Legislature(2023 - 2024)DAVIS 106

03/01/2023 06:00 PM House WAYS & MEANS

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Audio Topic
06:01:07 PM Start
06:02:11 PM Presentation(s): Permanent Fund Pomv Structure
06:44:31 PM Presentation(s): Permanent Fund Overview
07:01:31 PM HB72
07:39:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentations: TELECONFERENCED
- Permanent Fund POMV Structure by Permanent Fund
- Permanent Fund Overview by Legislative Finance
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         March 1, 2023                                                                                          
                           6:01 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Ben Carpenter, Chair                                                                                             
Representative Jamie Allard                                                                                                     
Representative Tom McKay                                                                                                        
Representative Kevin McCabe                                                                                                     
Representative Cathy Tilton                                                                                                     
Representative Andrew Gray                                                                                                      
Representative Cliff Groh                                                                                                       
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
PRESENTATION(S): PERMANENT FUND POMV STRUCTURE                                                                                  
     - HEARD                                                                                                                    
PRESENTATION(S): PERMANENT FUND OVERVIEW                                                                                        
     - HEARD                                                                                                                    
HOUSE BILL NO. 72                                                                                                               
"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;  and providing for                                                               
an effective date."                                                                                                             
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB  72                                                                                                                  
SHORT TITLE: PERMANENT FUND DIVIDEND; 75/25 POMV SPLIT                                                                          
SPONSOR(s): REPRESENTATIVE(s) ORTIZ                                                                                             
02/15/23       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/15/23       (H)       W&M, FIN                                                                                               
03/01/23       (H)       W&M AT 6:00 PM DAVIS 106                                                                               
WITNESS REGISTER                                                                                                              
DEVEN MITCHELL                                                                                                                  
Executive Director and Chief Executive Officer                                                                                  
Alaska Permanent Fund Corporation                                                                                               
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Gave  the  Permanent  Fund POMV  Structure                                                             
presentation via PowerPoint.                                                                                                    
CONOR BELL, Fiscal Analyst                                                                                                      
Legislative Finance Division                                                                                                    
Legislative Agencies and Offices                                                                                                
Juneau, Alaska                                                                                                                  
POSITION   STATEMENT:     Gave   the   Permanent  Fund   Overview                                                             
presentation  via PowerPoint;  Offered  information and  answered                                                               
questions during the hearing on HB 72.                                                                                          
REPRESENTATIVE DANIEL ORTIZ                                                                                                     
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  As prime sponsor presented HB 72.                                                                        
LIZ HARPOLD, Staff                                                                                                              
Representative Dan Ortiz                                                                                                        
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:   Presented the sectional analysis  for HB 72                                                             
and  responded to  questions on  behalf of  Representative Ortiz,                                                               
prime sponsor.                                                                                                                  
EMILY NAUMAN, Director                                                                                                          
Legislative Legal Services                                                                                                      
Legislative Agencies and Offices                                                                                                
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Answered questions  during the hearing on HB
ACTION NARRATIVE                                                                                                              
6:01:07 PM                                                                                                                    
CHAIR BEN  CARPENTER called the  House Special Committee  on Ways                                                             
and Means  meeting to order  at 6:01 p.m.   Representatives Groh,                                                               
McKay, McCabe,  Allard, Gray, Tilton, and  Carpenter were present                                                               
at the call to order.                                                                                                           
^PRESENTATION(S): PERMANENT FUND POMV STRUCTURE                                                                                 
         PRESENTATION(S): PERMANENT FUND POMV STRUCTURE                                                                     
6:02:11 PM                                                                                                                    
CHAIR CARPENTER announced that the  first order of business would                                                               
be the Permanent Fund POMV Structure presentation.                                                                              
6:03:22 PM                                                                                                                    
DEVEN MITCHELL,  Executive Director and Chief  Executive Officer,                                                               
Alaska  Permanent Fund  Corporation, introduced  himself, offered                                                               
his professional  history, and  said he  would give  a PowerPoint                                                               
6:04:30 PM                                                                                                                    
The committee  took an  at-ease from  6:04 p.m.  to 6:05  p.m. to                                                               
ready the PowerPoint.                                                                                                           
6:05:05 PM                                                                                                                    
MR.  MITCHELL  began  the PowerPoint,  titled  "Alaska  Permanent                                                               
Fund," [hard copy included in  the committee packet], on slide 2,                                                               
"Creating a Renewable  Resource; a Decade in  Alaska," which read                                                               
as follows  [original punctuation provided, with  some formatting                                                               
     1969      The Prudhoe  Bay lease sale brings  more than                                                                    
     $900  million   to  the   State  for   drilling  rights                                                                    
     1971      Nixon signs  Alaska Native  Claims Settlement                                                                    
     Act (ANCSA)                                                                                                                
     1973      Congress   passes   Trans   Alaska   Pipeline                                                                    
     Authorization Act                                                                                                          
     1974      Pipeline Construction Begins                                                                                     
     1976      Alaska    voters    approve    Constitutional                                                                    
     Amendment  establishing   the  Permanent   Fund  2/3rds                                                                    
     margin 75,588 to 38,518                                                                                                    
     1977      The   Permanent  Fund   receives  its   first                                                                    
     deposit of dedicated oil royalties                                                                                         
     1980      The  Alaska  Permanent  Fund  Corporation  is                                                                    
     established to manage and invest the Fund                                                                                  
MR. MITCHELL discussed slide 3, which read as follows [original                                                                 
punctuation provided]:                                                                                                          
     Alaska Constitution Article IX, Section 15                                                                                 
     At  least  twenty-five  percent of  all  mineral  lease                                                                    
     rentals,  royalties,  royalty  sale  proceeds,  federal                                                                    
     mineral revenue  sharing payments and  bonuses received                                                                    
     by the state  shall be placed in a  permanent fund, the                                                                    
     principal  of  which  shall  be  used  only  for  those                                                                    
     income-producing  investments  specifically  designated                                                                    
     by law as eligible  for permanent fund investments. All                                                                    
     income from  the permanent fund  shall be  deposited in                                                                    
     the general fund unless otherwise provided by law.                                                                         
MR.  MITCHELL   added  that   additional  contributions   to  the                                                               
permanent  fund  were  allowed.    He  discussed  the  consistent                                                               
discipline  that followed,  as shown  on slide  4, which  read as                                                               
follows [original punctuation provided]:                                                                                        
     The Alaska  Permanent Fund is recognized  globally as a                                                                    
     model for  converting a non-renewable  natural resource                                                                    
     into a renewable financial resource.                                                                                       
     APFC's Stewardship                                                                                                         
          Honoring   the  vision   and  sacrifices   of  the                                                                    
     Alaskans that created the  Fund and enduring leadership                                                                    
     committed to intergenerational benefit.                                                                                    
          Recognizing  the savings  function established  in                                                                    
     the Constitution ensures that  a portion of our mineral                                                                    
     wealth is  saved and invested to  benefit all Alaskans,                                                                    
     today and tomorrow.                                                                                                        
          Protecting    the    Principal   and    maximizing                                                                    
     investment  returns  for  the benefit  of  current  and                                                                    
     future generations of Alaskans.                                                                                            
          Providing  a predictable  revenue  stream to  help                                                                    
     balance the State's budget now and into the future.                                                                        
     A Renewable Financial Resource                                                                                             
     Through  income  producing  investments, the  Fund  has                                                                    
     generated  more  than  $82.1 billion  of  realized  net                                                                    
     earnings to the Earnings Reserve Account.                                                                                  
     Inflation Proofing Principal $18.0 B                                                                                       
     Special Appropriations to Principal $12.3 B                                                                                
     Alaska Capital Income, Amerada Hess ~$0.4 B                                                                                
     Dividend Fund through FY18 $24.4 B                                                                                         
     Percent of Market Value FY19-FY23 $15.1 B                                                                                  
MR. MITCHELL added that the first dividend paid out in 1982 came                                                                
from the general fund (GF); subsequent dividends were from the                                                                  
permanent fund's earning reserve account (ERA).                                                                                 
6:09:36 PM                                                                                                                    
MR. MITCHELL discussed slide 6, "Legislative Directive -                                                                        
Investing for the Long Term," which read as follows [original                                                                   
punctuation provided]:                                                                                                          
     AS 37.13.020 Legislative Findings                                                                                          
     for the purpose of the Permanent Fund                                                                                      
          the fund  should provide a  means of  conserving a                                                                    
     portion of  the state's revenue from  mineral resources                                                                    
     to benefit all generations of Alaskans;                                                                                    
          the fund's  goal should be  to maintain  safety of                                                                    
     principal while maximizing total return;                                                                                   
          the  fund  should  be used  as  a  savings  device                                                                    
     managed to  allow the maximum use  of disposable income                                                                    
     from the fund for purposes designated by law.                                                                              
     AS 37.13.120 Investment Responsibilities                                                                                   
     The  Board of  Trustees objective  for the  Fund is  to                                                                    
     achieve  the  highest  level of  performance  based  on                                                                    
     prudent investment practices.                                                                                              
     Investment Performance                                                                                                   
     Ability to  generate an annualized return  of inflation                                                                    
     (CPI) + 5% over a 10-year period (long-term target).                                                                       
     Investment Risk                                                                                                          
     Ability  of the  Fund to  achieve the  long-term target                                                                    
     while conforming to the  Board's approved risk appetite                                                                    
MR. MITCHELL compared the permanent fund to fisheries, in that                                                                  
there may be argument about the use, but the bottom line is to                                                                  
ensure the health of the fishery, as with the fund.                                                                             
6:13:04 PM                                                                                                                    
MR.  MITCHELL,  highlighting the  sacrifices  made  in the  past,                                                               
displayed  a  bar chart  on  slide  7, "Principal  Contributions;                                                               
Intergenerational Savings,"  which spans years from  1978 to 2022                                                               
[and  partially 2023].   He  talked about  royalty deposits  that                                                               
were not  spent on current needs  but were saved for  the future,                                                               
regardless  of whether  the state  was experiencing  "bad times."                                                               
He talked  about inflation-proofing and percentages  and sticking                                                               
to strategies to ensure the highest probability of success.                                                                     
6:17:07 PM                                                                                                                    
MR. MITCHELL  drew attention to  slide 8, "Long-Term  Stability -                                                               
Real   Return;  Annual   investment   performance  adjusted   for                                                               
inflation  indicates  sustained   value  and  purchasing  power,"                                                               
another bar chart, which he said  shows the impact of the percent                                                               
of market value (POMV) transfers  to the state and the volatility                                                               
of oil  revenue.  He  said the  POMV transfer is  predictable and                                                               
has  helped  solve  issues   surrounding  volatility  of  revenue                                                               
6:17:47 PM                                                                                                                    
MR.  MITCHELL,  in response  to  Representative  McCabe, said  he                                                               
thinks   the  inflation-proofing   process   has  been   followed                                                               
"probably  up  until  the  traditional  permanent  fund  dividend                                                               
wasn't  funded."   He  proffered  there  had been  "a  disconnect                                                               
between what was written in statute  and what the practice of the                                                               
day  had   become,"  and   that  was   challenged  in   State  v.                                                             
Wielechowski, when the court  determined that statutory framework                                                             
is something  that "the legislature  of the day has  more control                                                               
over than ... you might have  otherwise thought."  In response to                                                               
a follow-up question,  he said he does not think  the statute has                                                               
been followed to the letter since 2015.                                                                                         
6:21:14 PM                                                                                                                    
MR.   MITCHELL,  in   response  to   Chair  Carpenter,   reviewed                                                               
inflation-proofing under statute versus the POMV model.                                                                         
6:24:08 PM                                                                                                                    
MR.  MITCHELL continued  the presentation  by pointing  out slide                                                               
10,  "Distribution Calculations,"  which  lists income-based  and                                                               
value-based  calculations,  and  "Fund Growth  and  Returns,"  on                                                               
slide  11.   He moved  on  to slide  12, "State  Revenues &  POMV                                                               
Contribution," which  shows fiscal year  2018 (FY 18)  through FY                                                               
22 added together,  divided by 5 for an  average, then multiplied                                                               
by 5  percent to  create the  payout.  He  reiterated that  it is                                                               
predictable.   He then brought  attention to slide  13, "Earnings                                                               
Reserve  Account  (ERA)," where  the  red  line shows  "how  that                                                               
balance is moving."   The middle of the chart  shows that the ERA                                                               
balance diminished,  and in  FY 20 there  were draws  through the                                                               
POMV dividend  transfer and inflation-proofing that  exceeded the                                                               
amount of the statutory net income  that year.  He explained that                                                               
statutory  net  income is  "the  actual  realized income  of  the                                                               
fund."   He compared the  years as shown on  the chart.   He also                                                               
drew attention to  the effective POMV rates:  4.13  percent in FY                                                               
19;  4.5 percent  in  FY 20;  3.79  percent in  FY  21; and  4.04                                                               
percent in FY  22.  He said  if the fund experiences  a period of                                                               
flat growth, which  he said it is in "today,"  to the extent some                                                               
of the  lower growth years  "fall off," the percentage  will rise                                                               
again, and with declining balances,  the effective POMV draw will                                                               
rise above 5 percent.                                                                                                           
6:29:55 PM                                                                                                                    
MR. MITCHELL  brought attention  to slide  14, "Total  Fund Value                                                               
$76,990,000,000 Unaudited as of January  31, 2023," which shows a                                                               
comparison  of principal  and ERA.   He  said it  highlights "the                                                               
stress that  appears to be  on the ERA  currently."  He  spoke of                                                               
unrealized gain and  explained there is not a good  way to assign                                                               
that  to one  category  or  another in  statute,  so  it is  held                                                               
separately and "assigned pro rata  between principal in the ERA,"                                                               
and he  discussed the  amounts shown on  the slide  and explained                                                               
the hidden risk that is "that pro  rata part."  He pointed to the                                                               
$3.8  billion uncommitted  realized  earnings as  the number  the                                                               
Alaska  Permanent Fund  Corporation  (APFC)  would recommend  the                                                               
legislature use "from a conservative perspective."                                                                              
6:32:43 PM                                                                                                                    
MR.  MITCHELL  moved on  to  slide  16, "Current  Structure:  Two                                                               
Accounts," which shows a flow  chart of contributions, principal,                                                               
income producing  investments, sale  and distribution  of assets,                                                               
and  the ERA.   He  then discussed  slide 17,  "Constitutionalize                                                               
Annual  Fund  Draw,"   noting  that  the  APFC   Board  has  been                                                               
supportive of a shift to a  POMV structure for decades, the first                                                               
resolution appearing  in [2003].   Mr. Mitchell showed  slide 18,                                                               
"Proposed: Classic Endowment Structure,"  a flow chart that shows                                                               
contributions  into the  Permanent  fund,  APFC's investment  and                                                               
management of  the fund, and  the POMV.   He then wrapped  up the                                                               
presentation  by   showing  slides  19-21,  and   mentioning  the                                                               
trustees' paper  and the  list of  resources available  on APFC's                                                               
6:36:30 PM                                                                                                                    
MR. MITCHELL,  in response to  Representative McCabe,  said there                                                               
is no  move by  investors to  invest for  [environmental, social,                                                               
and governance]  (ESG) [investing]  rather than  maximum monetary                                                               
performance; it is not part of the corporation's mandate.                                                                       
6:38:52 PM                                                                                                                    
MR.  MITCHELL, in  response to  Representative McKay's  expressed                                                               
concern  about  ESG investing  destroying  Alaska's  oil and  gas                                                               
driven economy, explained that  any divestiture requirement would                                                               
have the potential of negative  impact to performance; therefore,                                                               
the corporation would advise against it.                                                                                        
6:42:56 PM                                                                                                                    
MR. MITCHELL, in response to  Representative Groh, said he thinks                                                               
the "spirit of saving" still exists.   He said he thinks there is                                                               
a challenge  before the legislature,  and he offered  any support                                                               
he could give toward its decision making.                                                                                       
^PRESENTATION(S): PERMANENT FUND OVERVIEW                                                                                       
            PRESENTATION(S): PERMANENT FUND OVERVIEW                                                                        
6:44:31 PM                                                                                                                    
CHAIR CARPENTER announced  that the next order  of business would                                                               
be the Permanent Fund Overview presentation.                                                                                    
6:44:58 PM                                                                                                                    
CONOR BELL,  Fiscal Analyst, Legislative Finance  Division (LFD),                                                               
Legislative   Agencies   and   Offices,  began   the   PowerPoint                                                               
presentation,  titled  "Permanent  Fund Draw  Comparison,"  [hard                                                               
copy included in the committee  packet], drawing attention to the                                                               
disclaimer  on   slide  2,  which   read  as   follows  [original                                                               
punctuation provided]:                                                                                                          
      Scenarios in this presentation were requested by the                                                                      
      Committee Chair. LFD is policy neutral and does not                                                                       
     endorse a particular fiscal plan.                                                                                          
MR.  BELL  covered  slide  3, which  read  as  follows  [original                                                               
punctuation provided]:                                                                                                          
     POMV Draw Versus Income Available for Distribution                                                                         
     • Percent of Market Value (POMV) Draw                                                                                      
       AS 37.13.140(b)                                                                                                          
          5.25% of lagged five-year average fund value                                                                          
     (excluding Am-Hess) for FY19-FY21                                                                                          
       Lowered to 5% beginning FY22                                                                                             
     • Income Available for Distribution                                                                                        
       AS 37.13.140(a)                                                                                                          
       21% of five-year average statutory net income                                                                            
       50% of calculation is for statutory PFD                                                                                  
        Other 50% is available for other state spending,                                                                        
     though this has never been used historically                                                                               
MR.  BELL,  regarding  the  income  available  for  distribution,                                                               
clarified:    "And  then  there   is  the  income  available  for                                                               
distribution, which is 25 percent  of the five-year statutory net                                                               
income; the average  - so that is  a mistake in the slide  - is a                                                               
total statutory  net income for  the past five  years, multiplied                                                               
by 21  percent."  He noted  that the legislature has  the ability                                                               
to use either one of  the aforementioned statutes or ignore them.                                                               
In response to a question from  Chair Carpenter, he said up until                                                               
the percent of market value  (POMV) statute, the other 50 percent                                                               
was kept in the permanent fund, drawn only for dividends.                                                                       
MR. BELL  moved on  to slide  4, "Actual  POMV Draws  Compared to                                                               
Calculated  Income Available  for Distribution,"  and noted  that                                                               
the columns on the left  show actual POMV draws appropriated from                                                               
the permanent fund.  He noted that  the $3.5 billion for FY 24 is                                                               
included  in the  governor's  budget and  is in  line  for the  5                                                               
percent POMV [draw  rate].  He explained that the  numbers on the                                                               
right  half  of   the  slide  show  income   available  under  AS                                                               
37.13.140(a).   If the state  had followed "the  income available                                                               
statute" for  FY 19, he said,  it would have drawn  $3.8 billion.                                                               
He explained  that the FY 24  amount is estimated, since  it will                                                               
include FY 23 returns in the  calculations.  He explained that by                                                               
"effective  POMV draw  rate" he  is referring  to the  equivalent                                                               
POMV rate  that would have been  required to get to  $3.8 billion                                                               
in FY 19.  In response  to Chair Carpenter, he confirmed that the                                                               
income available  statute refers to  the previous slide  where it                                                               
read that  50 percent of that  "was identified for a  purpose for                                                               
the PFD" and the other 50 percent was "for something else."                                                                     
6:49:19 PM                                                                                                                    
MR. BELL  discussed slide 5,  "Projected Impact of  Volatility on                                                               
POMV Draw and  Income Available for Distribution,"  which he said                                                               
shows  risk analysis  and the  potential projected  volatility of                                                               
the  POMV  draw  and  income  available  for  distribution.    He                                                               
paraphrased the  information at  the bottom  of the  slide, which                                                               
read [original punctuation provided]:                                                                                           
     Assumes POMV draw  from ERA in both  scenarios, so only                                                                    
     PFD payment differs.  Risked analysis applying Callan's                                                                    
     projected 7.05%  projected return and  13.25% projected                                                                    
     annual  standard  deviation. Assumes  annual  statutory                                                                    
     net  income is  equal  to 20%  of  the unrealized  gain                                                                    
     balance plus 2%  of the prior year's  total fund value.                                                                    
     Assumes no ERA overdraws occur.                                                                                            
MR. BELL  highlighted parts of  the graphs  on the slide  to show                                                               
examples  of  the range  of  percentages  of amounts  in  various                                                               
fiscal  years under  the 50/50  POMV PFD  shown on  the left  and                                                               
under the  statutory PFD  shown on  the right.   He  then covered                                                               
slide 6, "Projected Impact of  Volatility on POMV Draw and Income                                                               
Available for Distribution."                                                                                                    
6:52:47 PM                                                                                                                    
MR. BELL moved on to  slide 7, "Income Available for Distribution                                                               
'What If' Scenario," which read  as follows [original punctuation                                                               
     • This historical "what if" scenario does not take                                                                         
     secondary impacts into account. It is intended as                                                                          
     a rough hypothetical illustration.                                                                                         
     • Due to historical changes in Permanent Fund                                                                              
     accounting practices, this analysis has some                                                                               
     margin for error in replicating the Fund's history.                                                                        
     • Assumes statutory PFD was paid in all years.                                                                             
     • Assumes the other 50% of 'Income Available for                                                                           
     Distribution' was drawn annually to pay for                                                                                
     government services.                                                                                                       
MR. BELL  covered slides 8, 9,  and 10: "How Would  The Permanent                                                               
Fund Balance  Have Been  Different?"; "How  Would PFDs  Have Been                                                               
Different?"; and "How Much of  the Permanent Fund Would have been                                                               
drawn and spent on Government Services?," respectively.                                                                         
6:56:18 PM                                                                                                                    
MR. BELL, in response to  Representative Groh, confirmed that oil                                                               
revenue,  which had  been strong  from  1980, fell  substantially                                                               
somewhere in 2015, and nonpermanent  fund revenues plummeted.  He                                                               
explained  that the  analysis is  a simplified  scenario to  show                                                               
"how the  permanent fund  would have  grown."   In response  to a                                                               
follow-up question regarding tension  between the income approach                                                               
and the  POMV approach, he  said there is more  volatility basing                                                               
[the PFD]  on amount of earnings  versus the amount in  the fund;                                                               
he indicated adjustment can be  made based on investment returns.                                                               
To  another  follow-up  question,  he  confirmed  there  is  more                                                               
volatility in the income-based calculations.                                                                                    
6:59:24 PM                                                                                                                    
MR. BELL, in response to  Representative Gray, revisited slides 5                                                               
and 6 for clarification purposes.                                                                                               
        HB 72-PERMANENT FUND DIVIDEND; 75/25 POMV SPLIT                                                                     
7:01:31 PM                                                                                                                    
CHAIR CARPENTER announced that the  final order of business would                                                               
be HOUSE BILL  NO. 72, "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; and providing for an effective date."                                                                                  
7:01:48 PM                                                                                                                    
REPRESENTATIVE DANIEL  ORTIZ, Alaska State Legislature,  as prime                                                               
sponsor,  presented  HB  72.   He  read  the  sponsor  statement,                                                               
[included  in  the  committee  packet]   which  read  as  follows                                                               
[original punctuation provided]:                                                                                                
     The  purpose of  this  bill is  to  settle the  age-old                                                                    
     debate over which  statutes to follow when  it comes to                                                                    
     determining  the  size  of a  Permanent  Fund  Dividend                                                                    
     (PFD). If  adopted, it will  reconcile the  current two                                                                    
     competing statutes regarding the dividend amount.                                                                          
       House Bill 72, the Protecting Future Dividends Act                                                                       
     (PFD Act), will put into statute the percent of money                                                                      
     from  the POMV  dedicated to  a PFD.  It establishes  a                                                                    
     75/25  split in  which  75 percent  of  the Percent  of                                                                    
     Market  Value (POMV)  draw goes  into the  general fund                                                                    
     and 25  percent of the  POMV draw goes to  the dividend                                                                    
     fund.   It's   simple,   and  most   importantly   it's                                                                    
     The  POMV   draw  is  the  largest   single  source  of                                                                    
     Unrestricted  General Funds  these  days. Revenue  that                                                                    
     the  state receives  from natural  resource development                                                                    
     no  longer consistently  makes up  the majority  of our                                                                    
     revenue. Instead, we rely on  the POMV draw. As long as                                                                    
     we continue  to rely on  the POMV draw, this  bill will                                                                    
     continue to provide a PFD into the future.                                                                                 
     Based on  current projections, this  bill allows  us to                                                                    
     balance our budget without needing  to come up with new                                                                    
     revenue sources.  Over the next  ten years, if  we pass                                                                    
     and  follow  HB 72,  and  if  resource revenue  remains                                                                    
     stable and  our state  budget grows as  anticipated, we                                                                    
     won't have a budget deficit and we will have a PFD.                                                                        
     This bill does  not make stipulations on  how the money                                                                    
     will be spent after the  POMV draw is sifted 75/25 into                                                                    
     the general fund and dividend  fund. It simply provides                                                                    
     structure as to where the POMV is appropriated.                                                                            
7:06:25 PM                                                                                                                    
LIZ  HARPOLD,  Staff,  Representative  Dan  Ortiz,  Alaska  State                                                               
Legislature, on  behalf of  Representative Ortiz,  prime sponsor,                                                               
gave the  sectional analysis [included in  the committee packet],                                                               
which read as follows [original punctuation provided]:                                                                          
     Sec. 1 Establishes a short  title: The Act may be known                                                                    
     as the Protecting Future Dividends Act.                                                                                    
     Sec. 2  Amends AS 37.13.140(a) to  delete language that                                                                    
     describes a  formula to determine the  amount of income                                                                    
     of the fund that  is available for distribution. Amends                                                                    
     AS 37.13.140(b)  to clarify  that the  amount available                                                                    
     appropriation  from the  earnings  reserve account  may                                                                    
     not  exceed   the  balance  in  the   earnings  reserve                                                                    
     Sec. 3  Amends AS 37.13.145(b)  to provide that  of the                                                                    
     appropriation  each  year  from  the  earnings  reserve                                                                    
     account under  AS 37.13.140(b) will  go to  the general                                                                    
     fund, and then 25% of that  total amount will go to the                                                                    
     dividend fund.                                                                                                             
     Sec.  4   Amends  AS   37.13.145(c)  to   authorize  an                                                                    
     appropriation, after the  appropriations to the general                                                                    
     fund  and  dividend fund  in  AS  37.13.145(b), to  the                                                                    
     principal   of  the   permanent   fund  for   inflation                                                                    
     Sec.  5  Amends AS  37.13.145(d)  to  clarify that  the                                                                    
     permanent fund income  earned as a result  of the State                                                                    
     v.   Amerada   Hess   case   is   not   available   for                                                                    
     appropriation to  the dividend fund or  general fund or                                                                    
     the principal and  that it shall be  deposited into the                                                                    
     Alaska capital income fund.                                                                                                
     Sec. 6 Amends  AS 37.13.300(c) to clarify  that the net                                                                    
     income of the mental health  trust fund is not included                                                                    
     in  the   computation  of  the  amount   available  for                                                                    
     appropriation from the  permanent fund earnings reserve                                                                    
     account under AS 37.13.140(b).                                                                                             
     Sec.  7  Amends AS  43.23.025(a)  to  clarify that  the                                                                    
     legislature  appropriates money  to  the dividend  fund                                                                    
     consistent with section 3.                                                                                                 
     Sec. 8 Repeals  AS 37.13.145 (e) and  (f) which related                                                                    
     to total appropriations from the earnings reserve.                                                                         
     Sec. 9 Establishes an immediate effective date.                                                                            
MS.   HARPOLD  told   committee  members   she  had   spoke  with                                                               
Legislative Legal Services about  a possible committee substitute                                                               
(CS)  which would  change  "distribution"  to "appropriation"  on                                                               
page 2,  line 20, to conform  to a previous section  of the bill,                                                               
and "add a reference to subsection (b), on page 2, line 21."                                                                    
7:08:38 PM                                                                                                                    
The committee took an at-ease from 7:08 p.m. to 7:10 p.m.                                                                       
7:10:04 PM                                                                                                                    
CONOR  BELL,   Fiscal  Analyst,  Legislative   Finance  Division,                                                               
Legislative  Agencies  and  Offices,  showed  a  slide,  entitled                                                               
"Legislative Finance Division Fiscal  Model," [hard copy included                                                               
in  the committee  packet].    He said  the  model  assumes a  25                                                               
percent  of market  value (POMV)  permanent fund  dividend (PFD),                                                               
and the governor's  fiscal year 2024 (FY 24)  amended budget with                                                               
2.5 percent annual  agency operations.  He pointed to  a chart in                                                               
the top-right  showing savings balances, with  the constitutional                                                               
budget reserve/statutory budget  reserve (CBR/SBR) ending balance                                                               
and  the realized  earnings reserve  account (ERA)  balance.   He                                                               
said, "Since  there is  no draws  from the  ERA or  other savings                                                               
accounts, that's unaffected."  He continued as follows:                                                                         
     The budget summary is showing  our baseline budget, and                                                                    
     the  reason there's  that negative  scenario change  in                                                                    
     our budget summary  of $449 million negative  in FY 24,                                                                    
     that's  because  the   Legislative  Finance  [Division]                                                                    
     baseline  is currently  using ...  last year's  capital                                                                    
     budget,  growing with  inflation, which  would be  $750                                                                    
     million,  and so  that's the  biggest  change there  is                                                                    
     that the scenario's using  the governor's budget versus                                                                    
     assuming there  would be a $750  million capital budget                                                                    
     growing with inflation each year.   And otherwise, it's                                                                    
     ...  inline   with  what   the  governor's   budget  is                                                                    
     proposing.   So, based on those  assumptions, there are                                                                    
     surpluses  throughout  the  period.   ...  The  surplus                                                                    
     before  the  PFD  is  $2  billion,  and  then  the  PFD                                                                    
     appropriation  in FY  24 is  $881.5  million, which  is                                                                    
     $1,300  per person;  and  the  pre-transfer surplus  is                                                                    
     $1.1 billion in  FY 24.  That is  basically the surplus                                                                    
     before there's transfers between  accounts, such as the                                                                    
     revenue replacement from the  American Rescue Plan Act.                                                                    
     By the  end of the  period, the  PFD has grown  to $1.1                                                                    
     billion, which  would be  approximately ...  $1,700 per                                                                    
     person, and  the ... surplus  at the end of  the period                                                                    
     would be  $226 million,  estimated.   And I  should add                                                                    
     that this  is based on  the ... fall  revenue forecast,                                                                    
     which  has declining  revenues  throughout the  period;                                                                    
     that's why  the surpluses  are getting so  much smaller                                                                    
     is  because  they're  ...  based  on  the  oil  futures                                                                    
     markets, which  have slowly  declining prices.   You're                                                                    
     seeing those  lower revenues  throughout the  period in                                                                    
     our baseline forecast.                                                                                                     
7:13:35 PM                                                                                                                    
REPRESENTATIVE  MCCABE   asked  whether  the   division's  budget                                                               
baseline  includes  money  for the  base  student  allocation  or                                                               
defined benefit plan, for example.                                                                                              
MR. BELL answered  that the division does not  include any policy                                                               
changes  in its  analysis  that  could lead  to  higher or  lower                                                               
7:14:14 PM                                                                                                                    
MR. BELL confirmed a clarification  from Chair Carpenter that the                                                               
budget assumption in  this fiscal model is what  the governor has                                                               
presented as  his budget,  "plus the  amendments to  his original                                                               
budget."   He added that the  division is adding the  2.5 percent                                                               
annual growth for inflation.                                                                                                    
7:14:36 PM                                                                                                                    
REPRESENTATIVE MCCABE surmised that  if policy changes were made,                                                               
then "the PFD would go down significantly."                                                                                     
CHAIR CARPENTER responded that the  intent of the committee would                                                               
be to answer that question later with another model.                                                                            
7:15:38 PM                                                                                                                    
REPRESENTATIVE GRAY  pointed to the pre-transfer  surplus deficit                                                               
line,  and observed  that  after FY  24 there  would  be a  $1.17                                                               
billion  surplus,  so  theoretically a  base  student  allocation                                                               
increase could be paid with that surplus.                                                                                       
MR. BELL answered that's correct.                                                                                               
7:16:34 PM                                                                                                                    
REPRESENTATIVE   MCKAY   asked   whether  this   model   includes                                                               
production from the Willow [Project] and the Pikka [oil field].                                                                 
MR.  BELL explained  that  the division  uses  the Department  of                                                               
Revenue's revenue forecast, which  uses the Department of Natural                                                               
Resources'  production forecast.    He  mentioned the  percentage                                                               
used in calculation and said  presumably there is some proportion                                                               
of Willow and Pikka included in the forecast.                                                                                   
7:17:50 PM                                                                                                                    
REPRESENTATIVE GROH asked the bill  sponsor to address who, under                                                               
HB 72, would pay for "the structural deficit."                                                                                  
REPRESENTATIVE ORTIZ  answered that  everyone who receives  a PFD                                                               
of a potential  larger amount pays for that  potential deficit by                                                               
"giving up  some of the  PFD now."   He said the  committee could                                                               
choose  to amend  HB 72  to scale  the split  down to  50/50 when                                                               
revenue  is  greater.    However, another  option  if  there  are                                                               
surpluses created  under the 75/25  split, could be to  invest in                                                               
long-deferred infrastructure projects.                                                                                          
7:22:11 PM                                                                                                                    
REPRESENTATIVE  MCCABE directed  attention  to  bill language  on                                                               
page 2, lines 15  and 24, and asked the bill  sponsor why he used                                                               
"may" instead of "shall".                                                                                                       
REPRESENTATIVE ORTIZ deferred to his staff to answer.                                                                           
7:22:50 PM                                                                                                                    
MS.  HARPOLD  suggested  Emily  Nauman,  from  Legislative  Legal                                                               
Services,  was   available  to  give  feedback   about  the  bill                                                               
7:23:11 PM                                                                                                                    
EMILY NAUMAN,  Director, Legislative Legal  Services, Legislative                                                               
Agencies and  Offices, stated that  HB 72 uses "may"  rather than                                                               
"shall" because the Constitution of  the State of Alaska requires                                                               
that the  movement of  money out  of the  ERA into  the permanent                                                               
fund  requires   appropriation  by  the  legislature   under  the                                                               
dedicated  fund  clause, and  that  was  reaffirmed in  State  v.                                                             
Wielechowski.  In response to  a follow-up question as to whether                                                             
amending  the   constitution  would   be  effective,   she  first                                                               
explained that  whether the  statute says  "may" or  "shall", the                                                               
legislature retains the authority  to appropriate whatever amount                                                               
for dividends  or out of  the ERA  in any given  year; therefore,                                                               
using "may"  is more  accurate to  how the  laws are  applied and                                                               
interpreted.   Regarding the  idea of a constitutional amendment,                                                               
she indicated it would depend on how it was worded.                                                                             
7:25:53 PM                                                                                                                    
REPRESENTATIVE ALLARD  asked Ms. Nauman for  the legal difference                                                               
between "shall" and "may".                                                                                                      
MS. NAUMAN answered that "shall"    in this case, "and if it were                                                               
constitutional"    means  the legislature  would  be required  to                                                               
appropriate a  certain amount for  a dividend; the word  "may" is                                                               
permissive  and means  the legislature  may or  may not  "do that                                                               
7:27:02 PM                                                                                                                    
MS.  HARPOLD,  in  response to  a  question  from  Representative                                                               
McKay,  clarified that  HB 72  would amend  the original  statute                                                               
that pertains to  the income of the permanent fund.   She said it                                                               
would leave  the definition of  income as  is but "it's  not what                                                               
will be  used as a basis  for ... an appropriation."   She stated                                                               
that AS  37.13.140(b) is the POMV  portion of statute, and  HB 72                                                               
would  add that  the legislature  cannot take  more than  what is                                                               
available  in the  ERA.    In Section  3,  the  bill would  amend                                                               
statute to say that the legislature  may appropriate to the GF an                                                               
amount  available for  appropriation  under  AS 37.13.140(b);  it                                                               
could take the  5 percent draw and  put it into the  GF, and then                                                               
25 percent of that would go  into the permanent fund.  She added,                                                               
"And so  we are  basically taking  those previous  statutes away,                                                               
and it helps  simplify what's there; and that's part  of the goal                                                               
of having  this piece of  legislation is to take  ... potentially                                                               
competing or conflicting statutes out of the way."                                                                              
REPRESENTATIVE MCKAY  concluded that the intent  was "to simplify                                                               
the conflict that we've been having for so long."                                                                               
REPRESENTATIVE ORTIZ responded, "Absolutely."                                                                                   
7:30:01 PM                                                                                                                    
MS. HARPOLD, to  a previous question, confirmed that  HB 72 would                                                               
not include policy  decisions; it would indicate how  much of the                                                               
POMV would go toward the PFD or state services.                                                                                 
7:31:00 PM                                                                                                                    
REPRESENTATIVE  MCCABE  asked  for confirmation  that  the  state                                                               
could pay the  50/50 now and it would not  become a problem until                                                               
about 2028.                                                                                                                     
7:31:57 PM                                                                                                                    
REPRESENTATIVE  ORTIZ  answered  yes, but  underlined  that  this                                                               
assumes the  current governor's budget  with no increases  in the                                                               
base   student  allocation   for   the  next   eight  years   and                                                               
continuation  of the  capital budget  at a  flat level  for eight                                                               
years, for example.                                                                                                             
7:33:09 PM                                                                                                                    
REPRESENTATIVE  GROH  suggested that  a  50/50  plan put  in  the                                                               
constitution may  be harder to address  in the future than  if it                                                               
were in statute.                                                                                                                
REPRESENTATIVE  ORTIZ   concurred.    Notwithstanding   that,  he                                                               
mentioned that the [Fiscal Policy  Working Group] had supported a                                                               
constitutional amendment  that states that  "a PFD will  be paid,                                                               
as provided by law".   He said the key there  is that whatever is                                                               
put in  the constitution needs  to be sustainable, and  he opined                                                               
that the 50/50 model is not sustainable in the future.                                                                          
7:35:59 PM                                                                                                                    
REPRESENTATIVE ALLARD asked  the bill sponsor if he  is saying he                                                               
wants to  take money  from the  PFD to pay  for the  base student                                                               
REPRESENTATIVE ORTIZ answered that the  bill is "agnostic to that                                                               
CHAIR  CARPENTER  assured  the  committee  that  there  would  be                                                               
opportunity to "plug this bill into  a moving diagram" to see the                                                               
policy choices in relation to HB 72 and other proposed bills.                                                                   
7:37:31 PM                                                                                                                    
REPRESENTATIVE  GRAY  asked  if  the legislature  could  use  the                                                               
aforementioned surplus to "make a bigger PFD."                                                                                  
7:37:48 PM                                                                                                                    
MS. HARPOLD answered  yes; the bill does not state  how the 75/25                                                               
split must be used.                                                                                                             
7:38:14 PM                                                                                                                    
REPRESENTATIVE ORTIZ thanked the committee for hearing HB 72.                                                                   
[HB 72 was held over.]                                                                                                          
7:39:06 PM                                                                                                                    
There being no further business before the committee, the House                                                                 
Special Committee on Ways and Means meeting was adjourned at                                                                    
7:39 p.m.                                                                                                                       

Document Name Date/Time Subjects
House Ways & Means Presentation - Permanent Fund Corporation.pdf HW&M 3/1/2023 6:00:00 PM
House Ways and Means Permanent Fund Presentation - Legislative Finance.pdf HW&M 3/1/2023 6:00:00 PM
HB072 02.15.2023.PDF HW&M 3/1/2023 6:00:00 PM
HB 72
HB072 Sponsor Statement 02.28.2023.pdf HW&M 3/1/2023 6:00:00 PM
HB 72
HB072 Sectional Analysis 02.27.2023.pdf HW&M 3/1/2023 6:00:00 PM
HB 72
HB072 Fiscal Note DOR Tax Division 02.25.2023.pdf HW&M 3/1/2023 6:00:00 PM
HB 72
HB072 Supporting Document - LFD Fiscal Model 02.27.2023.pdf HW&M 3/1/2023 6:00:00 PM
HB 72