                                                               
resolution and  proposed under  HJR 31].   The second  option was                                                               
described under number 2 of  the [APFC] resolution, which read in                                                               
     2.  Adjustments  to  the  existing  rules-based  system                                                                  
     governing fund transfers into and  out of the Principal                                                                  
     and ERA, ...                                                                                                             
     a. The  Board recommends having a  mechanism built into                                                                  
     state  law  that would  require  APFC  to revisit  this                                                                    
     return assumption every few years ...                                                                                      
     b. To hedge  this risk, the Board supports  a change to                                                                  
     the existing  rules-based system to maintain  a balance                                                                    
     in the ERA  of at least four times  the expected annual                                                                    
     POMV draw ("4X Buffer").                                                                                                 
CO-CHAIR  KREISS-TOMKINS  expressed  his understanding  that  the                                                               
trustees preferred option 1 over option  2, but in the absence of                                                               
1, 2 is better  than nothing.  He said that  he agrees with their                                                               
REPRESENTATIVE  HOPKINS offered  that option  1 does  not require                                                               
action by the legislature every year, but option 2 does.                                                                        
REPRESENTATIVE VANCE  asked whether, in addition  to changing the                                                               
constitution to combine the ERA with  the corpus and adding the 5                                                               
percent POMV draw,  the sponsor considered enshrining  the PFD in                                                               
the constitution as part of HJR 31.                                                                                             
CO-CHAIR  KREISS-TOMKINS  answered  no.   He  said  that  he  has                                                               
supported doing so  in past years and believes it  to be the best                                                               
solution to  addressing the dividend; however,  because there are                                                               
so many  diverse perspectives on  the PFD, layering  the dividend                                                               
question on top of the  question of protecting the permanent fund                                                               
would  create  division, and  it  would  be impossible  to  reach                                                               
REPRESENTATIVE  VANCE suggested  that linking  the protection  of                                                               
the fund  with the  PFD would demonstrate  to Alaskans  that they                                                               
would get their share of  the resources while the state's portion                                                               
is "wrapped up tight."                                                                                                          
3:55:48 PM                                                                                                                    
CO-CHAIR FIELDS  commented that he  would like to see  a modeling                                                               
of  lifetime  earnings from  the  fund  for individual  Alaskans,                                                               
comparing  the   rate  of  return  through   the  permanent  fund                                                               
investments  with   the  rate   of  return   through  investments                                                               
available to individuals.  He  mentioned that he, himself, cannot                                                               
earn at the same rate as the fund.                                                                                              
CO-CHAIR  KREISS-TOMKINS offered  that HJR  31 represents  one of                                                               
the most important questions that  the legislature can broach and                                                               
is very timely.   In response to Representative  Vance, he stated                                                               
that there is broad agreement  that the permanent fund should not                                                               
be  overspent;  HJR 31  adheres  to  that principle  rather  than                                                               
introducing other issues such as an income tax or the dividend.                                                                 
CO-CHAIR FIELDS stated that HJR 31 would be held over.                                                                          

Document Name Date/Time Subjects
HJR 31 Work Draft Committee Substitute ver S 3.11.20.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 ver U 3.10.2020.PDF HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 Sponsor Statement 3.10.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 Sectional Anaylsis 3.10.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 Supporting Document - APFC Resolution 20-01 3.5.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 Fiscal Note OOF-DOE 3.8.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HB 190 ver A 1.24.20.PDF HSTA 2/25/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 190
HJR 31 Explanation of Changes v. U to v. S 3.11.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HJR 31 Sectional Analysis v. S 3.11.2020.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31
HB 190 Sponsors Statement 1.24.20.pdf HSTA 2/25/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 190
HB 190 Fiscal Note DOR-PFD 2.22.20.pdf HSTA 2/25/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 190
HB 307 v. A 3.9.2020.PDF HSTA 3/10/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 307
HB 307 Sponsor Statement v. A 3.9.2020.pdf HJUD 3/23/2020 1:00:00 PM
HSTA 3/10/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 307
HB 307 Sectional Analysis v. A 3.9.2020.pdf HSTA 3/10/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 307
HB 307 Fiscal Note DOC-IDO-03-06-20.pdf HSTA 3/10/2020 3:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 307
HB 307 Supporting Document - Reentry Coalitions Letter 3.11.2020.pdf HJUD 3/23/2020 1:00:00 PM
HSTA 3/12/2020 3:00:00 PM
HB 307
HB 307 v. A Proposed Amendment #1 HSTA 3.12.2020.pdf HSTA 3/12/2020 3:00:00 PM
HB 307
HJR 31 Letter of Opposition - Testimony 3.11.20.pdf HSTA 3/12/2020 3:00:00 PM
HJR 31