Legislature(2021 - 2022)BUTROVICH 205

04/21/2021 01:30 PM Senate JUDICIARY

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               SJR 6-CONST. AM: PERM FUND & PFDS                                                                            
                 SB 53-PERM FUND; ADVISORY VOTE                                                                             
1:34:17 PM                                                                                                                    
CHAIR  HOLLAND  announced  the   consideration  of  SENATE  JOINT                                                               
RESOLUTION  NO. 6,  Proposing amendments  to the  Constitution of                                                               
the  State  of Alaska  relating  to  the Alaska  permanent  fund,                                                               
appropriations from  the permanent  fund, and the  permanent fund                                                               
SENATE BILL  NO. 53,  "An Act  relating to use  of income  of the                                                               
Alaska permanent  fund; relating to  the amount of  the permanent                                                               
fund  dividend; relating  to the  duties of  the commissioner  of                                                               
revenue;  relating to  an advisory  vote on  the permanent  fund;                                                               
providing for an  effective date by repealing  the effective date                                                               
of  sec. 8,  ch. 16,  SLA 2018;  and providing  for an  effective                                                               
[This was the first hearing for both SJR 6 and SB 53.]                                                                          
1:35:01 PM                                                                                                                    
BRANDON  BREFCZYNSKI, Special  Assistant to  the Policy  Advisor,                                                               
Office of the Governor, Juneau, Alaska,  stated that SJR 6 is the                                                               
governor's  constitutional  amendment  related to  the  permanent                                                               
fund and  SB 53 is  the governor's  statutory 50:50 rule  for the                                                               
permanent  fund dividend  (PFD). On  behalf of  the governor,  he                                                               
related  that  these  two  pieces  of  legislation  are  Governor                                                               
Dunleavy's  top  priorities.  The  first  step  to  securing  the                                                               
state's fiscal  future is to  protect the permanent fund  and the                                                               
PFD   constitutionally.  After   years  of   spending  down   the                                                               
Constitutional  Budget Reserve  (CBR)  and  the Statutory  Budget                                                               
Reserve (SBR) accounts, a simple  majority vote could deplete the                                                               
accounts   and  jeopardize   the  permanent   fund.  This   could                                                               
potentially  eliminate   the  PFD   for  future   generations  of                                                               
Alaskans. The governor  senses the urgency of  the fiscal crisis,                                                               
he said. The governor has  proposed this legislation to establish                                                               
a framework for managing the  permanent fund and implementing the                                                               
necessary protections  to prevent ad  hoc spending and  allow for                                                               
continued growth.  In addition to protecting  the permanent fund,                                                               
this  proposal  will  protect  the  PFD.  It  will  also  restore                                                               
Alaskan's confidence and trust that  they will receive the annual                                                               
share  of Alaska's  resources and  wealth. The  governor believes                                                               
the public must be included because  it was through the people of                                                               
the state  that the permanent  fund was initially created.  SJR 6                                                               
and  SB  53 must  be  considered  together  to make  sense.  This                                                               
resolution and bill will protect  the permanent fund, provide for                                                               
the  fund's  continued  growth,   and  involve  Alaskans  in  the                                                               
1:37:51 PM                                                                                                                    
SENATOR  SHOWER  asked him  to  explain  why  both the  bill  and                                                               
resolution are necessary.                                                                                                       
MR.  BREFCZYNSKI responded  that SJR  6 proposes  two provisions.                                                               
First, it  would provide an  annual draw from the  permanent fund                                                               
through  a percentage-of-market-value  (POMV) rule  and establish                                                               
the  permanent fund  dividend (PFD)  in the  Alaska Constitution.                                                               
Second, it  would require that  a portion of the  funds withdrawn                                                               
be used for the  PFD. SB 53 proposes a change  in the PFD formula                                                               
to 50 percent  of the 5 percent-of-market-value  (POMV) draw from                                                               
the permanent  fund earnings.  Thus, SB  53 provides  the formula                                                               
referenced in the constitutional amendment  proposed in SJR 6 and                                                               
will ensure that the PFD will be paid as provided by law.                                                                       
1:39:09 PM                                                                                                                    
SENATOR SHOWER stated that he  has heard some legislators express                                                               
that enshrining  the formula into  the Alaska  Constitution could                                                               
bind  future legislatures.  He said  that this  concern could  be                                                               
assuaged since  SB 53  establishes the  formula in  statute. This                                                               
provides  the  legislature  with  the  ability  to  work  on  the                                                               
formula. SJR  6 would  guarantee the  POMV draw  for the  PFD, he                                                               
MR. BREFCZYNSKI  added that while  PFD formula would  be provided                                                               
for in statute, any further  changes to the formula would require                                                               
a vote of the people to ratify the change.                                                                                      
1:40:15 PM                                                                                                                    
SENATOR HUGHES  asked if the reason  for the 50:50 split  was not                                                               
only  because it  was how  then-Governor Hammond  established the                                                               
permanent  fund,  but  also  because  50  percent  falls  halfway                                                               
between the amount of the  permanent fund that would be available                                                               
to  fund government  and the  amount that  could be  paid out  in                                                               
She recalled  that initially, the  governor suggested  paying out                                                               
dividends at  70 to  80 percent  of the  draw and  depositing the                                                               
remaining 20  to 30 percent  in the  general fund to  provide for                                                               
government services. However, some  legislators wanted to reverse                                                               
that ratio, so the 50:50 split falls in the middle, she said.                                                                   
1:41:42 PM                                                                                                                    
MR. BREFCZYNSKI replied it is  both. Alaska's resources are owned                                                               
in  common  by  the  people  of  the  state.  He  agreed  that  a                                                               
disconnect exists  between the current  statutory PFD  formula in                                                               
law and  how the legislature uses  the POMV formula to  draw from                                                               
the  permanent fund.  The governor  has decided  to meet  halfway                                                               
with the 50:50 proposal.                                                                                                        
SENATOR HUGHES asked if the  governor is proposing a midway point                                                               
or if he  is using the 50:50 rule to  negotiate some other split,                                                               
such as  20 percent  for the  PFD and  80 percent  for government                                                               
MR. BREFCZYNSKI said  the governor believes the  50:50 formula is                                                               
the appropriate split.                                                                                                          
SENATOR HUGHES  asked him  to verify  that the  governor supports                                                               
the statutory PFD, but he is willing to meet at the mid-point.                                                                  
MR.  BREFCZYNSKI  answered yes.  The  governor  believes that  50                                                               
percent for  PFDs and 50  percent for government services  is the                                                               
appropriate split.                                                                                                              
1:43:47 PM                                                                                                                    
At ease                                                                                                                         
1:44:04 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
1:44:06 PM                                                                                                                    
SENATOR  MYERS  offered his  view  that  the  50:50 rule  is  not                                                               
accurate. He  said that SJR 6  relates to 50 percent  of earnings                                                               
from  investments. However,  the  state has  already diverted  75                                                               
percent of royalties to fund  government, perhaps more. Thus, the                                                               
state has already shifted a  significantly higher proportion than                                                               
50 percent to fund government services.                                                                                         
MR. BREFCZYNSKI agreed. It is not  50 percent of the pure royalty                                                               
wealth, but  it also  includes the  investment earnings  from the                                                               
royalties.  Then through  a  formula, 50  percent  of the  annual                                                               
statutory net  income from the royalties  and investment earnings                                                               
provides  for the  dividends. He  explained  that since  Alaskans                                                               
cannot  own   the  subsurface  rights,  this   is  a  compromise.                                                               
Landowners in  the Lower  48 receive  royalties for  any resource                                                               
development  on their  property,  so  if they  choose  to save  a                                                               
portion  of  those  royalties,   it  will  result  in  investment                                                               
earnings, which would pay these landowners an ongoing dividend.                                                                 
1:45:42 PM                                                                                                                    
SENATOR SHOWER agreed with Senator  Myers that the amount to fund                                                               
government  does   not  represent   50  percent.  He   asked  Mr.                                                               
Brefczynski to highlight the differences  between SJR 6 and SJR 1                                                               
introduced by Senator Wielechowski.  He expressed his interest in                                                               
inflation  proofing   the  permanent   fund  for   the  continued                                                               
protection and growth of the fund.                                                                                              
1:46:40 PM                                                                                                                    
MR. BREFCZYNSKI  deferred to Mr. Barnhill  to speak to SJR  1. In                                                               
terms of inflation proofing, SJR  6 will constitutionally protect                                                               
the permanent  fund, so  it will not  be necessary  to inflation-                                                               
proof the  fund by depositing  a portion of the  Earnings Reserve                                                               
Account into  the fund's  principal. He  said that  the permanent                                                               
fund  is also  protected from  inflation  by having  a set  draw.                                                               
Currently, statutes  set the draw  at 5  percent. The goal  is to                                                               
have the  permanent fund earn  more, he said. He  illustrated how                                                               
the calculation  in SJR  6 would work,  such that  permanent fund                                                               
earnings  of 7  percent with  a 5  percent draw  would have  real                                                               
growth of 2 percent. He explained  that basing the 5 percent draw                                                               
means it would be based on  a five-year average, so the effective                                                               
rate would  also be considered.  He reported that  currently, the                                                               
fund  balance is  $78 billion.  He clarified  that the  five-year                                                               
average goes  back 6  years. Thus,  it is  a much  smaller number                                                               
than a 5  percent calculation on $78 billion,  the fund's current                                                               
1:47:49 PM                                                                                                                    
SENATOR KIEHL agreed  it is not a 50:50 split  for the people and                                                               
government.  As  Mr. Brefczynski  said  when  he paraphrased  the                                                               
preamble of the  Alaska Constitution, the state is  the people so                                                               
it  is the  peoples' roads,  bridges, troopers,  prisons, courts,                                                               
education, schools,  clean air, clean drinking  water, biologists                                                               
and fish managers.                                                                                                              
1:48:49 PM                                                                                                                    
At ease                                                                                                                         
1:51:47 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
1:52:22 PM                                                                                                                    
MIKE  BARNHILL,  Deputy   Commissioner,  Department  of  Revenue,                                                               
Juneau,   Alaska,   began  a   PowerPoint   on   behalf  of   the                                                               
administration.  He  said  that   the  proposals  are  relatively                                                               
straightforward.  In response  to  Senator  Shower's request,  he                                                               
offered to compare SJR 1 and SJR 6 during his presentation.                                                                     
MR. BARNHILL referred  to slide 2, which  outlines the objectives                                                               
of SJR  6. The first objective  is to protect the  permanent fund                                                               
to  ensure  it  lasts  forever by  aligning  the  permanent  fund                                                               
structure  with the  modern  approach  to managing  institutional                                                               
funds and  endowments. As the  third bullet point  suggests, that                                                               
will happen if the legislature  adopts a single-account structure                                                               
for the permanent  fund. The current structure was  placed in the                                                               
Alaska Constitution  in 1976. The drafters  crafted the amendment                                                               
based on  historic trust  law and trust  structures which  used a                                                               
two-account  structure:   a  principal  account  and   an  income                                                               
account. Historically, the  mantra was to save  the principal and                                                               
spend the income.  In the last few  decades, investment advisers,                                                               
consultants,  and  investment   managers  have  recommended  that                                                               
endowments update their structures  to a one-account structure. A                                                               
specific percentage  can be spent annually.  Once that percentage                                                               
is   devised,   it   will   automatically   inflation-proof   the                                                               
institutional fund or endowment  and its inflation-adjusted value                                                               
will last forever.                                                                                                              
MR.   BARNHILL   stated  that   the   second   objective  is   to                                                               
constitutionally  protect the  PFD. SJR  6 would  require that  a                                                               
percentage  of  the  distribution  from  the  permanent  fund  be                                                               
dedicated  to  the  permanent  fund  dividend  (PFD).  Since  the                                                               
enactment of  Senate Bill 26  in 2018,  the state has  been using                                                               
the  permanent  fund  to  pay  the  PFD  and  provide  funds  for                                                               
government spending.  The spending demands on  the permanent fund                                                               
have increased, therefore the percentage  of funds drawn from the                                                               
permanent fund has also increased.  One reason the administration                                                               
and  other stakeholders,  including  the trustees  of the  Alaska                                                               
Permanent Fund  Corporation, are suggesting the  state update the                                                               
structure   in  the   Alaska   Constitution   is  concern   about                                                               
prematurely depleting  the Earnings Reserve Account  (ERA). It is                                                               
possible that the  ERA could be depleted in a  series of years by                                                               
annually  drawing  5  percent  from the  fund,  combined  with  a                                                               
downturn in the investment market.  To avoid that occurrence, the                                                               
APFC  trustees  and  the administration  propose  to  covert  the                                                               
existing  two-account   structure  to  a   one-account  endowment                                                               
structure.  Finally, this  measure requires  an advisory  vote by                                                               
the people  of Alaska  when statutory  changes to  the allocation                                                               
for PFDs are made.                                                                                                              
1:57:07 PM                                                                                                                    
SENATOR  KIEHL  asked  which  provision in  SJR  6  will  protect                                                               
against  eroding  the  real  value of  the  permanent  fund.  The                                                               
drafting structure for SJR 6  would allow the legislature to draw                                                               
10 percent  in a year  with a simple  majority vote by  each body                                                               
and the governor's signature.                                                                                                   
MR. BARNHILL answered  that his PowerPoint contains  a slide that                                                               
discusses the real value versus  the nominal value of returns. He                                                               
explained  that  the real  value  of  a  fund is  its  inflation-                                                               
adjusted  value.  The  purpose of  using  the  inflation-adjusted                                                               
value of the  fund is to ensure that the  purchasing power of the                                                               
fund will  be no less  over time. Governor Dunleavy  has proposed                                                               
to  allow   the  legislature  through  statute   to  specify  the                                                               
distribution percentage.  In 2018, the legislature  passed Senate                                                               
Bill 26, the distribution rule.  Initially, the distribution rule                                                               
specified 5.25 percent  of the lagging five-year  market value of                                                               
the permanent fund and today it  is 5 percent. As Mr. Brefczynski                                                               
described, the  five-year lagging average  is the average  of the                                                               
first 5 of the last 6  fiscal years (FY). The legislature has had                                                               
ongoing  discussions  about  whether  5 percent  is  the  correct                                                               
number  in the  past few  years. He  opined that  this discussion                                                               
would  never end.  The state  must always  evaluate the  spending                                                               
from  the fund  in relation  to the  real return  of the  fund to                                                               
protect the fund  from inflation. That calculation  is subject to                                                               
fluctuations in capital markets, inflation, and spending levels.                                                                
MR. BARNHILL said  this creates a bit of a  dilemma. One solution                                                               
would   be   to  hardwire   a   specific   percentage  into   the                                                               
Constitution, but  as capital  markets fluctuate,  the percentage                                                               
could be too high or too low.  SJR 1 proposes placing a 5 percent                                                               
distribution   of   the   permanent  fund's   lagging   five-year                                                               
percentage-of-market-value (POMV)  in the  Constitution. Governor                                                               
Dunleavy's proposal in SJR 6  would not specify the percentage in                                                               
the  Constitution.  Instead,  SB  53 would  establish  an  annual                                                               
distribution rule  of 5 percent  of the lagging  five-year market                                                               
value. This will  give the legislature the flexibility  to pick a                                                               
distribution  rate consistent  with  protecting  the fund's  real                                                               
value over time.                                                                                                                
2:00:31 PM                                                                                                                    
MR.  BARNHILL responded  to Senator  Kiehl's question  of whether                                                               
the legislature could draw 10  percent. He argued that the Alaska                                                               
Constitution sets  out that  it must be  a permanent  fund, which                                                               
means that the fund's real  value must be permanently maintained.                                                               
Enacting distribution rates are  at odds with that constitutional                                                               
He  said the  markets  could have  such high  returns  that a  10                                                               
percent distribution  is consistent with  the real return  of the                                                               
permanent  fund. That  has happened  for brief  periods over  the                                                               
past  50 years,  but  it  is not  likely  to  be sustainable.  He                                                               
offered his belief that the  legislature will focus on the spirit                                                               
of the  Alaska Constitution and  that any distribution  rate that                                                               
risks  eroding the  real value  of the  permanent fund  over time                                                               
will likely be found invalid.                                                                                                   
MR.  BARNHILL  said  that the  governor's  approach  would  allow                                                               
flexibility and for indefinite,  ongoing discussions because that                                                               
is how endowment  funds are managed. However,  if the legislature                                                               
so desires, the  governor is willing to let  the legislature make                                                               
the policy  decision to hardwire  a specific percentage  into the                                                               
Alaska Constitution. This could happen  in a variety of ways. One                                                               
approach  taken in  2018 in  House Bill  213 was  to convert  the                                                               
Public School Trust  from a historic two-account  structure to an                                                               
endowment  with not  more  than a  5  percent distribution  rate.                                                               
Adding  specific  language  "not  more  than"  provided  it  some                                                               
flexibility to  distribute less if  APFC's staff  and consultants                                                               
determined  there  was a  risk  of  overdraw.  HJR 1  takes  that                                                               
approach, he said.                                                                                                              
2:03:09 PM                                                                                                                    
SENATOR  MYERS asked  if the  constitutional language  should use                                                               
the average real realized rate  of return rather than hardwire in                                                               
a specific figure into the Alaska Constitution or statute.                                                                      
MR.  BARNHILL answered  that would  be worth  considering because                                                               
the goal  of modern  institutional fund management  is to  try to                                                               
match  the  real  rate  of  return  to  the  spending  rate.  One                                                               
difficulty is that market rates  can fluctuate substantially. The                                                               
danger of using the real rate  of return is that when markets are                                                               
high, it is possible to draw out  too much and fund the budget at                                                               
a higher level,  which would need to be  ratcheted down. However,                                                               
setting  the percentage  of distribution  rate in  statute, using                                                               
the  lagging  five-year  market  value  of  the  permanent  fund,                                                               
provides the permanent fund and  the legislature some consistency                                                               
each  year. Currently,  under  the Senate  Bill  26 formula,  the                                                               
permanent fund distributions have been about $3 billion a year.                                                                 
2:05:48 PM                                                                                                                    
SENATOR HUGHES asked  if there is universal  or general agreement                                                               
among  financial experts  that a  5 percent  POMV will  allow for                                                               
inflation  proofing.   She  said   she  has  heard   some  people                                                               
supporting a lower amount.                                                                                                      
MR. BARNHILL moved  to slide 4, distribution  rates. He explained                                                               
that  discussions  about  the returns  from  the  permanent  fund                                                               
typically relate  to nominal returns.  In order to  calculate the                                                               
real rate  of return, it  is necessary to subtract  inflation. In                                                               
order  to  inflation proof  an  institutional  or endowment  fund                                                               
model, the  fund needs to  retain earnings  in the amount  of the                                                               
inflation  during  that  period.  He clarified  that  the  global                                                               
capital market has been a  bull market, meaning returns have been                                                               
rising  since  2009.  Investment  markets were  concerned  as  to                                                               
whether  the bull  market  was sustainable.  In  March 2020,  the                                                               
global pandemic caused  a sharp market correction  with an almost                                                               
automatic  rebound. The  bull market  has continued  or else  the                                                               
markets have entered a new business cycle and bull market.                                                                      
He offered  his belief that  overall, the  investment consultants                                                               
never  agree. However,  most  investment  consultants and  market                                                               
advisors  the state  uses are  concerned  that over  the next  10                                                               
years, hitting the 5 percent  rate of return will be challenging.                                                               
Currently, the year-to-date investment  return is greater than 20                                                               
percent for the retirement systems and permanent fund.                                                                          
2:08:52 PM                                                                                                                    
MR.  BARNHILL  offered his  view  that  the capital  markets  are                                                               
pulling  returns forward  and the  state will  pay the  price for                                                               
that over  the next three  to five  years. However, no  one knows                                                               
for sure.  The Department  of Revenue  recommends that  the state                                                               
always keep  an eye  on the  1, 3,  5, and  10-year real  rate of                                                               
return and  the effective spending  rate. In fact,  the permanent                                                               
fund has  started reporting  its effective  spending rate  in its                                                               
presentations to  the Finance committees.  If the  effective rate                                                               
of spending  is higher than  the real  rate of return  over time,                                                               
there is  a risk of  eroding the inflation-adjusted value  of the                                                               
permanent fund.  He opined that investment  consultants expressed                                                               
concern that 5  percent may not be achievable over  ten years, so                                                               
the state must be very aware  of spending versus the real rate of                                                               
MR. BARNHILL  offered to bring  reports to the  finance committee                                                               
to provide  an understanding  with respect  to spending  versus a                                                               
real return.                                                                                                                    
2:10:44 PM                                                                                                                    
SENATOR  SHOWER   recalled  that  legislators   have  extensively                                                               
discussed  the  spending cap  related  to  the structure  of  the                                                               
permanent fund  in prior years.  As Mr. Barnhill  highlighted, it                                                               
is possible to draw down  permanent fund savings. He acknowledged                                                               
that a spending cap would provide stability.                                                                                    
MR. BARNHILL opined that a 10  percent real rate of return is not                                                               
likely to be sustainable.                                                                                                       
2:12:32 PM                                                                                                                    
MR. BARNHILL restated  the mechanics of SJR 6. SJR  6 proposes to                                                               
convert  the Alaska  Permanent Fund  in  the Alaska  Constitution                                                               
from  its   existing  two-account  structure  to   a  one-account                                                               
endowment  structure. SJR  6  would establish  the  formula as  a                                                               
percentage  times the  lagging five-year  average  of the  market                                                               
value  of  the Alaska  Permanent  Fund.  It would  establish  the                                                               
permanent  fund  dividend in  the  Alaska  Constitution with  the                                                               
legislature setting  the allocation formula in  statute. Finally,                                                               
SJR 6 proposes when statutory  changes to the allocation for PFDs                                                               
are  made, it  will require  an advisory  vote by  the people  of                                                               
2:14:06 PM                                                                                                                    
SENATOR  HUGHES  stated  that  the  State  v.  Wielechowski  case                                                               
determined  that  the  appropriation powers  of  the  legislature                                                               
superseded  the   statutory  formula   for  the   permanent  fund                                                               
dividend. Some legislators consider  the operating budget as law.                                                               
She related  a scenario in  which SJR 6 and  SB 53 both  pass and                                                               
the PFD  formula is  set in statute.  The legislature  could fund                                                               
PFDs at  a different  amount in the  operating budget.  She asked                                                               
whether SJR  6 would prevent  that from happening since  they are                                                               
both laws. She referred  to page 2, line 7 of  SJR 6, which read,                                                               
"A law  that changes the  amount allocated for  dividend payments                                                               
must be  approved by the  voters of the  State under (d)  of this                                                               
section."  Therefore, the  formula could  be set  in statute  but                                                               
also the  operating budget.  If the  legislature does  not follow                                                               
the statutory  formula but uses  the amount set by  the operating                                                               
budget,  she asked  if  it  must be  put  before  the voters  for                                                               
2:15:48 PM                                                                                                                    
MR. BARNHILL  referred to the language  on page 3, lines  5-11 of                                                               
the bill, which read:                                                                                                           
     (d) For purposes  of the 2022 amendments  to Section 15                                                                    
     of Article  IX, the law governing  the amount allocated                                                                    
     for dividend  payments to residents of  the State under                                                                    
     Section 15(c)  of Article IX  is the law  setting forth                                                                    
     the  allocation for  dividend payments  at the  time of                                                                    
     adoption  of the  2022 amendments  to Section  15(c) of                                                                    
     Article IX and that is not  a law that is enacted as an                                                                    
     appropriation bill,  subject to the enactment  of a law                                                                    
     amending  the   law  regarding  dividend   payments  in                                                                    
     accordance with  the requirements  of Section  15(d) of                                                                    
     Article IX.                                                                                                                
MR.  BARNHILL explained  that the  bill drafters  considered that                                                               
question  and included  language in  SJR 6  that the  law setting                                                               
forth  the  allocation for  dividend  payments  could not  be  an                                                               
appropriation bill.                                                                                                             
2:16:29 PM                                                                                                                    
SENATOR HUGHES  expressed concern that  SJR 6 will  give Alaskans                                                               
less assurance that a dividend  will be paid because the language                                                               
related  to the  draw states  "may".  She related  a scenario  in                                                               
which the  state has a windfall,  assuming it has a  spending cap                                                               
and  it can  fund  the budget  without a  draw.  She related  her                                                               
understanding that there would not be a PFD without a draw.                                                                     
MR.  BARNHILL responded  that her  scenario was  considered at  a                                                               
hearing yesterday and  that Mr. Brefczynski responded  that it is                                                               
the  administration's intention  that  PFDs will  be issued  each                                                               
year.  He  said  that  Mr.  Brefczynski offered  to  work  on  an                                                               
amendment to make that clear.                                                                                                   
2:18:24 PM                                                                                                                    
SENATOR  KIEHL  agreed that  the  language  needs to  be  revised                                                               
because the way it is currently  written, without a draw it would                                                               
take a vote of  the people. He was unsure about  the timing of an                                                               
advisory vote under SJR 6. He  asked what the approach and vision                                                               
taken  in SJR  6 would  be. He  said it  seems like  "protect the                                                               
check" rather than a "protect the permanent fund."                                                                              
2:19:34 PM                                                                                                                    
MR.  BARNHILL  answered  that the  administration's  goal  is  to                                                               
protect the inflation-adjusted value  of the permanent fund going                                                               
forward  with no  overspending. The  proposed plan  is consistent                                                               
with modern  institution and  endowment practices,  which attempt                                                               
to balance access  to the funds for the present  versus access to                                                               
funds  in the  future.  The best  way to  accomplish  this is  to                                                               
ensure that  spending is limited to  the real return of  the fund                                                               
and  nothing more.  This  needs to  be  viewed in  5  to 10  year                                                               
averages  because  market  returns  can be  volatile.  The  whole                                                               
philosophy    of    governing    endowments   is    to    protect                                                               
intergenerational equity.  As long  as the  fund's real  value is                                                               
the  same   over  time,  it   maintains  purchasing   power.  The                                                               
governor's  proposal  is  similar  to   how  the  trustees  of  a                                                               
university endowment fund would  manage its fund. The legislature                                                               
will decide the rate of  distribution, but the legislature should                                                               
always consider a distribution rate  that will protect the fund's                                                               
real value. He offered  to work on the language in  SJR 6 to make                                                               
that clear.  That is  somewhat at  odds with  the 5  percent rate                                                               
that  is hardwired  in the  Alaska Constitution  under SJR  1. He                                                               
acknowledged that  5 percent  could be  too high  during specific                                                               
economic  time   periods  in  investment  market   climates.  The                                                               
administration's  goal  is to  protect  the  permanent fund  over                                                               
2:23:09 PM                                                                                                                    
SENATOR MYERS acknowledged that SJR 6  and SB 53 were designed to                                                               
work concurrently. He asked what happens  if SB 53 passes but SJR
6 does not  pass since SB 53  will take 11 votes, but  SJR 6 will                                                               
take 14 votes to pass the Senate.                                                                                               
2:23:48 PM                                                                                                                    
MR.  BARNHILL  turned  to  slide  5.  He  explained  that  SB  53                                                               
implements SJR 6 but it also acts  as a stand-alone bill if SJR 6                                                               
does not  pass. SB 53 proposes  a 5 percent distribution  rate, a                                                               
50:50 rule to  allocate the PFD, and it will  require an advisory                                                               
vote on  the PFD. If SJR  6 fails to  pass, but SB 53  passes, it                                                               
will  make some  conforming  changes to  align  the statute  with                                                               
State  v.  Wielechowski.  The state  would  continue  under  that                                                               
paradigm, he said.                                                                                                              
2:24:52 PM                                                                                                                    
SENATOR MYERS  offered his  view that  the legislature  will face                                                               
more problems  if SB  53 passes but  SJR 6 does  not than  if the                                                               
statutes were left alone. He said  in the interest of time and to                                                               
allow people to consider this, he does not have any questions.                                                                  
2:25:28 PM                                                                                                                    
MR. BARNHILL  offered to compare  SJR 1 to  SJR 6 in  response to                                                               
Senator Shower's earlier request.                                                                                               
2:25:58 PM                                                                                                                    
MR.  BARNHILL said  SJR 1  would use  the historical  approach of                                                               
distributing from the permanent  fund using statutory net income,                                                               
which  considers  cash  and realization.  These  funds  would  be                                                               
deposited  in the  Earning Reserve  Account. Using  the statutory                                                               
net  income approach  to  investment  management decisions  would                                                               
generate more income at limes and  less at other times. The point                                                               
is that the statutory net income approach can be volatile.                                                                      
He  said SJR  6 proposes  using an  institutional endowment  fund                                                               
approach,   a   percent-of-market-value  (POMV)   approach,   the                                                               
standard  method  of  distributing  from one  account  fund.  The                                                               
(POMV)  approach is  used by  institutional  and endowment  funds                                                               
worldwide  because   it  is  more  consistent   over  time.  This                                                               
percentage  can  be   calculated  in  a  variety   of  ways.  The                                                               
administration  proposes  using  a 5  percent  distribution  rule                                                               
using a percentage of the  permanent fund's average lagging five-                                                               
year market value, split 50:50 to fund PFDs and government.                                                                     
MR. BARNHILL  explained the fundamental difference  between SJR 1                                                               
and SJR 6 is that SJR  1 would place the legacy statutory formula                                                               
consisting of  a 5 percent  hardwired distribution rate  into the                                                               
Alaska  Constitution. However,  a  lack of  alignment exists  for                                                               
using that approach to distribute  PFDs. He expressed his concern                                                               
that  SJR  1  is  taking  an approach  to  distribution  that  is                                                               
nonstandard and  can be volatile.  There are times when  it could                                                               
be in  excess of  the 5 percent  distribution rate.  He suggested                                                               
those are concerns the committee should consider.                                                                               
2:30:01 PM                                                                                                                    
At ease                                                                                                                         
2:30:40 PM                                                                                                                    
CHAIR HOLLAND reconvened the meeting.                                                                                           
2:31:32 PM                                                                                                                    
WILLIAM MILKS,  Senior Assistant Attorney General,  Legislation &                                                               
Regulations Section,  Civil Division, Department of  Law, Juneau,                                                               
Alaska, stated  that SJR  6 proposes an  amendment to  the Alaska                                                               
Constitution and SB  53 would set out the  specific percentage of                                                               
market  value (POMV)  at 5  percent and  a 50  percent split.  He                                                               
stated  the  Alaska  Supreme Court  State  v.  Wielechowski  case                                                               
relates to the statute that sets out how a PFD would be paid.                                                                   
2:33:00 PM                                                                                                                    
SENATOR  HUGHES  stated  that  Art. [XI],  Sec.  7,  pertains  to                                                               
restrictions  for  initiatives,   including  that  an  initiative                                                               
cannot make or  repeal appropriations. She asked  if any conflict                                                               
would  arise by  requiring the  amount proposed  by SJR  6 to  be                                                               
approved or disapproved by placing it on the ballot.                                                                            
MR.  MILKS said  SJR  6  proposes a  percentage  of market  value                                                               
(POMV) draw from  the permanent fund and in Sec.  2 (c) a portion                                                               
of that  amount shall be  allocated for dividend  payments (PFD).                                                               
It  includes  language that  a  future  law changing  the  amount                                                               
allocated  for PFDs  must be  approved by  the voters.  He stated                                                               
that  SJR  6  will  govern  over  more  general  restrictions  on                                                               
initiatives in Art. XI than was identified.                                                                                     
2:34:37 PM                                                                                                                    
SENATOR  HUGHES expressed  concern that  SB 53  does not  ask the                                                               
voters  if  the  proposal  is something  the  legislature  should                                                               
consider   adopting  as   a  resolution   for  a   constitutional                                                               
amendment.  She asked  if that  were added  to the  advisory vote                                                               
whether it  could be combined  as one question  or if it  must be                                                               
two questions. She  clarified her concern was  that asking people                                                               
if  the  law should  be  changed  when  they  know that  the  law                                                               
establishing  the PFD  statutory  formula has  not been  followed                                                               
might bring voters  to conclude that changing the  law won't mean                                                               
She said it  seems as though an advisory vote  would also include                                                               
SJR 6. It would ask voters if  the 50:50 rule is okay and whether                                                               
the  legislature  should  consider the  Constitutional  Amendment                                                               
proposed by SJR 6 to establish this in the Alaska Constitution.                                                                 
MR. MILKS responded  that the legislature has a  broad ability to                                                               
draft language  for an advisory  vote. The legislature's  goal is                                                               
to  understand  what  the  people  think. He  said  that  if  the                                                               
legislature asks a compound question,  it could create ambiguity.                                                               
For example,  some people  may like  the 50:50  rule but  may not                                                               
want  that  language in  the  Alaska  Constitution. He  cautioned                                                               
members that  the legislature must  be careful how  that language                                                               
is drafted.                                                                                                                     
2:37:01 PM                                                                                                                    
SENATOR  HUGHES  related  her understanding  that  combining  the                                                               
questions will not  pose any legal issue, but care  must be taken                                                               
when drafting the language.                                                                                                     
2:37:09 PM                                                                                                                    
SENATOR MYERS suggested  that the advisory vote  as written would                                                               
not pass  because an advisory vote  on SJR 6 would  require a yes                                                               
or no  answer. However,  some people will  vote yes  because they                                                               
like the  change, some will  vote no  because they want  a bigger                                                               
ratio to increase  government funding. Some will  vote no because                                                               
they  support the  original  statutory formula  for  the PFD.  He                                                               
suggested  that  an  advisory  vote  as  written  might  be  like                                                               
"putting the cart before the horse."                                                                                            
MR.  MILKS deferred  to  Mr.  Barnhill to  answer  why  SJR 6  is                                                               
written  in this  fashion.  He  said SB  53  would establish  the                                                               
framework for  how to spend  permanent fund income  and establish                                                               
an advisory  vote to ask voters  if the 50:50 rule  sounds like a                                                               
good idea.                                                                                                                      
2:39:06 PM                                                                                                                    
MR.  BARNHILL  said  the administration  wants  a  proposal  that                                                               
comprehensively addresses  some thorny problems that  have defied                                                               
resolution. The three principles  the governor is putting forward                                                               
are first,  protect the permanent  fund forever;  second, involve                                                               
the people in a meaningful  way; and third, protect the permanent                                                               
fund dividend (PFD)  forever. He said if you ask  60 people about                                                               
these  issues, there  will be  disagreement in  the details,  but                                                               
there  would  be  broad-scale agreement  on  the  principles.  He                                                               
acknowledged  that it  is fair  to ask  which should  come first.                                                               
However,   the  administration   is   trying  to   put  forth   a                                                               
comprehensive set  of measures for  the legislature  to consider.                                                               
He said he hoped a supermajority would agree.                                                                                   
2:40:57 PM                                                                                                                    
SENATOR MYERS expressed concern  about meaningfully involving the                                                               
people, such that the meaning will  get lost. He offered his view                                                               
that by changing  the Alaska Constitution in SJR 6  and a statute                                                               
in SB 53  first, then asking the people if  they agree with those                                                               
changes  muddles the  meaning.  If an  advisory  vote fails,  the                                                               
legislature  could  interpret why  it  failed  in many  different                                                               
ways. He offered his belief that it failed that test.                                                                           
2:41:58 PM                                                                                                                    
SENATOR  KIEHL  offered  his  view  that there  is  an  order  of                                                               
operations issue in  SJR 6 and SB 53 that  the legislature should                                                               
consider as  this legislation  moves through  the process.  SJR 6                                                               
proposes  any  change  to the  50:50  distribution  rule  between                                                               
government  services and  PFDs must  be approved  by the  voters.                                                               
However,  the  transitional  language states  that  this  happens                                                               
after  SB  53 becomes  law,  regardless  of  the outcome  of  the                                                               
advisory vote.  He said  it strikes him  as inconsistent  to make                                                               
changes  in the  Alaska  Constitution, then  require an  advisory                                                               
vote for further changes. Instead,  it should require an advisory                                                               
vote before changing the Alaska Constitution.                                                                                   
2:43:08 PM                                                                                                                    
MR. BARNHILL answered  that the people would be  consulted at the                                                               
first general  election, after which  the legislature  would have                                                               
the flexibility  to set the  PFD distribution rate.  The advisory                                                               
vote aims to determine whether  the voters agree with the changes                                                               
the  legislature  made.  He  acknowledged  that  there  could  be                                                               
different ways  to accomplish this.  However, this  process seems                                                               
relatively efficient in  that it gives appropriate  accord to the                                                               
legislative  process. The  people  elect  their legislators,  the                                                               
legislature  uses   its  expertise,  in  consultation   with  the                                                               
executive branch, to make decisions  on behalf of the people. The                                                               
people subsequently can voice their  opinions in an advisory vote                                                               
as to  whether they  agree with  the legislature's  decisions. As                                                               
previously  mentioned,  many  conclusions  can be  drawn  on  the                                                               
advisory  vote.  He  recalled   that  in  1999,  the  legislature                                                               
seriously considered the outcome of  the advisory vote on the use                                                               
of permanent  fund earnings. Therein  lies the  meaningful nature                                                               
of  this  process  since  the   legislature  would  consult  with                                                               
Alaskans on the decisions it made.                                                                                              
2:45:21 PM                                                                                                                    
SENATOR  SHOWER commented  on where  the legislature  is at  this                                                               
point.  He  related  that  the   legislature  is  discussing  and                                                               
debating the level  of services, including the  value of services                                                               
to the public, compared to  them receiving PFD checks. He offered                                                               
his view  it is  important to note  that government  services are                                                               
not equally  distributed. Some people  are consumers,  and others                                                               
are  producers; some  use  substantial  government services,  but                                                               
others  do not.  However, PFDs  are equally  distributed. It's  a                                                               
philosophical issue about  whether to support SJR 6 and  SB 53 or                                                               
how else  to solve the  level of government services  compared to                                                               
the  amount of  the PFDs.  The  legislature has  many options  to                                                               
address these issues.                                                                                                           
[SB 53 and SJR 6 were held in committee.]                                                                                       

Document Name Date/Time Subjects
SB 53 Sectional.pdf SJUD 4/21/2021 1:30:00 PM
SB 53
Dept of Revenue SJR 6 042021 - Final.pdf SJUD 4/21/2021 1:30:00 PM
SB 53
SB 122 Sponsor Statement v. B.pdf HJUD 5/10/2021 1:00:00 PM
HJUD 5/12/2021 1:00:00 PM
HJUD 5/14/2021 1:00:00 PM
HJUD 5/17/2021 1:00:00 PM
SJUD 4/21/2021 1:30:00 PM
SB 122
SB 122 Sectional Analysis v. B.pdf HJUD 5/10/2021 1:00:00 PM
HJUD 5/12/2021 1:00:00 PM
HJUD 5/14/2021 1:00:00 PM
HJUD 5/17/2021 1:00:00 PM
SJUD 4/21/2021 1:30:00 PM
SB 122