Legislature(2023 - 2024)DAVIS 106

04/18/2023 06:00 PM House WAYS & MEANS

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
06:02:56 PM Start
06:03:32 PM HB160
07:29:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Date Change --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
           HOUSE SPECIAL COMMITTEE ON WAYS AND MEANS                                                                          
                         April 18, 2023                                                                                         
                           6:02 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Representative Ben Carpenter, Chair                                                                                             
Representative Jamie Allard                                                                                                     
Representative Tom McKay                                                                                                        
Representative Andrew Gray                                                                                                      
Representative Cliff Groh                                                                                                       
MEMBERS ABSENT                                                                                                                
Representative Kevin McCabe                                                                                                     
Representative Cathy Tilton                                                                                                     
COMMITTEE CALENDAR                                                                                                            
HOUSE BILL NO. 160                                                                                                              
"An Act relating to the calculation of the amount available for                                                                 
appropriation from the Alaska permanent fund; and providing for                                                                 
an effective date."                                                                                                             
     - HEARD & HELD                                                                                                             
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: HB 160                                                                                                                  
SHORT TITLE: PERMANENT FUND CALCULATION                                                                                         
SPONSOR(s): WAYS & MEANS                                                                                                        
04/14/23       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/14/23       (H)       W&M                                                                                                    
04/18/23       (H)       W&M AT 6:00 PM DAVIS 106                                                                               
WITNESS REGISTER                                                                                                              
ED KING, Staff                                                                                                                  
Representative Tom McKay                                                                                                        
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  On behalf of the sponsor, the House Special                                                              
Committee on Ways and Means, presented the PowerPoint, titled                                                                   
"HB 160 - REAL POMV."                                                                                                           
KENDRA BROUSSARD, Staff                                                                                                         
Representative Ben Carpenter                                                                                                    
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  On behalf  of the sponsor, the House Special                                                             
Committee on  Ways and Means,  of which  Representative Carpenter                                                               
serves as chair, presented the sectional analysis for HB 160.                                                                   
ACTION NARRATIVE                                                                                                              
6:02:56 PM                                                                                                                    
CHAIR BEN  CARPENTER called the  House Special Committee  on Ways                                                             
and  Means  meeting  to  order  at  6:02  p.m.    Representatives                                                               
Carpenter,  Allard, McKay,  Gray, and  Groh were  present at  the                                                               
call to order.                                                                                                                  
               HB 160-PERMANENT FUND CALCULATION                                                                            
6:03:32 PM                                                                                                                    
CHAIR CARPENTER announced  that the only order  of business would                                                               
be HOUSE  BILL NO. 160,  "An Act  relating to the  calculation of                                                               
the amount available for appropriation  from the Alaska permanent                                                               
fund; and providing for an effective date."                                                                                     
[Contains discussion of HJR 9]                                                                                                  
6:04:00 PM                                                                                                                    
ED   KING,  Staff,   Representative  Tom   McKay,  Alaska   State                                                               
Legislature,  on  behalf  of  the   sponsor,  the  House  Special                                                               
Committee  on Ways  and Means,  presented the  PowerPoint, titled                                                               
"HB  160  - REAL  POMV"  [hard  copy  included in  the  committee                                                               
packet.]   He introduced himself  for the record and  referred to                                                               
Chair Carpenter's staff for the sectional analysis.                                                                             
6:04:15 PM                                                                                                                    
KENDRA  BROUSSARD, Staff,  Representative  Ben Carpenter,  Alaska                                                               
State Legislature,  on behalf of  the sponsor, the  House Special                                                               
Committee on  Ways and Means,  of which  Representative Carpenter                                                               
serves  as chair,  presented  the sectional  analysis  of HB  160                                                               
[copy included  in the committee  packet], which read  as follows                                                               
[original punctuation provided]:                                                                                                
      Section 1: Changes the POMV draw rate from 5% of the                                                                      
     5-year average market value to the real rate of return                                                                     
     times the balance.                                                                                                         
       Section 2: Changes "market value" to "balance" to                                                                        
     conform with the changes in section 1.                                                                                     
     Section 3: Makes language changes to conform with the                                                                      
     changes in section 1.                                                                                                      
       Section 4: Provides an effective date so that the                                                                        
     changes are in place next fiscal year.                                                                                     
6:05:00 PM                                                                                                                    
MR.  KING  stated  that the  Alaska  Permanent  Fund  Corporation                                                               
reached out with  proposed changes for HB 160,  including the use                                                               
of the  language "market value"  instead of "balance".   He began                                                               
the presentation, explaining the purpose  of the bill would be to                                                               
change the current percent of market  value (POMV) from a fixed 5                                                               
percent   to  a   variable  number   which  could   track  market                                                               
conditions.   Providing  a brief  overview  of the  need for  the                                                               
change, he  stated that  the stability of  the current  draw does                                                               
not allow for drastic changes in  the market, and a variable POMV                                                               
would base the  amount drawn directly on the  fund's increases or                                                               
decreases  in a  particular fiscal  year.   He  defined the  word                                                               
"real" in  the context of HB  160 to mean an  "inflation adjusted                                                               
6:06:34 PM                                                                                                                    
MR. KING moved to slide 3,  which listed the main problems with a                                                               
fixed POMV.   He first addressed that with a  fixed POMV the draw                                                               
rate  is  less  than  stated,  as  it  is  not  based  on  actual                                                               
performance,  and  this  exposes  the  state  to  risks  in  both                                                               
directions.  Concerning the draw  rate, he pointed to the graphic                                                               
on slide  4, which  showed that  the current  draw has  been less                                                               
than the 5  percent written in statute.  He  stated that any time                                                               
the Permanent  Fund has grown the  draw will continue to  be less                                                               
than 5  percent because of  the mathematical nature  of averaging                                                               
an amount  in a  state of  growth.   He pointed  out a  visual on                                                               
slide 5  which showed the difference  in draw size in  past years                                                               
compared to using a variable  POMV and reiterated that the amount                                                               
of the  draw was less than  5 percent because the  Permanent Fund                                                               
has been growing.                                                                                                               
6:08:36 PM                                                                                                                    
MR. KING posed the question of  what would happen if the POMV was                                                               
actually drawn at 5 percent and  pointed to slide 6, which showed                                                               
two  graphs  comparing the  rolling  average  versus the  current                                                               
value of the fund.  The graphs  showed that if the draw was based                                                               
on  the current  value  of  the fund  rather  than the  five-year                                                               
rolling  average, it  would create  a higher  allowable draw  and                                                               
could cause  the earnings reserve  account (ERA) to  cease growth                                                               
but remain stable.  He  added that inflation proofing was already                                                               
accounted  for in  the  graphs on  the slide,  and  ERA would  no                                                               
longer be  growing because the  Permanent Fund would  be reaching                                                               
the goal of a 5 percent draw.                                                                                                   
6:09:47 PM                                                                                                                    
MR. KING  stated that drawing  less is  a problem and  pointed to                                                               
slide 7.  He  explained that the issue is growing  ERA while in a                                                               
deficit.   He added  that the term  "deficit" here  describes the                                                               
state's fiscal situation, in that  investors and credit raters in                                                               
the national  market are assuming  the funds being  withdrawn are                                                               
from the savings  account, when actually the state  was using the                                                               
revenues from  the Permanent  Fund.  He  explained that  the POMV                                                               
draw  has been  below  the Permanent  Fund's actual  performance,                                                               
therefore forcing ERA to grow.                                                                                                  
6:10:48 PM                                                                                                                    
MR. KING,  on slide 8, pointed  out that the second  issue with a                                                               
fixed POMV is  that it does not track performance.   He explained                                                               
that the graph shows what the  allowable draws would have been in                                                               
years past if the POMV had been  based on the actual returns.  He                                                               
pointed out  that the allowable  and sustainable draw  would have                                                               
been above  5 percent.  He  stated that this would  have been the                                                               
case  in most  recent history,  until the  start of  the economic                                                               
decline in 2018.   He said the green line  is the average nominal                                                               
return, or  the actual  return.   He clarified  that the  type of                                                               
means shown on  the graph were chosen because  of simplicity, but                                                               
in the fiscal  note the Permanent Fund  Corporation has mentioned                                                               
the "more appropriate"  geometrical mean.  The green  line at the                                                               
top of  the graph is  the "average  nominal return" which  is not                                                               
adjusted  for  inflation.    He   stated  that  the  returns  are                                                               
consistently over 8  percent.  He contributed some  of the recent                                                               
loss  of   the  nominal  return   to  heightened   inflation  and                                                               
reiterated  that  the  real  return   was  already  adjusted  for                                                               
6:12:42 PM                                                                                                                    
MR.   KING  compared   the  current   formula  to   the  proposed                                                               
legislation on  slide 9.   He pointed out  that the graph  on the                                                               
left shows  how much money is  allowed to be drawn  from ERA into                                                               
the general fund,  while the graph on the right  shows the effect                                                               
on  the  balance.   He  explained  that  the numbers  reflect  an                                                               
assumed forecast  return of  7 percent,  which would  force lower                                                               
draws from  ERA because of  the low performance of  the Permanent                                                               
6:13:47 PM                                                                                                                    
MR. KING expressed the opinion  that the current POMV has exposed                                                               
the state to several risks, listed on  slides 10 and 11.  He said                                                               
the first risk  is the overperformance of the  Permanent Fund, as                                                               
the current  POMV would not  allow a  higher draw even  though it                                                               
would be sustainable.   He explained the  consequences of several                                                               
years at  a high rate  of return,  and he informed  the committee                                                               
that the  policy decision which  needs to  be made is  whether to                                                               
increase the savings account or  satisfy current budgetary needs.                                                               
During  high performance,  he identified  the risk  as being  the                                                               
inability to draw from the  various revenues available because of                                                               
the  fixed POMV,  and  this  forces the  legislature  to look  at                                                               
cutting  the budget  or raising  taxes instead  of utilizing  the                                                               
revenue Alaska already has.                                                                                                     
6:15:54 PM                                                                                                                    
MR. KING pointed out  another risk of a fixed POMV  is that the 5                                                               
percent might end up being too high.   On slide 12 he showed that                                                               
if  the Permanent  Fund consistently  produced  low returns,  ERA                                                               
would be driven  to a zero balance.   He said it  is incorrect to                                                               
say  that once  ERA's balance  goes to  zero, there  cannot be  a                                                               
draw.   He argued that  a draw could still  be made, but  only to                                                               
the amount of the actual returns from the Permanent Fund.                                                                       
6:18:05 PM                                                                                                                    
MR. KING  pointed out that  ERA was only  driven to zero  in this                                                               
hypothetical because the general fund  draw was not the only draw                                                               
on ERA.  He  pointed to slide 14 and explained  that draws to the                                                               
principal account  were made  to help  adjust for  inflation, and                                                               
this  means that  there are  two forms  of inflation  proofing in                                                               
current law.   He  suggested that if  the legislature  decides to                                                               
rely on only  the inflation proofing within  POMV, the additional                                                               
draws on  ERA could be eliminated,  and the balance would  not be                                                               
driven to zero.                                                                                                                 
6:19:26 PM                                                                                                                    
MR. KING addressed  what an appropriate draw would be.   On slide                                                               
14,  he  pointed  out  the results  if  inflation  proofing  were                                                               
completely removed.   He  said that because  ERA is  earnings off                                                               
the Permanent  Fund, the  legislature would  have full  access to                                                               
the  account.   He implied  that the  purpose of  ERA is  to help                                                               
"smooth" the account.   He suggested that this would  mean if the                                                               
state's savings  were not inflation proofed,  and the legislature                                                               
wanted  to fully  fund services,  like education  and the  Alaska                                                               
State Troopers,  it could draw from  ERA to do so.   He concluded                                                               
on slide 15 that the  legislature could draw the complete nominal                                                               
return while still being sustainable.                                                                                           
6:20:47 PM                                                                                                                    
REPRESENTATIVE  GROH asked  why  the members  from the  Permanent                                                               
Fund  Corporation  Board of  Trustees  were  not present  at  the                                                               
CHAIR CARPENTER responded that he had not invited them.                                                                         
REPRESENTATIVE GROH,  considering the importance of  stability in                                                               
the  permanent  fund dividend  (PFD)  for  the public  and  state                                                               
spending, he  asked for  a comparison  between the  volatility of                                                               
the current fixed POMV and the proposed variable POMV.                                                                          
MR. KING replied  that the volatility in current  law is absorbed                                                               
in the  fund balance, so this  fluctuates as opposed to  the draw                                                               
amount.   He expressed the assumption  that the trade off  with a                                                               
variable  rate  would  be  choosing  either  a  "tracking"  or  a                                                               
"smoothing" approach.  He categorized  the 20-year plan as having                                                               
a smoothing  effect, but trying  to use ERA to  completely remove                                                               
volatility  would   be  improbable  because  of   the  volatility                                                               
introduced through  the oil  market.  He  said a  better solution                                                               
does exist,  but when speaking  strictly about the POMV,  as long                                                               
as reserves are maintained, a variable  POMV would not add to the                                                               
REPRESENTATIVE  GROH   sought  a  list   of  pros  and   cons  in                                                               
consideration of passing HJR 9 instead of HB 160.                                                                               
MR. KING  explained that  the two pieces  of legislation  are not                                                               
substitutes for each  other.  He stated that HJR  9 would put the                                                               
5 percent POMV draw into  the state's constitution.  He expressed                                                               
the opinion that this would not  get rid of any of the previously                                                               
discussed issues, but rather increase the  risk to the state.  He                                                               
explained that this  is because in a situation where  the draw is                                                               
below 5 percent,  the draw would start to dig  into the principal                                                               
fund.   He  opined that  it would  be best  in this  hypothetical                                                               
situation  to have  a variable  POMV  which tracks  returns.   He                                                               
explained that the main difference  would be the draws would come                                                               
straight out  of the fund  and not  washed through ERA,  and this                                                               
would  remove the  possibility  of draining  the  ERA balance  to                                                               
zero.   In this case,  he inferred that  the state would  have to                                                               
maintain cash  reserves in a  different savings account  in order                                                               
to stabilize the volatility.   He expressed the opinion that this                                                               
savings  account  would  be  the  constitutional  budget  reserve                                                               
6:24:59 PM                                                                                                                    
CHAIR   CARPENTER  argued   that   the   risks  associated   with                                                               
constitutionalizing   a  specific   number,  in   particular  the                                                               
potential  for  future  circumstances,  would  mean  eroding  the                                                               
corpus in  order to pay  PFDs and pay  for state government.   He                                                               
suggested that this is not a future Alaskans would want.                                                                        
6:25:31 PM                                                                                                                    
MR. KING,  in response  to a  question from  Representative Groh,                                                               
stated that  he did  the modeling  included in  the presentation.                                                               
In  response  to  a  follow-up   question,  he  stated  that  the                                                               
Department of  Revenue (DOR) and  the Permanent  Fund Corporation                                                               
both  were  contacted  for  comment;  however,  no  response  was                                                               
received.   He stated that the  intent of the presentation  is to                                                               
include the topic of a  variable POMV in the fiscal conversation;                                                               
therefore, the modeling provided at  this time does not represent                                                               
a full analysis but is primarily  illustrative.  In response to a                                                               
follow-up question,  he stated  the Legislative  Finance Division                                                               
had not been contacted.                                                                                                         
REPRESENTATIVE  GROH requested  further  modeling  from DOR,  the                                                               
Permanent   Fund  Corporation,   and   the  Legislative   Finance                                                               
CHAIR CARPENTER replied that he would follow up on this request.                                                                
REPRESENTATIVE  GROH asked  for a  summary of  how this  proposal                                                               
arose and where the idea originated.                                                                                            
CHAIR CARPENTER interjected  that Mr. King should  step back from                                                               
the technical aspects of the presentation and "address the why."                                                                
6:27:40 PM                                                                                                                    
MR.  KING pointed  out  that  there is  a  fiscal  note from  the                                                               
Permanent  Fund Corporation  which may  help answer  the previous                                                               
questions.  He  mentioned that he was working  for the Department                                                               
of  Natural Resources  at the  time the  current POMV  statue was                                                               
passed, and many conversations had  revolved around the amount of                                                               
the draw.   As a professional economist, he  expressed the belief                                                               
that it would be more appropriate  to have a number which adjusts                                                               
to   actual    conditions,   especially   when    considering   a                                                               
constitutional  amendment.    He suggested  that  an  alternative                                                               
would be for  the legislature to react when the  draw is too high                                                               
or too low; however, he argued that this would be too late.                                                                     
6:28:56 PM                                                                                                                    
REPRESENTATIVE  GRAY  referred  to  the  graph  on  slide  8  and                                                               
reasoned  that with  the proposed  formulation,  the state  would                                                               
typically end  up with more  money.   He questioned why  this was                                                               
not the case for 2021.                                                                                                          
MR. KING  explained that there  is a 20-year rolling  average and                                                               
in  2021 there  was a  low  Permanent Fund  performance and  high                                                               
inflation.   He  added that  the state  probably overdrew  ERA in                                                               
2021 because the draw rate did  not react to the poor performance                                                               
of the fund.                                                                                                                    
REPRESENTATIVE  GRAY  requested  a  further  explanation  of  the                                                               
effects  of the  20-year average.   He  expressed the  assumption                                                               
that  it would  be more  stable, yet  the red  line on  the graph                                                               
indicates the POMV was flat.   He asked why [the proposed average                                                               
rate of return] was more volatile than the POMV.                                                                                
MR. KING  responded that  a fixed-POMV  draw fluctuates  based on                                                               
the balance of the fund,  which goes through multiple "smoothing"                                                               
measures and ends  up having less volatility.   He explained that                                                               
the proposed average  rate of return would react  directly to the                                                               
volatile oil  market; therefore,  even with a  20-year smoothing,                                                               
there  will be  volatility.   He said  that the  legislature will                                                               
have  to  decide  for  either  a  fixed  number  which  could  be                                                               
incorrect or a dynamic system  which requires the state to absorb                                                               
some of the volatility.                                                                                                         
REPRESENTATIVE GRAY expressed appreciation  for HB 160 because it                                                               
appears the  state would  have more money  to spend;  however, in                                                               
reference  to oil-based  revenues,  he expressed  comfort in  the                                                               
[fixed POMV]  formula, as  it appears more  stable.   He inferred                                                               
that  the state  has been  more fiscally  conservative in  recent                                                               
years  by  drawing  from  the  fund  less  than  necessary.    He                                                               
expressed  surprise that  legislation  was  being proposed  which                                                               
would allow the state to spend more.                                                                                            
MR.  KING explained  that  the state  would  not necessarily  get                                                               
access to more money.  He  referred to slide 9 and explained that                                                               
the  returns have  been higher  than predicted  in recent  years;                                                               
therefore, the draws were higher as  well.  Looking at the future                                                               
of  the fund,  he  suggested  there will  be  a  smaller draw  in                                                               
[fiscal  year 2025]  because of  high inflation  and the  zero to                                                               
negative  return of  the current  year.   He reiterated  that the                                                               
draw amount  is projected  to be less  because the  variable POMV                                                               
would adjust  to the returns in  real time.  He  implied that the                                                               
proposed draw would function as a  warning for the state to spend                                                               
less in years with low returns.                                                                                                 
REPRESENTATIVE GRAY  inquired about the difference  between using                                                               
the  current  five-year  average  and  the  proposed  twenty-year                                                               
average.   He assumed  that a five-year  average would  show more                                                               
influence from  poor market performance  over two years  than the                                                               
twenty-year model.   He asked  for a very  simplified explanation                                                               
of the impact the two bad years had on the model.                                                                               
MR.  KING confirmed  that Representative  Gray was  talking about                                                               
the "five years"  in current law.  He explained  that the current                                                               
law actually  takes five percent  of the average market  value of                                                               
the  funds.   The  proposal in  HB  160 would  change  POMV to  a                                                               
twenty-year average of the returns of  the fund, which he said is                                                               
not an apples-to-apples comparison.                                                                                             
REPRESENTATIVE GRAY  shared his  understanding that  the proposed                                                               
draw  was based  on the  Permanent Fund's  value and  not on  the                                                               
strength of the market.  He  sought to confirm that even when the                                                               
market is "bad," the recommended  draw would only change when the                                                               
fund's value did.                                                                                                               
MR. KING replied that this is  correct and added that if the POMV                                                               
was  drawing the  entirety of  the  return, the  number would  be                                                               
REPRESENTATIVE  GRAY  expressed  understanding to  the  point  in                                                               
slide 9;  however, he  expressed the belief  that slide  8, which                                                               
applies  the average  real return  to the  past, shows  the state                                                               
would have taken a bigger draw most  of the years.  If the market                                                               
was performing well, he questioned  whether there would be a draw                                                               
much larger than the current law allows.                                                                                        
MR.  KING replied  that if  the  future performance  of the  fund                                                               
mimicked the  performance of the  past, and the  returns remained                                                               
above 5  percent, then the  sustainable draw would also  be more,                                                               
and this would be correct.                                                                                                      
REPRESENTATIVE GRAY expressed satisfaction with the answer.                                                                     
MR. KING continued  addressing the risks of having  a fixed draw.                                                               
He reiterated that  a fixed draw could lead to  a number too high                                                               
or too  low, depending on  the activity  of the market,  and this                                                               
would force the legislature to  make a policy decision on whether                                                               
to grow savings or spend on government programs.                                                                                
6:38:56 PM                                                                                                                    
MR. KING,  in response to  a question from  Representative McKay,                                                               
answered  that Senate  Bill 26  [passed  during the  Thirty-First                                                               
Alaska State Legislature] took effect in  2018.  In response to a                                                               
follow-up question,  stated that the  5 percent POMV  draws began                                                               
in 2018, with no draws prior to this time.                                                                                      
REPRESENTATIVE MCKAY  stated that  the conversation about  a POMV                                                               
started around 2018 when Senate Bill  26 was being discussed.  He                                                               
questioned whether there had been  a decision between a fixed and                                                               
variable rate.                                                                                                                  
MR. KING agreed  that there was a lot of  discourse on the proper                                                               
draw  rate; however,  the conversation  revolved  around what  an                                                               
appropriate fixed rate would be.   He expressed the understanding                                                               
that at the time there had been no talk about a dynamic rate.                                                                   
REPRESENTATIVE  MCKAY  stated that  the  two  main components  of                                                               
Senate Bill  26 were  the five  percent fixed  rate draw  and the                                                               
five-year average  for "softening" the  funds.  He  expressed the                                                               
opinion  that  the  Senate  Bill   26  plan  had  been  the  more                                                               
conservative  approach,   resulting  in  lower  draws   and  more                                                               
inflation  proofing.   He recalled  that the  conservative choice                                                               
was  made because  this had  to do  with typical  endowment funds                                                               
MR.   KING  expressed   uncertainty  because   there  have   been                                                               
endowments  which draw  based on  need.   He added  that spending                                                               
rules  for endowments  vary widely  across the  world.   He added                                                               
that for  the international  standard, 7  percent is  the maximum                                                               
sustainable draw.                                                                                                               
REPRESENTATIVE  MCKAY asked  whether  there would  be  less of  a                                                               
deficit if  HB 160 were  passed.  If  so, he questioned  how much                                                               
less the deficit would be.                                                                                                      
MR. KING  answered that  yes, there  would be  a $500  million to                                                               
$600 million  draw this fiscal year  which could be added  to the                                                               
budget.  However, he explained  that the market's performance for                                                               
the remainder  of the year  would inform  the amount of  the draw                                                               
next year  and poor  performance could result  in an  increase in                                                               
the deficit in  the future.  He noted that  a complication with a                                                               
variable POMV would be if the draw  amount for the PFD were to be                                                               
set at half  of the POMV value,  and a high POMV would  lead to a                                                               
high PFD as well, which would not "close the gap completely."                                                                   
REPRESENTATIVE MCKAY hypothesized that  the possible $500 million                                                               
to $600  million return for  the current fiscal year  would clear                                                               
the budget deficit.                                                                                                             
MR. KING  reminded the committee that  the figure is not  "a hard                                                               
REPRESENTATIVE MCKAY  posited that  [the state's] "pain  is self-                                                               
inflicted" because of the policies set forth in Senate Bill 26.                                                                 
MR. KING confirmed that this opinion is fair.                                                                                   
6:45:10 PM                                                                                                                    
REPRESENTATIVE   GRAY   concurred  with   Representative   McKay;                                                               
however,  he expressed  trepidation  in reference  to Mr.  King's                                                               
statement that  next year  may be very  different.   He expressed                                                               
appreciation  for the  possible "extra  $600 million  right now,"                                                               
but  he expressed  fear that  a  variable POMV  could remove  the                                                               
certainty of the current POMV  and create "chaos that might rival                                                               
what [the state] has with oil revenues."                                                                                        
MR. KING  addressed the  concern by  stating that  the additional                                                               
revenue coming  from ERA, in  his analysis, would  essentially be                                                               
moving money from  CBR.  He suggested that this  would not add to                                                               
the problem  but change  the way  it would be  solved.   He added                                                               
that the volatility in the modeling  "is the price we pay" with a                                                               
variable POMV.   He said that the most prudent  way to manage the                                                               
volatility  would   be  through  a  stabilization   fund,  and  a                                                               
mechanism which  would prevent spending  when revenues  are high,                                                               
so  savings  would  be  available  when revenues  are  low.    He                                                               
suggested that this  structure would not be  difficult to design,                                                               
but he advised that it would need  to be applied to both the fund                                                               
and oil revenues.                                                                                                               
MR. KING, in  response to Chair Carpenter, confirmed  that he was                                                               
implying CBR is a stabilization fund.                                                                                           
6:47:47 PM                                                                                                                    
REPRESENTATIVE MCKAY,  in recalling a conversation  with Mr. King                                                               
about inflation  proofing, reminded the committee  that the state                                                               
has voluntarily deposited almost $9  billion into the corpus over                                                               
the last  two years.   He expressed  the understanding  that this                                                               
was to be for inflation  proofing; however, inflation proofing is                                                               
already  built  into  the  fund.     He  requested  a  simplified                                                               
explanation of this topic.                                                                                                      
MR. KING  explained that because  ERA contains earnings  from the                                                               
Permanent  Fund, all  of this  is constitutionally  accessible by                                                               
the  legislature.    He  said   that  if  the  market  conditions                                                               
deteriorate the  legislature could  put money  from ERA  into the                                                               
principal  account to  keep it  from being  spent.   In terms  of                                                               
maintaining  volatility stabilization,  he  explained that  there                                                               
must be  money in the accessible  fund for when the  stock market                                                               
and the oil market perform  poorly, as these two volatile revenue                                                               
streams usually offset  each other.  He said that  if the state's                                                               
portfolio  is managed  as a  whole, more  revenue could  be taken                                                               
from the better performing market,  and the state could move away                                                               
from  using  ERA.    He  suggested  that  a  mechanism  could  be                                                               
implemented which  would force  the state  to save  while returns                                                               
are high.   He referenced  the proposal in  HJR 2 as  an example.                                                               
He  pointed out  that  moving  money from  ERA  to the  principal                                                               
account is  not actually  inflation proofing,  even though  it is                                                               
referred to  as such.   In the past,  he said, ERA  was primarily                                                               
used for the PFD.                                                                                                               
MR. KING, in response to  Representative McKay, confirmed that in                                                               
the  original PFD  statue, ERA  was the  source of  the PFD.   He                                                               
explained that because ERA was  intended to be distributed in the                                                               
future  and  used  to  save  money, there  had  been  a  separate                                                               
mechanism in place  to inflation proof the principal.   He stated                                                               
that now the state employs a POMV  draw of ERA, and the 5 percent                                                               
draw was  chosen assuming there  would be 7.5 percent  growth and                                                               
2.5  percent inflation,  so the  draw amount  itself was  already                                                               
accounting  for  inflation.   He  suggested  that  the  principal                                                               
account and  ERA be thought  of as one  fund.  He  explained that                                                               
because  the  2.5 percent  was  not  drawn, it  forced  inflation                                                               
proofing  of the  entire fund,  but  this amount  must also  stay                                                               
within ERA.   He  said that transfers  between the  principal and                                                               
ERA for  additional inflation proofing were  voluntary because of                                                               
the  proofing  within the  POMV  structure.   When  making  these                                                               
transfers,  he suggested  that the  legislature consider  whether                                                               
this money should be accessed.                                                                                                  
REPRESENTATIVE  MCKAY  remarked that  in  the  past Alaskans  had                                                               
agreed  on  inflation  proofing in  anticipation  of  needing  it                                                               
someday, and this  had been done without realizing  the state was                                                               
"double dipping" on inflation proofing.                                                                                         
6:53:10 PM                                                                                                                    
CHAIR  CARPENTER stated  that the  committee should  look at  the                                                               
statute which  required inflation proofing before  Senate Bill 26                                                               
was in place.                                                                                                                   
MR. KING pointed out the  statute in question is AS 37.17.145(c).                                                               
He  continued  that  when   the  conversations  around  inflation                                                               
proofing began  in the 80s  and 90s, there was  the understanding                                                               
that  Alaska still  had  high  levels of  oil  production in  its                                                               
future.  Now  the state is facing less oil  production, he opined                                                               
that there  needs to  be a  transition from  growing the  fund to                                                               
using  it.   He  stated that  the  policy call  in  front of  the                                                               
legislature  now  is  how  to   structure  the  funding  for  the                                                               
government.  He remarked that a  [broad-based] tax may need to be                                                               
involved as  well, but whether  it is put  in place now  or later                                                               
depends on the legislature's plan for the Permanent Fund.                                                                       
6:54:34 PM                                                                                                                    
REPRESENTATIVE GRAY  shared the  understanding that HB  160 would                                                               
allow  the state  to draw  more money  from the  fund, but  there                                                               
would be  a spending cap  to prevent its  use in the  same fiscal                                                               
year.  If it allows there to be  more money for the state to use,                                                               
he stated  that he  could support HB  160; however,  he expressed                                                               
the understanding  that the spending  cap in the bill  would mean                                                               
the state would be "moving  money around" rather than having more                                                               
funds to spend.                                                                                                                 
MR. KING stated  that the legislature could  implement a spending                                                               
limit  for when  the fund  or oil  returns were  especially high,                                                               
which would  require the state  to save any extra  revenue rather                                                               
than spend it.  He explained  that if the limit were followed the                                                               
state would not need a POMV.                                                                                                    
6:56:41 PM                                                                                                                    
REPRESENTATIVE  MCKAY  expressed  the understanding  that  the  5                                                               
percent POMV would exceed the spending cap.                                                                                     
MR. KING explained that if a  spending cap was introduced and the                                                               
5 percent POMV  were to stay in effect, the  state could run into                                                               
problems during low-oil revenue years.   He posited that in these                                                               
years, CBR would not have enough  to balance the budget while ERA                                                               
would,  but the  state would  not be  able to  access the  excess                                                               
funds in  ERA.  He  stated that  this would create  an artificial                                                               
spending problem.   He suggested that if the  legislature were to                                                               
pass an effective spending limit,  the proposed legislation would                                                               
not be needed and POMV would be repealed.                                                                                       
6:57:24 PM                                                                                                                    
MR.  KING,  in  response  to a  question  from  Chair  Carpenter,                                                               
explained that  the POMV  was in  place to  limit the  amount the                                                               
legislature could spend  from the Permanent Fund earnings.   If a                                                               
[total]  spending  limit were  put  into  statute [instead  of  a                                                               
POMV], then  this would serve as  the POMV draw and  allow excess                                                               
earnings [from the  fund] to support the state  in low-oil years.                                                               
He surmised that it would be  unusual to have both a spending and                                                               
POMV  limit  because  the  constitution  prevents  the  principal                                                               
account  from  being  "invaded."   In  response  to  a  follow-up                                                               
comment, he  stated that the  stabilization fund would  be either                                                               
ERA or CBR.                                                                                                                     
6:58:26 PM                                                                                                                    
REPRESENTATIVE GRAY  expressed appreciation for  the explanation,                                                               
as he had  heard the POMV was a spending  limit, and he expressed                                                               
the understanding that HB 160  would be raising this limit during                                                               
high performing years, which was an idea he supported.                                                                          
6:58:56 PM                                                                                                                    
REPRESENTATIVE MCKAY referred to  previous conversations with Mr.                                                               
King  about the  possible  negative effects  of  an overly  large                                                               
corpus  on the  development of  the private  sector.   He posited                                                               
that spending  more of  the Permanent  Fund during  [low revenue]                                                               
years would be beneficial towards  creating a "healthy capitalist                                                               
economy" with  a vibrant private  sector.   He asked Mr.  King to                                                               
provide his thoughts on this idea.                                                                                              
MR. KING  addressed the fact that  in previous years there  was a                                                               
great surplus of funds, and it  made sense to grow savings in the                                                               
fund rather than  spend it.  He posited that  from an economist's                                                               
viewpoint,  it makes  sense to  save money  when the  fund is  in                                                               
surplus but does not make sense  to grow the savings account when                                                               
the money is coming from the  private sector economy.  He pointed                                                               
out two possible  futures the legislature would  need to consider                                                               
when deciding fund  policy.  In one future, he  stated that there                                                               
would  be  a  Permanent  Fund  large enough  to  fully  fund  the                                                               
government,  which would  necessitate a  smaller private  sector.                                                               
He deduced that this would put  the public and private sectors at                                                               
odds with each  other.  In the other possibility,  he described a                                                               
future  where the  fund provides  for  the "baseline"  government                                                               
services, and the private sector  contributes the rest [through a                                                               
tax], which  would allow the two  sectors to work in  tandem.  He                                                               
emphasized that,  when considering  the two futures,  there needs                                                               
to be the  consideration that sacrifices are often  required.  He                                                               
suggested that  the sacrifice for supporting  the government with                                                               
the  Permanent Fund  would  be taxing  and  injuring the  current                                                               
economy in  order to avoid  future taxes.   He posited  that this                                                               
would be as generationally inequitable  as doing the opposite and                                                               
"recklessly  draining the  fund" to  leave future  generations to                                                               
fend for  themselves.   He stated that  balancing this  "give and                                                               
take" is at the crux of the legislature's fiscal plan decisions.                                                                
REPRESENTATIVE MCKAY  referenced several different  tax proposals                                                               
before  the current  legislature and  posited that  if the  state                                                               
were to  implement all  of these, while  also not  drawing enough                                                               
from  the fund,  then  the  state would  be  hurting the  private                                                               
sector to keep the Permanent Fund higher than needed.                                                                           
MR.  KING replied  that  this  point is  valid,  in  that if  the                                                               
legislature decides  to continue growing  the fund, it  will also                                                               
need  to ask,  "At what  cost?"   He said  a good  long-term plan                                                               
would  balance the  fiscal impacts,  including taxation,  between                                                               
the current and  future generations.  He  described the balancing                                                               
act  of protecting  the  current economy  while  also insuring  a                                                               
prosperous future as "tenuous."   He attributed the difficulty of                                                               
these fiscal  decisions in part  to not  knowing the future.   He                                                               
argued   that  this   is  why   the  [fiscal]   structure  should                                                               
automatically adjust to the markets.                                                                                            
7:05:10 PM                                                                                                                    
CHAIR  CARPENTER discussed  the  history of  the PFD,  explaining                                                               
that the  PFD program  was not  created at  the inception  of the                                                               
Permanent Fund,  as the [original]  sole purpose was to  grow the                                                               
fund.  The PFD was created  to increase the public's stake in the                                                               
growth  of the  fund.   He expressed  the belief  that this  also                                                               
created inflation proofing  of the principal.   He continued that                                                               
the purpose  for the change  in the dividend formula  with Senate                                                               
Bill  26  was  to  create  a stabilized  revenue  for  the  state                                                               
government.  Returning  to the conversation about  the balance of                                                               
paying  dividends  and funding  services  through  a more  stable                                                               
source of  revenue, he stated that  part of this would  be to use                                                               
taxation as a  way to balance spending and allow  for money to be                                                               
removed  from the  fund to  further  its growth.   He  questioned                                                               
whether the current purpose is to  continue to grow the fund, and                                                               
if so, he questioned when "enough  is enough."  He stated that if                                                               
the  purpose is  instead to  provide revenue  for the  state, the                                                               
appropriate  amount which  allows the  fund to  be a  sustainable                                                               
revenue source needs to be determined.   He said that in order to                                                               
establish a fiscal  structure the question of  the fund's purpose                                                               
needs to  be decided  by the  legislature.   He stated  that this                                                               
answer  will  dictate  whether  Alaska  needs  support  from  the                                                               
private  sector  to  pay  for state  government.    He  expressed                                                               
agreement  with Representative  McKay's statement,  which related                                                               
that requiring  residents to  pay taxes  while still  focusing on                                                               
the growth of the fund would be "the wrong thing to do."                                                                        
7:08:38 PM                                                                                                                    
REPRESENTATIVE GRAY  expressed the opinion  that one of  the most                                                               
difficult  things  is for  people  to  take  action in  order  to                                                               
benefit  future generations,  instead  of the  current  one.   He                                                               
shared his understanding that Alaska  will run out of oil revenue                                                               
eventually, and the importance of  keeping the fund growing would                                                               
be to provide  the state with a  stable form of revenue.   If one                                                               
or more of the proposed  taxes passes in the current legislature,                                                               
he pointed out that Alaska would  still be the lowest taxed state                                                               
in the  nation because of  the Permanent  Fund.  He  referenced a                                                               
statement made  by a  fellow member that  the state  could "spend                                                               
the whole  Permanent Fund, and  then figure  it out."   He feared                                                               
that if  this happens, Alaska  would be  forced to become  one of                                                               
the  highest  taxed states,  with  no  revenue  from oil  or  the                                                               
Permanent Fund.  He expressed  appreciation for past decisions of                                                               
the legislature  to put money  away without being required  to do                                                               
so, and  he expressed  the sentiment  that he  would not  want to                                                               
increase the POMV draw at the expense of future Alaskans.                                                                       
REPRESENTATIVE  MCKAY argued  that  the state  may  be forced  to                                                               
[raise the POMV] in a couple of years because CBR will be empty.                                                                
REPRESENTATIVE  GRAY countered  by expressing  the hope  that the                                                               
state will still have over $80 billion.                                                                                         
REPRESENTATIVE MCKAY  responded that there  would be an  issue if                                                               
CBR is drawn to zero and the budget is still in a deficit.                                                                      
7:11:38 PM                                                                                                                    
CHAIR CARPENTER remarked that if  the state draws all reserves to                                                               
zero, the state is constitutionally  obligated to provide for the                                                               
current generation  and will  have to go  after other  sources of                                                               
funding to do so.  He  named these sources as the education fund,                                                               
corporations  the  state  has  funded,  and  the  Permanent  Fund                                                               
7:12:22 PM                                                                                                                    
REPRESENTATIVE GROH  pointed out  the progress the  committee has                                                               
shown  on   the  topic.     He  expressed  appreciation   of  the                                                               
acknowledgement   that  Alaska   is  the   lowest  taxed   state.                                                               
Continuing  the  discussion  of  Alaska's  many  eras  of  fiscal                                                               
policy, he  shared that he  had been born  in Alaska when  it was                                                               
still  a territory.   Before  the  oil market  was developed,  he                                                               
recalled  that Alaska  used an  income tax  as its  main form  of                                                               
revenue.   He also  recalled that  in 2015  it became  obvious to                                                               
[the  public] that  the  system of  living off  the  oil tax  was                                                               
broken.   He stated that it  was not until 2018  this problem was                                                               
acknowledged by the state with the creation of the POMV draw.                                                                   
REPRESENTATIVE  MCKAY asked  whether the  action was  prompted by                                                               
the [Alaska]  Supreme Court case  in 2016 pertaining  to Governor                                                               
Bill Walker's PFD veto.                                                                                                         
REPRESENTATIVE GROH  expressed disagreement  and argued  that the                                                               
general thinking around  how to fund the state  started to change                                                               
in  2015.   He continued  that this  was when  residents realized                                                               
that using oil  money exclusively to fund the  government and the                                                               
PFD no longer worked.                                                                                                           
7:14:38 PM                                                                                                                    
CHAIR CARPENTER  replied that  a decision had  been made  [by the                                                               
7:14:53 PM                                                                                                                    
REPRESENTATIVE GROH shared  that in his previous line  of work he                                                               
would give  many presentations on  the topic, where the  same two                                                               
questions were  asked.   He stated that  the first  question was,                                                               
"What  is the  Permanent Fund  for?"   He acknowledged  that this                                                               
echoes  Chair Carpenter's  statement.   He said  that the  second                                                               
question about Alaska's fiscal future  was, "How long do you plan                                                               
to stay  in Alaska?"   He opined that  one of the  biggest issues                                                               
facing Alaska is how many people  plan to leave the state at some                                                               
point.    He   expressed  the  belief  that   this  question  has                                                               
contributed  to  the  reluctance  to make  a  sacrifice  now,  as                                                               
residents may  plan to move.   He  expressed the belief  that the                                                               
reality of outmigration needs to  be confronted and considered as                                                               
a large factor in Alaska's fiscal plan.                                                                                         
7:17:07 PM                                                                                                                    
REPRESENTATIVE MCKAY requested that  Mr. King describe what would                                                               
happen  if CBR  became empty.   He  referenced the  legislature's                                                               
ability to move money from ERA.                                                                                                 
MR.  KING   responded  that   there  are   two  clauses   in  the                                                               
constitution  which allow  for  a  draw from  CBR.    One of  the                                                               
clauses  allows the  legislature to  make  a CBR  draw through  a                                                               
three-quarter vote.  He reported  that the other clause has never                                                               
actually been  used because it  only gets triggered if  the state                                                               
does not  have the  revenues to  fund the  budget from  the prior                                                               
year.    He  stated  that  this clause  only  requires  a  simple                                                               
majority vote to pass.                                                                                                          
REPRESENTATIVE  MCKAY restated  for the  record that  a mechanism                                                               
existed which could be triggered  during a budget deficit, with a                                                               
zero  balance in  CBR,  allowing the  legislature  to refill  CBR                                                               
[from ERA] through a majority vote to balance the budget.                                                                       
MR.  KING  replied  that Representative  McKay  was  correct  and                                                               
further  explained that  the introduction  of  these two  clauses                                                               
into  the  constitution  acted  as   a  spending  limit  for  the                                                               
legislature.   He referenced the  idea of putting a  spending cap                                                               
into law and said that  CBR already naturally restricts spending.                                                               
If funds are to be kept in CBR,  rather than ERA, for the sake of                                                               
stabilization,  he  pointed  out that  these  mechanisms  already                                                               
exist, and there is no need  for further legislation.  He pointed                                                               
out  the  common  misuse of  vernacular  surrounding  ERA,  which                                                               
refers to draws from this  account as "drawing from our savings".                                                               
All  funds within  ERA  are earnings  already  accessible to  the                                                               
legislature as part  of the general fund, and  he emphasized that                                                               
the POMV  law does not give  the state permission to  access ERA,                                                               
but  rather limits  how  much can  be drawn.    He described  the                                                               
public discourse  around ERA  and PFD  as misleading  because the                                                               
principal of the  PFD cannot be invaded unless there  is a change                                                               
to  the  constitution.    He inferred  that  the  current  policy                                                               
question is not  whether to draw from the  principal, but whether                                                               
the legislature wants  to give protections to the  balance of ERA                                                               
or use this balance for government spending.                                                                                    
REPRESENTATIVE MCKAY  referenced the  situation in  Norway, where                                                               
they have a  $1 trillion sovereign wealth fund,  but no dividend.                                                               
He stated that the country has  a high tax rate, while continuing                                                               
to grow  its fund from oil  and gas revenues.   He inquired about                                                               
Norway's  fiscal  plan  in  comparison to  Alaska's.    He  asked                                                               
whether Norway  no longer  funds its  government entirely  on gas                                                               
and oil, and  whether it is looking to implement  a draw from its                                                               
fund.   He  additionally questioned  the similar  wealth fund  in                                                               
Alberta,  positing that  Alaska  is not  like  other states,  but                                                               
rather like other countries.                                                                                                    
7:22:46 PM                                                                                                                    
CHAIR CARPENTER informed  Mr. King that he would  not be required                                                               
to address the  situation in Norway, as this is  not his field of                                                               
7:22:59 PM                                                                                                                    
REPRESENTATIVE  GROH  pointed  out  several  differences  between                                                               
Norway  and   Alaska,  including   higher  taxes  and   a  higher                                                               
government  take  of  oil  revenues.   He  opined  that  Norway's                                                               
government  takes  on  more  risk  with  operations,  such  as  a                                                               
government  run  oil company.    He  expressed support  for  this                                                               
strategy in Alaska.                                                                                                             
7:24:12 PM                                                                                                                    
CHAIR CARPENTER  said the  point being made  is that  Norway does                                                               
things very differently than Alaska.                                                                                            
7:24:18 PM                                                                                                                    
REPRESENTATIVE  GROH touched  on  Representative McKay's  inquiry                                                               
about  Alberta's wealth  fund  and opined  that  there have  been                                                               
social investments made with this  fund which created substantial                                                               
trouble for the  province.  He expressed the  opinion that Alaska                                                               
has worked hard to avoid this.                                                                                                  
7:24:42 PM                                                                                                                    
CHAIR  CARPENTER commented  that  the  committee conversation  is                                                               
challenging  the current  paradigm.   He  posited  that the  main                                                               
question  being discussed  is  how the  legislature  can solve  a                                                               
deficit  in  the current  year,  while  taking into  account  the                                                               
fiscal  security of  future generations.   He  questioned whether                                                               
the 5  percent POMV is serving  the right purpose in  the current                                                               
fiscal  choices.    He  listed  additional  financial  levers  to                                                               
consider for  reducing the  deficit, such  as implementing  a tax                                                               
and  reducing   spending.     Additionally,  he   considered  the                                                               
possibility of drawing money from  the Permanent Fund and whether                                                               
its use  should be  solely for government  services, or  also for                                                               
growing businesses  and promoting private sector  investment.  He                                                               
stated that the current models  being proposed include a 50/50 or                                                               
75/25 split,  but the underlying  question of the purpose  of the                                                               
fund must  be answered in  either case.   He reiterated  that the                                                               
state  needs  to make  the  choice  between  a future  where  the                                                               
Permanent Fund fully  funds the government or a  future where the                                                               
private  sector economy  is  tied  to the  state's  economy.   He                                                               
suggested that there is value  in the private sector tax revenue,                                                               
beyond just  funds.   He continued that  job growth  and creating                                                               
buy-ins from the private sector  would bring economic growth.  He                                                               
opined that Alaska  could choose the path of  economic growth and                                                               
fund government  services this way,  or fund  government services                                                               
fully from the Permanent Fund, as in Norway.                                                                                    
7:27:41 PM                                                                                                                    
REPRESENTATIVE  GROH clarified  that  Norway has  many taxes  and                                                               
does not fully  fund the government through  its sovereign wealth                                                               
CHAIR  CARPENTER  agreed  with Representative  Groh's  point  and                                                               
stated that he  was referring to Norway's lack of  a dividend and                                                               
that it uses both the wealth  fund and tax revenue for government                                                               
7:28:07 PM                                                                                                                    
MR. KING  commented on Representative  Gray's concern  for saving                                                               
the money  for the future by  stating that the state  has already                                                               
done  this,  as  there  is   $60  billion  protected  within  the                                                               
principal for  future generations.   He  added that  the original                                                               
growth  of the  fund was  intended to  make temporary  oil wealth                                                               
last  forever.   Continuing to  save some  of the  royalties into                                                               
perpetuity  made sense,  but he  argued  that now  the state  was                                                               
considering  saving   earnings  rather  than  oil   wealth.    He                                                               
concluded  by  stating that  the  policy  call  in front  of  the                                                               
legislature  is whether  to  save oil  wealth  or Permanent  Fund                                                               
earnings for the future.                                                                                                        
[HB 160 was held over.]                                                                                                         
7:29:33 PM                                                                                                                    
There being no  further business before the  committee, the House                                                               
Special  Committee on  Ways and  Means meeting  was adjourned  at                                                               
7:29 p.m.                                                                                                                       

Document Name Date/Time Subjects
HB0160A.PDF HW&M 4/18/2023 6:00:00 PM
HB 160
HB 160 Sponsor Statement.pdf HW&M 4/18/2023 6:00:00 PM
HB 160
HB 160 Sectional Analysis.pdf HW&M 4/18/2023 6:00:00 PM
HB 160
HB 160-DOR-ASD-04-17-23.pdf HW&M 4/18/2023 6:00:00 PM
HB 160
HB 160-DOR-APFC-04-17-23.pdf HW&M 4/18/2023 6:00:00 PM
HB 160
HB 160 Presentation.pdf HW&M 4/18/2023 6:00:00 PM
HB 160