Legislature(2019 - 2020)SENATE FINANCE 532

04/10/2019 09:00 AM Senate FINANCE

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Heard & Held
Heard & Held
                 SENATE FINANCE COMMITTEE                                                                                       
                      April 10, 2019                                                                                            
                         9:01 a.m.                                                                                              
9:01:28 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Stedman called the Senate Finance Committee                                                                            
meeting to order at 9:01 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Natasha von Imhof, Co-Chair                                                                                             
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Peter Micciche                                                                                                          
Senator Donny Olson                                                                                                             
Senator Mike Shower                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator Lyman Hoffman;                                                                                                          
ALSO PRESENT                                                                                                                  
Juli Lucky, Staff, Senator Natasha von Imhof; Senator Chris                                                                     
Birch; Senator Cathy Giessel; Senator Mia Costello; Senator                                                                     
Gary Stevens.                                                                                                                   
SB 103    PFD APPROPRIATIONS                                                                                                    
          SB 103 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SB 104    APPROPRIATION LIMIT                                                                                                   
          SB 104 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
SENATE BILL NO. 104                                                                                                           
     "An Act relating to an appropriation limit; relating                                                                       
     to the budget responsibilities of the governor; and                                                                        
     providing for an effective date."                                                                                          
9:04:20 AM                                                                                                                    
CO-CHAIR  NATASHA VON  IMHOF, SPONSOR,  explained the  bill.                                                                    
She  shared that  there was  already a  spending cap  in the                                                                    
constitution.  She noted  that the  governor had  introduced                                                                    
Senate  Joint  Resolution  6,  which   was  a  spending  cap                                                                    
amendment.  She remarked  that any  constitutional amendment                                                                    
would  go  before voters  in  2020;  this legislation  would                                                                    
provide  a  more  immediate  solution.   She  spoke  to  the                                                                    
PowerPoint presentation related to the bill (copy on file).                                                                     
Co-Chair von Imhof looked at Slide 1, "Why a Spending Cap?"                                                                     
     1. Restrain the growth of the state budget over time                                                                       
     2. Save during the good times so we have a backstop                                                                        
     for the tough                                                                                                              
    ? Spending Cap aka: TEL (Tax and Expenditure Limit)                                                                         
She  said  that her  research  had  shown that  states  with                                                                    
successful  spending caps  also had  spending mechanisms  in                                                                    
place  to bridge  periods of  revenue downturns;  Alaska has                                                                    
the Constitutional  Budget Reserve (CBR). She  shared that a                                                                    
2010   report  from   the  National   Conference  of   State                                                                    
Legislatures  described how  Colorados   Taxpayers  Bill  of                                                                    
Rights  (TBR)  initially  allowed access  revenue  collected                                                                    
above the cap  to be refunded to voters.  However, after the                                                                    
severe  economic downturn  in 2001  and 2002,  when Colorado                                                                    
experience  significant  revenue  shortfalls, there  was  no                                                                    
account to provide  a buffer and a  recession soon followed.                                                                    
In 2005,  Colorado voters approved a  legislative referendum                                                                    
to forego  the projected  mandatory tax refunds  and instead                                                                    
kept  surpluses in  a savings  account to  provide a  fiscal                                                                    
buffer when  revenue shrank. She reiterated  that Alaska has                                                                    
the CBR,  which needed to  be funded during years  of excess                                                                    
revenue to fund the state when the need arose.                                                                                  
Co-Chair  von  Imhof  addressed   Slide  2,  "Five  Decision                                                                    
     1. Starting Point                                                                                                          
     2. Growth rate                                                                                                             
     3. What is included under the cap                                                                                          
     4. What is excluded outside the cap                                                                                        
     5. What do we do with excess revenue                                                                                       
She explained  that the plan  for excess revenue was  not in                                                                    
the bill  but was an  important issue to address.  She hoped                                                                    
that the meeting  would result in a  deeper understanding of                                                                    
the pros  and cons for  each decision point, to  think about                                                                    
how different options might make  sense under a wide variety                                                                    
of circumstances, and  to understand the pros and  cons of a                                                                    
spending cap in statute versus in the constitution.                                                                             
9:07:46 AM                                                                                                                    
Co-Chair  von Imhof  highlighted  Slide 3,  "What are  other                                                                    
states doing?"  She noted  that there was  a mix  within the                                                                    
states that had a tax  and expenditure limit (TEL) in place.                                                                    
She said that as of 2015,  28 (represented in blue, pink and                                                                    
yellow) states  had a TEL. The  black states did not  have a                                                                    
TEL, and  of the colored states  on the map, 17  had a limit                                                                    
in  their constitution,  11 in  statute. She  said that  the                                                                    
difference  between putting  it in  the constitution  versus                                                                    
statute was the level of flexibility over time.                                                                                 
9:08:19 AM                                                                                                                    
Co-Chair von Imhof highlighted Slide  4, "Looking back." She                                                                    
relayed that  the slide showed the  historical levels, since                                                                    
1980, when  the current  constitutional spending  cap began,                                                                    
and oil  became a  major contributor  to state  revenue. The                                                                    
orange  line   was  the  unrestricted  general   fund  (UGF)                                                                    
spending, plus the permanent fund  dividend (PFD). The green                                                                    
line was the UGF revenue, plus the PFD.                                                                                         
9:08:46 AM                                                                                                                    
Co-Chair Stedman  asked for a  definition of UGF and  how it                                                                    
could be manipulated by the legislature.                                                                                        
9:09:05 AM                                                                                                                    
Co-Chair  von  Imhof explained  that  UGF  was revenue  that                                                                    
could  be   used  by  the  legislature   to  appropriate  to                                                                    
anything. She added that there  were other federal funds and                                                                    
designated general funds (DGF)  that were generally directed                                                                    
to a specific area.                                                                                                             
9:09:58 AM                                                                                                                    
Co-Chair  Stedman  clarified that  UGF  were  the fund  that                                                                    
could be used for general  expenditure in the budget to meet                                                                    
the  states  fiduciary  obligations  and  were flexible  and                                                                    
could be moved as the legislature deemed fit.                                                                                   
9:10:06 AM                                                                                                                    
Co-Chair von Imhof continued to  discuss the slide. She said                                                                    
that for  approximately 25 years,  revenue and  spending did                                                                    
not  fluctuate  very  much.  She  continued  that  in  2005,                                                                    
revenue and  spending experienced wild swings,  resulting in                                                                    
13 years  of chaos.  She relayed that  in that  time revenue                                                                    
spiked  high   and  spending  jumped  up   accordingly.  She                                                                    
furthered that in 2012, revenue  went into a free-fall for 6                                                                    
years, during  which time $13  billion of the CBR  was spent                                                                    
to offset budget deficits. She  noted the jump in revenue in                                                                    
2019, due to the passage of SB 26.                                                                                              
9:11:07 AM                                                                                                                    
Senator  Micciche  was  curious  about the  green  line  and                                                                    
whether the PFD earnings were factored in.                                                                                      
9:11:24 AM                                                                                                                    
Co-Chair von Imhof  replied that UGF plus PFD  meant that on                                                                    
top  of the  permanent fund,  the amount  of money  that was                                                                    
used to pay the PFD had been added.                                                                                             
9:11:38 AM                                                                                                                    
Co-Chair Stedman understood  that the PFD had  been added on                                                                    
top of the UGF.                                                                                                                 
9:11:44 AM                                                                                                                    
Co-Chair von Imhof agreed.                                                                                                      
9:11:50 AM                                                                                                                    
Co-Chair von Imhof related that  calculations showed that if                                                                    
the state  had had an  effectual spending cap in  place from                                                                    
2005 to  2018, more  would have ween  saved in  high revenue                                                                    
years, and less  spent out of the CBR in  low revenue years,                                                                    
and a total  of $15 billion would have been  retained in the                                                                    
CBR. She felt  that the take-away was that  it was important                                                                    
to have  a savings account to  provide a buffer, as  well as                                                                    
an effectual spending cap.                                                                                                      
9:12:37 AM                                                                                                                    
Co-Chair  von Imhof  addressed Slide  5. She  explained that                                                                    
the  grey  line  represented  the  current  constitutionally                                                                    
mandated spending cap.  She said that under  the status quo,                                                                    
UGF spending will be $10  billion in 2020. She believed that                                                                    
the rate  was too high. She  noted the dark grey  line along                                                                    
the bottom of  the graph that showed  population growth. She                                                                    
pointed out that growth had  been steady. The dark blue line                                                                    
reflected the SB 104 limit. In  the graph the dark blue line                                                                    
had  been modeled  backwards  and forwards  to  see what  an                                                                    
effectual  spending  cap would  look  like  had it  been  in                                                                    
place. She  said that  the growth  rate of  the cap  was the                                                                    
last five-year  trailing consumer  price index  average. The                                                                    
green dotted  line was the  estimated revenues  published in                                                                    
the  current Spring  Revenue Source  Book, it  appeared that                                                                    
revenues were estimated to remain  steady over the next five                                                                    
years. She stated that the  current spending cap illustrated                                                                    
why  long-term growth  rates, left  untouched, could  become                                                                    
very large. She  stressed that the growth  rate mattered and                                                                    
would  have  to contend  with  Compound  Annual Growth  Rate                                                                    
(CAGR). She  discussed CAGR. She  asserted that  revenue and                                                                    
expenditure projections  were not based on  the same things;                                                                    
revenue  in the  state, or  oil  prices, were  not based  on                                                                    
inflation but  on supply and demand,  technology, and global                                                                    
politics. The market  value of the permanent  fund, under SB
26, was  based on the  value of stocks, bonds,  real estate,                                                                    
supply  and demand,  consumer  confidence,  and global  free                                                                    
market forces  (green line). She  furthered that  the orange                                                                    
line,  or   expenditures,  was   based  mainly   on  federal                                                                    
matching, federal mandates, and  politics. She believed that                                                                    
an effectual spending cap would  have been helpful during FY                                                                    
05 and FY 18, assuming there  had been the political will to                                                                    
follow it. She  warned that compound annual  growth rate was                                                                    
a  mathematical calculation  that had  economic consequences                                                                    
when  it  was inside  a  spending  cap and  she  recommended                                                                    
periodic reevaluation  of any spending  cap that was  put in                                                                    
place, regardless of  whether it was in  the constitution or                                                                    
in a statute.                                                                                                                   
9:17:02 AM                                                                                                                    
Senator Olson  asked whether the  sponsor had plans  for the                                                                    
surplus revenue  that could be  generated by  implementing a                                                                    
spending cap like Colorado.                                                                                                     
Co-Chair von  Imhof thought the  issue should be had  at the                                                                    
table.  She  said  that  past  proposals  that  suggested  a                                                                    
certain  percentage  of  excess  revenue  could  go  towards                                                                    
capital, savings, and perhaps a dividend.                                                                                       
9:18:19 AM                                                                                                                    
Co-Chair Stedman reminded the  committee of a decade between                                                                    
the late 80s  and through the 90s when  Capital Budgets were                                                                    
flattened due to  tight revenue which had  led a substantial                                                                    
deferred maintenance  buildup in the state.  The buildup had                                                                    
resulted  increased   in  the  Capital  Budget   as  revenue                                                                    
increased in the  early 2000s. He wondered  how the spending                                                                    
formula  would  affect the  ability  to  deal with  deferred                                                                    
9:19:03 AM                                                                                                                    
Co-Chair  von  Imhof replied  in  years  of surpluses  money                                                                    
would be  put in the  CBR to use  for years when  the market                                                                    
forces were not favorable.                                                                                                      
9:20:56 AM                                                                                                                    
Senator Wielechowski queried the  penalty if the legislature                                                                    
exceeded the appropriation limit.                                                                                               
9:21:10 AM                                                                                                                    
Co-Chair  von Imhof  replied that  she had  not come  across                                                                    
that information  in her research.  She thought that  it was                                                                    
up  to  the committee  to  discuss  whether the  legislature                                                                    
could exceed the cap with a three-quarter vote.                                                                                 
9:22:17 AM                                                                                                                    
Senator  Wielechowski  argued  that  the  legislature  could                                                                    
ignore  the statute  in much  the  same way  it ignores  the                                                                    
constitutional provision for a 90-day legislative session.                                                                      
9:22:26 AM                                                                                                                    
Co-Chair  von  Imhof  offered that  other  states  exercised                                                                    
threshold votes to override statutes.                                                                                           
9:22:31 AM                                                                                                                    
Senator  Micciche  noticed that  the  bill  did not  add  an                                                                    
exclusion on capital spending. He  asked whether the sponsor                                                                    
could be open to tighter  reigns on capital spending outside                                                                    
of the exclusion.                                                                                                               
9:24:10 AM                                                                                                                    
Co-Chair von  Imhof replied that capital  matching funds had                                                                    
been paid out  of UGF over the past several  years. She said                                                                    
that she was  attempting to keep the Capital  Budget at $150                                                                    
million for  FY 20,  that would  allow for  federal matching                                                                    
funds,  limited   deferred  maintenance,  and   several  new                                                                    
capital items.  She said that  the constitution  stated that                                                                    
any new  Capital Budget must communicate  to the legislature                                                                    
what the ongoing costs would be in subsequent years.                                                                            
9:25:56 AM                                                                                                                    
Senator  Wielechowski  understood   that  the  appropriation                                                                    
limit would be $5 billion and  would include the PFD at $1.9                                                                    
9:26:05 AM                                                                                                                    
Co-Chair von  Imhof replied in the  affirmative. She pointed                                                                    
to the green line on Slide  5 and relayed that an amount had                                                                    
to  be chosen  to  put  in the  bill.  She  offered a  brief                                                                    
explanation of that process.                                                                                                    
9:26:26 AM                                                                                                                    
Co-Chair von Imhof looked at Slide 6.                                                                                           
9:27:19 AM                                                                                                                    
Co-Chair  von  Imhof highlighted  Slide  7,  "Expenses as  a                                                                    
comparison."  [Secretary Note:  Slides 6  and 7  are not  in                                                                    
backup and were not provided to the committee]                                                                                  
9:27:47 AM                                                                                                                    
Senator Bishop  asked whether it  would be possible  to take                                                                    
Slides  4 and  5  and  model them  with  the 50/50  dividend                                                                    
9:28:07 AM                                                                                                                    
Co-Chair von Imhof agreed to provide that information.                                                                          
9:28:14 AM                                                                                                                    
Co-Chair Stedman  said that the legislature  had the ability                                                                    
to  increase expenditures,  and drive  the economy,  through                                                                    
the  Capital  Budget.  He said  that  certain  past  Capital                                                                    
Budget had  been in response  to the declining  national and                                                                    
international economy to keep  Alaska out of the recessions.                                                                    
He  said that  Capital Projects  were funded  throughout the                                                                    
state  that had  kept Alaska  out  of harms  way during  the                                                                    
Great Recession.  He wondered  how the  same thing  could be                                                                    
done under SB 104.                                                                                                              
9:30:33 AM                                                                                                                    
Co-Chair von Imhof  thought that the decision  could be made                                                                    
by the legislature to slightly  increase the budget over the                                                                    
spending cap after weighing the  risk. She asserted that the                                                                    
spending cap could give the legislature a guideline.                                                                            
9:32:00 AM                                                                                                                    
Co-Chair  Stedman felt  that  the  committee should  closely                                                                    
examine the  capital budget.  He noted that  in the  90s the                                                                    
budget was  flat, like  the current  budget. He  warned that                                                                    
capping the capital budget at  $150 million would be too low                                                                    
and  would limit  the  states  ability  to  invest in  state                                                                    
infrastructure outside of federal support.                                                                                      
9:33:18 AM                                                                                                                    
Senator  Micciche  thought  that  the state  was  victim  to                                                                    
investment  growth versus  inflation.  He  thought that  the                                                                    
problem was when  getting so far out of  moderation that the                                                                    
spend above  the spending  cap could  cause a  recession. He                                                                    
suggested moderating  capital spend  to level out  the long-                                                                    
term  effects.  He expressed  the  desire  to talk  about  a                                                                    
percent  over UGF  spend for  capital, which  would moderate                                                                    
the spend while allowing usage  of stimulus and the building                                                                    
of necessary infrastructure.                                                                                                    
9:34:39 AM                                                                                                                    
Co-Chair Stedman mentioned  two major budgetary distortions:                                                                    
oil  tax   credits  that  were   paid  out   and  retirement                                                                    
liability.  He thought  that when  those  distortions had  a                                                                    
financial impact that should  be considered when structuring                                                                    
9:35:02 AM                                                                                                                    
Senator  Bishop added  on a  positive  distortion note,  the                                                                    
additional inflation  proofing payments  that had  been made                                                                    
to the PFD for approximately $6 billion.                                                                                        
9:35:25 AM                                                                                                                    
Co-Chair   Stedman   agreed   that   the   legislature   had                                                                    
historically added  funds to the  constitutionally protected                                                                    
portion of the fund and could add more in the future.                                                                           
9:35:36 AM                                                                                                                    
Senator   Wielechowski  relayed   that  the   constitutional                                                                    
appropriation  limit  specifically  excluded  appropriations                                                                    
for  PFDs and  expressed  concern with  their inclusion.  He                                                                    
wondered  whether  having a  limit  of  $5 billion,  with  a                                                                    
statutory PDF that costs $1.9  billion, left $3.1 billion in                                                                    
UGF. He  thought that  this would  create a  situation where                                                                    
future permanent  cuts to the  PFD, or government,  would be                                                                    
locked in.  He considered  that the  PFD should  be excluded                                                                    
from the number set for the cap.                                                                                                
9:37:03 AM                                                                                                                    
Co-Chair Stedman  asked for clarity concerning  the pros and                                                                    
cons of excluding, or including, the PFD.                                                                                       
9:37:19 AM                                                                                                                    
Co-Chair von  Imhof retorted that  the POMV was used  to pay                                                                    
the PFD. She argued that  it would be unwise moving forward,                                                                    
to take extra  money from the ERA, thereby  depleting it, to                                                                    
pay  a  large  dividend   based  on  the  current  statutory                                                                    
calculation. She  said that the  second option was  to spend                                                                    
what was available. She stressed  that she was interested in                                                                    
a spending cap  that matched the green line on  Slide 5. She                                                                    
thought that thought  choices needed to be  made: either the                                                                    
state  could   cut  teachers,  troopers,  and   health  care                                                                    
professionals to  pay a $3000  dividend, or a  balance could                                                                    
be  found that  paid  a  reasonable dividend  as  well as  a                                                                    
reasonably   sized  budget   that  funded   core  government                                                                    
services.   She   related   that  this   would   require   a                                                                    
recalculation to the dividend  going forward. She noted that                                                                    
the material change was the passage of SB 26.                                                                                   
9:39:15 AM                                                                                                                    
Senator Shower  touched on the  broader topic of  taking the                                                                    
ERA out  of play and  putting it  into the corpus  under the                                                                    
POMV model.                                                                                                                     
9:40:00 AM                                                                                                                    
Co-Chair  von Imhof  responded that  the APFC  had testified                                                                    
that the  PFD was the  only sovereign wealth  fund endowment                                                                    
or  foundation that  has an  accounting with  and ERA  and a                                                                    
corpus.   She  shared   that   all   other  endowments   and                                                                    
foundations  had one  account and  the percentage  endowment                                                                    
payment came from that one  account. With the passage of the                                                                    
POMV it  made sense  to incorporate the  ERA and  the corpus                                                                    
into  one large  account and  ask the  head of  the APFC  to                                                                    
manage the percentage draw overtime.                                                                                            
9:41:16 AM                                                                                                                    
Senator Shower  expressed concern  for a  statutory spending                                                                    
limit  when  there  was already  a  constitutional  spending                                                                    
limit. He  said that the  problem with a  statutory spending                                                                    
limit was  the rule of  21 and 11  vote. He said  that there                                                                    
was a propensity in the  legislature to ignore statutes that                                                                    
it  did not  like.  He asked  whether  a statutory  spending                                                                    
limit would even be effective.                                                                                                  
9:42:55 AM                                                                                                                    
Co-Chair  von Imhof  said in  1982 there  had been  a 4-year                                                                    
check  in and  the  voters  got to  check  in  in 1986.  She                                                                    
wondered  whether a  periodic check  in with  voters on  the                                                                    
constitutional spending  cap could  be effective.  She added                                                                    
that currently,  if SJR  6 were in  place, voters  would not                                                                    
vote until  2020, leaving no  solution in the  meantime. She                                                                    
suggested that with  a statute it could be on  the books for                                                                    
several  years  as a  trial  run,  then  voters could  on  a                                                                    
constitutional amendment in 4 years.                                                                                            
9:43:49 AM                                                                                                                    
Senator  Wielechowski did  not want  the public  to be  left                                                                    
with the  perception that the  only solution to  the states                                                                     
budget  problems was  the PFD  versus cuts.  He argued  that                                                                    
those were  not the  only options. He  said that  a solution                                                                    
could be found in cutting  deductible oil tax credits, which                                                                    
costs the  state $1.25 billion.  He argued that  a statutory                                                                    
PFD could  be paid out  if the legislature  considered other                                                                    
available options.                                                                                                              
9:44:42 AM                                                                                                                    
Co-Chair  Stedman thought  that  the potential  rise of  the                                                                    
states   pension  obligation   should  be  considered  while                                                                    
working thorough the factors on the model.                                                                                      
9:45:26 AM                                                                                                                    
Senator  Bishop   agreed.  He  relayed  that   the  unfunded                                                                    
liability of the pension plans  was currently underfunded by                                                                    
approximately 30 percent.                                                                                                       
9:46:23 AM                                                                                                                    
Senator Wilson  wondered about putting  forward a  bill that                                                                    
excluded  the  PFD and  added  a  sunset  date of  2020.  He                                                                    
suggested a  bill that  mirrored SJR 6,  with a  sunset date                                                                    
9:47:21 AM                                                                                                                    
Co-Chair  von Imhof  rebutted that  she  preferred her  bill                                                                    
over SJR 6.                                                                                                                     
9:47:43 AM                                                                                                                    
Co-Chair Stedman thought that the  bill would be modified by                                                                    
committee  after modeling  and sensitivity  analysis by  the                                                                    
Legislative Finance Division.                                                                                                   
9:48:45 AM                                                                                                                    
Senator  Micciche  stated  that  he liked  aspects  of  both                                                                    
pieces of legislation.                                                                                                          
9:49:06 AM                                                                                                                    
Co-Chair Stedman asked Senator Micciche to define SJR 6.                                                                        
9:49:12 AM                                                                                                                    
Senator  Micciche  replied that  SJR  6  was the  governors                                                                     
spending  limit   that  was  being  worked   on  in  another                                                                    
committee.  He  asserted  that  there was  no  way  to  deny                                                                    
inflation. He  supported not  allowing growth  in government                                                                    
and  a safety  valve on  capital spending.  He thought  that                                                                    
without  a  statutory  limit  it  was  challenging  for  the                                                                    
legislature  to stay  within  the  constitutional limit.  He                                                                    
admitted  that   the  legislature  did  not   always  follow                                                                    
statutes  and  thought  that this  issue  warranted  further                                                                    
9:51:09 AM                                                                                                                    
Senator  Shower highlighted  that some  of the  things under                                                                    
discussion at  the table had  been addressed  in resolutions                                                                    
that had been filed and would be discussed in committee.                                                                        
9:52:09 AM                                                                                                                    
Co-Chair   Stedman   reiterated   that   LFD   would   craft                                                                    
presentations and  projections to aid in  future discussions                                                                    
on  spending limits.  He noted  that the  vote hurdle  for a                                                                    
statutory   bill   was  lower   than   the   hurdle  for   a                                                                    
constitutional amendment.                                                                                                       
9:53:12 AM                                                                                                                    
JULI LUCKY, STAFF, SENATOR NATASHA  VON IMHOF, discussed the                                                                    
Sectional Analysis (copy on file):                                                                                              
     Sec. 1: Amends AS 37.05.540(a) by deleting a reference                                                                   
     to the existing statutory appropriation limit that is                                                                      
     repealed by this bill.                                                                                                     
     Sec. 2: Enacts a new AS 37.05.545 - Appropriation                                                                        
          (a) Establishes the parameters of the limit:                                                                          
               .notdef Includes all Unrestricted General Fund                                                                   
               (UGF)  appropriations  for  agency  spending,                                                                    
               Permanent    Fund    dividends,    retirement                                                                    
               obligations, and  capital projects.  Does not                                                                    
               include   reappropriations,  federal   funds,                                                                    
               Designated   General  Fund   (DGF)  spending,                                                                    
               program   receipts,   money   received   from                                                                    
               nonstate  sources for  specific purposes,  or                                                                    
               the exclusions listed in (b).                                                                                    
               .notdef Starting point is $5 billion for FY 2021,                                                                
               with a  growth rate  based on the  average of                                                                    
               the  previous   five-year's  inflation.  This                                                                    
               rate was  chosen because  it provides  a more                                                                    
               stable   rate   than  an   annual   inflation                                                                    
          (b) Lists the exclusions to the appropriation                                                                         
               (1)  Appropriations  to  the  Permanent  Fund                                                                    
               principal (corpus);                                                                                              
               (2) Debt payments;                                                                                               
               (3) Disaster funding; and                                                                                        
               (4)  Deposits   into  savings   accounts  and                                                                    
               transfers   into    accounts   that   require                                                                    
               additional legislative action to spend.                                                                          
          (c) Defines the terms "unrestricted general fund"                                                                     
          and "program receipts" for the purposes of this                                                                       
     Sec. 3:  Adds a  requirement to  AS 37.07.020  that the                                                                  
     governor  submit,  along  with  the  annual  budget,  a                                                                    
     report  noting  whether  the  proposal  is  within  the                                                                    
     spending limit.  The report must be  updated to include                                                                    
     any supplemental appropriations and budget amendments.                                                                     
     Sec.  4: Repeals  the  current statutory  appropriation                                                                  
     limit, specifically AS  37.05.540(b); 37.05.540(c), and                                                                    
     Secs 5  - 7:  Applicability, transition,  and effective                                                                  
     date   language    that   specifies   when    the   new                                                                    
     appropriation  limit and  reporting requirements  would                                                                    
     take  effect.  The  limit would  apply  to  the  FY2021                                                                    
     budget and the  governor would be required  to file the                                                                    
     necessary reports for the  proposed budgets starting in                                                                    
     December 2019.                                                                                                             
9:56:53 AM                                                                                                                    
AT EASE                                                                                                                         
9:57:16 AM                                                                                                                    
9:57:20 AM                                                                                                                    
Senator Micciche attempted to make a motion.                                                                                    
9:57:28 AM                                                                                                                    
AT EASE                                                                                                                         
9:58:27 AM                                                                                                                    
9:58:43 AM                                                                                                                    
Senator Micciche pointed  out that there was  nothing in the                                                                    
bill  that considered  designated  general  funds (DGF).  He                                                                    
spoke of a past  conversation concerning voluntary increases                                                                    
where Alaskans picked  up a part of state  spending, such as                                                                    
University  tuitions. He  lamented  that the  administration                                                                    
had been  lumping the funding  sources all  together leaving                                                                    
the committee  to explain the difference.  He asked Co-Chair                                                                    
von Imhof  to explain why  DGF might become a  valuable tool                                                                    
in  managing  state  budgets   moving  forward  as  Alaskans                                                                    
volunteered to pick up some expenses.                                                                                           
9:59:44 AM                                                                                                                    
Co-Chair von Imhof related that  UGF had been chosen for the                                                                    
spending  cap if  the University  increased  its tuition  so                                                                    
that the  tuition receipts  would go  to the  University and                                                                    
nowhere else.                                                                                                                   
10:00:13 AM                                                                                                                   
Senator  Micciche  shared that  he  often  explained UGF  to                                                                    
constituents  as  the amount  that  would  come out  of  the                                                                    
publics pocket  if the state  could not pay.  He appreciated                                                                    
that  DGF specifically  paid for  programs and  he supported                                                                    
that it was not part of the spending limit.                                                                                     
10:00:56 AM                                                                                                                   
Senator  Wielechowski asked  whether  the current  statutory                                                                    
budget limit, AS 37.05.540, had ever been violated.                                                                             
10:01:09 AM                                                                                                                   
Ms. Lucky  understood that the  existing in statute  had not                                                                    
been violated.                                                                                                                  
10:01:47 AM                                                                                                                   
Co-Chair  Stedman  repeated  the  LFD would  be  before  the                                                                    
committee  to provide  details on  the current  spending cap                                                                    
and the proposed cap.                                                                                                           
10:02:17 AM                                                                                                                   
Ms. Lucky  clarified that  she would  make the  most current                                                                    
graph crafted by LFD available to the committee.                                                                                
10:02:26 AM                                                                                                                   
Co-Chair Stedman  said that a  robust discussion  would take                                                                    
place  on the  issue. He  was  hopeful that  a solution  was                                                                    
10:02:53 AM                                                                                                                   
Senator  Bishop noted  that the  bill was  a Senate  Finance                                                                    
Committee  bill and  that the  entire committee  was working                                                                    
together on the issue.                                                                                                          
10:03:15 AM                                                                                                                   
Co-Chair  von Imhof  stated  that a  spending  cap was  very                                                                    
important  to  the  governor  and  she  sincerely  hoped  to                                                                    
deliver a spending cap that all parties could support.                                                                          
SB  104  was  HEARD  and   HELD  in  committee  for  further                                                                    
10:04:31 AM                                                                                                                   
AT EASE                                                                                                                         
10:07:47 AM                                                                                                                   
Co-Chair Stedman handed the gavel to Co-Chair von Imhof.                                                                        
SENATE BILL NO. 103                                                                                                           
     "An  Act relating  to deposits  into the  dividend fund                                                                    
     and appropriations  from the earnings  reserve account;                                                                    
     and providing for an effective date."                                                                                      
10:08:15 AM                                                                                                                   
Senator  Micciche MOVED  to ADOPT  the committee  substitute                                                                    
for SB 103, Work Draft 31-LS0654\U (Nauman, 4/9/19).                                                                            
Co-Chair von Imhof OBJECTED for discussion.                                                                                     
10:08:35 AM                                                                                                                   
CO-CHAIR  BERT  STEDMAN,  SPONSOR, explained  the  committee                                                                    
Co-Chair von  Imhof WITHDREW the  OBJECTION. There  being NO                                                                    
OBJECTION, it was so ordered.                                                                                                   
10:10:23 AM                                                                                                                   
Co-Chair Stedman said  that the bill would  take the percent                                                                    
of market value and adjust  the split, or which portion went                                                                    
to the PFD, and which  portion went to other expenditures or                                                                    
was reinvested back in the fund.                                                                                                
Co-Chair Stedman  explained the Sectional Analysis  (copy on                                                                    
     Sec. 1 & 2:    Removes  from AS  37.13.140(a) the  1982                                                                  
     formula  for  calculating   the  amount  available  for                                                                    
     distribution  and leaves  the Net  Income language  for                                                                    
     accounting purposes.                                                                                                       
          Adds language  to AS 37.13.140(b), the  Percent of                                                                    
     Market Value (POMV) calculation  for the Permanent Fund                                                                    
     draw, stating that the  amount for appropriation cannot                                                                    
     exceed  the balance  of  the  Earnings Reserve  Account                                                                    
     Section 1  inserts the  language into  current statute;                                                                    
     Section  2  is  necessary to  accommodate  the  delayed                                                                    
     effective date of  the same statute when  the POMV draw                                                                    
     rate "steps  down" effective July 1,  2021 (Fiscal Year                                                                    
     Sec. 3:   Amends AS  37.13.145(b) to enact  the "split"                                                                  
     of  the  POMV draw:  50  percent  to dividends  and  50                                                                    
     percent to the general fund.                                                                                               
     Sec.  4:     Conforming:  AS  37.13.145(c) states  that                                                                  
     inflation  proofing   payments  may  not  be   used  to                                                                    
     increase the  value of Amerada Hess  subaccount. Sec. 4                                                                    
     makes  technical changes  in  this  statute to  conform                                                                    
     with changes made by this bill.                                                                                            
     Sec. 5:   Conforming:   AS  37.13.145(d)   states  that                                                                  
     funds from  the Amerada Hess settlement  cannot be used                                                                    
     for  dividends. Section  5 makes  technical changes  in                                                                    
     this statute to conform to changes made by this bill.                                                                      
     Sec. 6:   Conforming: AS  37.13.300(c) states  that net                                                                  
     income  from  the  Mental  Health  Trust  Fund  is  not                                                                    
     included  in  calculations   for  the  Permanent  Fund.                                                                    
     Section 6  makes technical changes  in this  statute to                                                                    
     conform to changes made by this bill.                                                                                      
     Sec. 7:   Conforming: AS  37.14.031(c) states  that the                                                                  
     computation of  net income of  the Mental  Health Trust                                                                    
     Fund  shall  be  computed  in   the  same  way  as  the                                                                    
     Permanent  Fund. Since  the POMV  split  makes the  net                                                                    
     income  calculation for  the  Permanent Fund  obsolete,                                                                    
     section  7 replaces  the reference  with  a net  income                                                                    
     Sec. 8:   Conforming:   AS  43.23.025(a)   defines  the                                                                  
     formula for  calculating individual dividends  once the                                                                    
     amount available for appropriation  is known. Section 8                                                                    
     makes technical  changes to conform to  changes made by                                                                    
     section 3 of this bill.                                                                                                    
     Sec. 9:   Conforming:  Repeals  statutes  that  are  no                                                                  
     longer needed:  AS 37.13.145(e) & (f),  which limit the                                                                    
     draw to  the net  income calculation being  repealed in                                                                    
     this bill.                                                                                                                 
     Sec. 10:  Effective date for Section 2 of this bill.                                                                     
10:15:29 AM                                                                                                                   
Senator Wilson asked about the language in Section 3, and                                                                       
the use of the work may rather than shall.                                                                                      
10:16:03 AM                                                                                                                   
Co-Chair  Stedman replied  that the  language was  suggested                                                                    
language,  and that  the  committee could  weigh  in on  how                                                                    
restrictive or broad the language should be.                                                                                    
10:16:30 AM                                                                                                                   
Senator  Wilson felt  that  stronger  language would  assure                                                                    
that the rules were followed.                                                                                                   
10:17:13 AM                                                                                                                   
Co-Chair von  Imhof interjected that the  work  shall  could                                                                    
connotate   a   dedicated   fund,  which   was   potentially                                                                    
10:17:25 AM                                                                                                                   
Senator Wielechowski  was curious  about the  2018 effective                                                                    
10:17:39 AM                                                                                                                   
Co-Chair  Stedman  said  that  the  effective  date  concept                                                                    
considered budget  cycles. He  relayed that  he was  open to                                                                    
all discussions and possible committee changes.                                                                                 
10:18:40 AM                                                                                                                   
Co-Chair  Stedman discussed  the presentation,  "Senate Bill                                                                    
103;  Senate Finance  Committee;  April 10,  2019" (copy  on                                                                    
file). He looked at Slide 2:                                                                                                    
     The Permanent  Fund was established  in 1976 by  a vote                                                                    
     of the  people to  save a  portion of  Alaska's mineral                                                                    
     wealth  for future  generations and  limit overspending                                                                    
     by the legislature.                                                                                                        
10:19:14 AM                                                                                                                   
Co-Chair Stedman highlighted Slide 3:                                                                                           
     The Permanent Fund is an Alaska success: current value                                                                     
     of $64 billion from a total contribution of $40.4                                                                          
Co-Chair Stedman  said that  chart sowed  the growth  of the                                                                    
permanent fund  overtime. The top  bar represented  the ERA.                                                                    
He  shared that  the state  has a  formula driven  dividend,                                                                    
established when  the portfolio  was smaller.  The portfolio                                                                    
had grown  overtime to  over $60  billion. The  formula took                                                                    
the 5-year  average of  gains and losses  and net  income to                                                                    
pay out a  dividend to every resident of the  state. He said                                                                    
that  the passage  of SB  26 had  created a  linking problem                                                                    
between how  the dividend  was calculated  and how  the POMV                                                                    
was  drawn.   A  Strong  bull  market   resulted  in  bigger                                                                    
dividends  and  currently  the   formula  targeted  a  $3000                                                                    
dividend, which  took a substantial  percentage of  the POMV                                                                    
draw. He said  that the dividend today, after  a decade long                                                                    
bull market,  took a bigger  portion. He  directed committee                                                                    
attention to  2008, 2009,  2010, and  recalled conversations                                                                    
then over concern about the  declining financial markets and                                                                    
possible politics involved  in the management of  the PFD at                                                                    
that time. He  noted that in 2003 the gold  bar on the chart                                                                    
nearly  disappeared. He  stated that  looking over  the past                                                                    
several years,  a historical distortion  could be seen  of a                                                                    
massive ERA  driving a  large dividend.  He shared  that the                                                                    
hope was  to create a   smoothing  of the dividends  and the                                                                    
cash flow to  the general fund, when it was  needed. He said                                                                    
that the  smoothing mechanism  looked back  over the  past 5                                                                    
years, averaged the market value,  then took 5.25 percent to                                                                    
pay out dividends  and or state core services.  He said that                                                                    
stretching out 5 years helped  reduce volatility in the cash                                                                    
flow.  He said  that the  smoothing made  the dividend  more                                                                    
10:25:17 AM                                                                                                                   
Co-Chair  Stedman addressed  Slide 5,  "The ERA  is variable                                                                    
and uncertain.  By its nature  it lacks the stability  to be                                                                    
relied upon for budget stabilization."                                                                                          
Co-Chair  Stedman  pointed  to  2009, when  there  was  $420                                                                    
million in  the ERA,  $29.5 constitutionally  prote4cted. He                                                                    
lamented  that  $420  million would  not  meet  the  states                                                                     
current obligations. He  noted that under POMV,  in 2003 the                                                                    
entire  ERA would  have  to  be used  to  pay dividends.  He                                                                    
stressed  that   the  dividend  calculation  needed   to  be                                                                    
modified to coincide  with the POMV structure.  He noted the                                                                    
targeted numbers  for 2019 and  warned that  the legislature                                                                    
needed  to deal  with  the  massive growth  in  the ERA.  He                                                                    
warned  that  the ERA  should  not  be  relied on  for  both                                                                    
dividends  to residents  and any  operational assistance  to                                                                    
the  state. He  said that  even  if there  was no  operation                                                                    
assistance to the  state the dividend was in  peril by being                                                                    
focused in the ERA.                                                                                                             
10:27:23 AM                                                                                                                   
Co-Chair  Stedman discussed  Slide 4,  "SB 103  Protects the                                                                    
Permanent Fund." The  slide offered the basic  layout of the                                                                    
draw and  the split. He hoped  that the final bill  would be                                                                    
transparent  and  understandable  by  the  citizens  of  the                                                                    
state; the  people of  Alaska are  the collective  owners of                                                                    
the  entire portfolio.  The slide  reflected a  50/50 split,                                                                    
which Co-Chair Stedman  said was a proposal  for the purpose                                                                    
of discussion only.                                                                                                             
10:30:19 AM                                                                                                                   
Co-Chair Stedman  discussed Slide  6, "SB 103  Doesn't Alter                                                                    
the Fund's Principles; Save and Grow":                                                                                          
     SB 103 limits any draw from the Fund to a maximum 5                                                                        
     percent of its 5-year average value.                                                                                       
          This draw limit is conservative and sustainable.                                                                      
          5 percent is comfortably under the Fund's growth                                                                      
Co-Chair Stedman shared  that the 5 percent  long-term was a                                                                    
reasonable target  and was set  in statute.  This percentage                                                                    
could be higher  or lower and would be  under discussion. He                                                                    
said that  when the distribution  rate was set at  5 percent                                                                    
it was  driven by  the asset  allocation and  performance of                                                                    
the  PFD  and a  deliberate  effort  had  been made  not  to                                                                    
distort and  push the  PFD asset  allocation; the  draw rate                                                                    
should not  be so high that  APFC had to chase  risky assets                                                                    
to produce  the return, or  so low  that the sharing  of the                                                                    
wealth was inequitable for future  generations. He said that                                                                    
SB 26  recognized APFC was  a separate entity that  knew the                                                                    
cashflow  that needed  to  be produced  to  the treasury  in                                                                    
advance and prepare their portfolio prepared accordingly.                                                                       
10:32:45 AM                                                                                                                   
Co-Chair von Imhof  noted that the bill did  not address the                                                                    
draw  rate in  SB  26  but reiterated  the  draw  rate as  5                                                                    
percent starting in  2021 and addressed the split  of that 5                                                                    
10:33:12 AM                                                                                                                   
Co-Chair Stedman agreed.                                                                                                        
10:33:31 AM                                                                                                                   
Co-Chair Stedman  looked at  Slide 7,  "SB 103  Protects the                                                                    
Permanent Fund; Let's Talk Dividends":                                                                                          
     The dividend (est. 1982) has disbursed $22b to                                                                           
          It is an equitable distribution of resource                                                                           
          wealth to those who own the resources.                                                                                
          SB 103 provides a predictable and transparent                                                                         
          dividend via a 50/50 formula.                                                                                         
          Dividends will once again be reliable and linked                                                                      
          to the value of the fund.                                                                                             
10:34:12 AM                                                                                                                   
Co-Chair  Stedman addressed  Slide  8,  "Comparison of  1982                                                                    
Formula and SB 103."                                                                                                            
Co-Chair  Stedman  noted that  the  chart  offered a  linear                                                                    
interpretation  and  reminded  committee  members  that  the                                                                    
market was anything  but linear. He said that  the draw rate                                                                    
on the  first row and  relayed that the  long-term objective                                                                    
was to get  to 5 percent. He spoke to  the second row, which                                                                    
showed  the total  POMV draw  and  was the  total amount  of                                                                    
money that  could be drawn from  the PFD in any  given year.                                                                    
He  moved  to  the  1982  formula,  which  was  the  current                                                                    
dividend  calculation, $3332  per  resident in  FY 2020.  He                                                                    
stated  that  in SB  103,  the  transfer dropped  from  $1.9                                                                    
billion to $1.5, the split would  be 50/50 and the PFD would                                                                    
be  $2285.  He related  that  the  numbers depended  on  the                                                                    
strength of  the ERA and  the financial markets;  a ten-year                                                                    
bull market  was hard  to beat.  He pointed  to FY  2028 and                                                                    
noted  that the  dividend  would be  reduced  to $2600,  but                                                                    
there  would be  more  stability. He  hoped  for input  from                                                                    
committee  members to  craft the  legislation to  ensure the                                                                    
long-term survival  of the PFD  and to restrict  the ability                                                                    
of the governor and the  legislature to overdraw the PFD and                                                                    
reduce  purchasing power;  net real  losses in  market value                                                                    
would destabilize the PDF for future generations.                                                                               
10:38:56 AM                                                                                                                   
Senator Micciche requested  a graph like the one  on Slide 8                                                                    
beginning in 2000. He wondered  whether income was currently                                                                    
calculated excluding unrealized gains and losses.                                                                               
Co-Chair  Stedman  replied in  the  negative.  He said  that                                                                    
current income used realized gains  and losses in income for                                                                    
the  dividend   formula.  He  deferred  to   Angela  Rodell,                                                                    
Executive  Director, Alaska  Permanent Fund  Corporation for                                                                    
more information.                                                                                                               
10:40:56 AM                                                                                                                   
Senator Olson asked  whether the APFC Director  and Board of                                                                    
Trustees had weighed in on the legislation.                                                                                     
10:41:06 AM                                                                                                                   
Co-Chair Stedman deferred to Ms. Rodell.                                                                                        
10:41:31 AM                                                                                                                   
Co-Chair von  Imhof said  that how the  money was  spent was                                                                    
the  per  view  of  the   legislature.  She  asked  why  the                                                                    
presenter had landed on the 50/50 split.                                                                                        
10:42:12 AM                                                                                                                   
Co-Chair Stedman  stated that  he had  tried to  gauge where                                                                    
there would  be public  support. He  thought that  the 50/50                                                                    
split was  a good starting  point for discussions.  He added                                                                    
that a  50/50 split  would take time  to implement  and that                                                                    
the state  may need  financial assistance  from the  APFC to                                                                    
meet its obligations without massive budget cuts.                                                                               
10:44:32 AM                                                                                                                   
Senator  Bishop spoke  to Slide  3. He  stressed that  small                                                                    
dividend payments had  gone out in the  past, without public                                                                    
outcry, and  felt that the 50/50  split was a good  idea. He                                                                    
believed that  the effective  rate could  be lowered  to 4.5                                                                    
10:46:35 AM                                                                                                                   
Co-Chair von  Imhof agreed that  the 50/50 split was  a good                                                                    
place to  start. She  pointed out to  the committee  that it                                                                    
would  require,  based  on the  current  budget,  over  $800                                                                    
million  in cuts.  She argued  that a  50/50 split  may seem                                                                    
fair, but  that there  were many factors  that needed  to be                                                                    
10:48:30 AM                                                                                                                   
Senator Wilson  said that people  had been happy  with lower                                                                    
dividends in the past because  they knew what was happening.                                                                    
He suggested that  people did not become  outraged until the                                                                    
government began  messing with the  formula. He said  he was                                                                    
in  favor  of a  50/50  plan.  He thought  the  constitution                                                                    
should  be changed  with a  vote of  the people.  He worried                                                                    
about tinkering  with the formula  to  feed the  appetite of                                                                    
10:50:59 AM                                                                                                                   
Co-Chair Stedman thought that  the predictability of the PFD                                                                    
payout and  the cashflow to  the treasury would be  best for                                                                    
the state. He believed that  the decision was a multi-decade                                                                    
one.  He added  that LFD  would  be working  to provide  the                                                                    
historical data requested by Senator Micciche.                                                                                  
10:51:55 AM                                                                                                                   
Senator Shower  noted that  the original  language in  SB 26                                                                    
had  a 70/30  split. He  said  that the  narrative had  been                                                                    
driven that  the money belonged  to the government,  and the                                                                    
public  as being  allowed a  portion. He  thought the  50/50                                                                    
seemed like an equitable split.  He lamented that the public                                                                    
did not trust the legislature  to follow statute. He offered                                                                    
an analogy about a fish countered by one involving Caesar.                                                                      
10:54:40 AM                                                                                                                   
Senator Wielechowski  stressed that  the maximum  benefit of                                                                    
the resource should be provided  to the people. He felt that                                                                    
government had  received its fair share;  the peoples  share                                                                    
was a tiny  fraction of the total value of  the oil produced                                                                    
in  the  state.  He  expressed  concern  with  changing  the                                                                    
language from  shall transfer   to  may appropriate  because                                                                    
it could lead an even smaller share going to Alaskans.                                                                          
10:57:07 AM                                                                                                                   
Co-Chair von Imhof discussed housekeeping.                                                                                      
SB 103 was HEARD and HELD in committee for further                                                                              
10:57:50 AM                                                                                                                   
The meeting was adjourned at 10:57 a.m.                                                                                         

Document Name Date/Time Subjects
SB 104 - Sponsor Statement.pdf SFIN 4/10/2019 9:00:00 AM
SFIN 2/4/2020 9:00:00 AM
SB 104
SB 104 - Sectional Analysis.pdf SFIN 4/10/2019 9:00:00 AM
SB 104
041019 SB104 Spending Cap Presentation.pdf SFIN 4/10/2019 9:00:00 AM
SB 104
SB 103 - Sectional Analysis.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 - Sponsor Statement.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 Presentation 041019.pdf SFIN 4/10/2019 9:00:00 AM
SB 103
SB 103 Work Draft Version U.pdf SFIN 4/10/2019 9:00:00 AM
SB 103