Legislature(2021 - 2022)SENATE FINANCE 532
09/08/2021 01:00 PM Senate FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Legislative Legal Services - Permanent Fund Law | |
| Presentation: Legislative Finance Division - Permanent Fund "what If" Scenarios | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
THIRD SPECIAL SESSION
September 8, 2021
1:01 p.m.
1:01:19 PM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 1:01 p.m.
MEMBERS PRESENT
Senator Click Bishop, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Lyman Hoffman
Senator Donny Olson [via teleconference]
Senator Bill Wielechowski [via teleconference]
Senator David Wilson
MEMBERS ABSENT
Senator Natasha von Imhof
ALSO PRESENT
Alexei Painter, Director, Legislative Finance Division;
Conor Bell, Fiscal Analyst/Economist, Legislative Finance
Division.
PRESENT VIA TELECONFERENCE
Emily Nauman, Deputy Director, Legislative Legal Services,
Alaska State Legislature.
SUMMARY
PRESENTATION: LEGISLATIVE LEGAL SERVICES - PERMANENT FUND
LAW
PRESENTATION: LEGISLATIVE FINANCE DIVISION - PERMANENT FUND
"WHAT IF" SCENARIOS
Co-Chair Stedman discussed the agenda.
1:02:53 PM
AT EASE
1:03:37 PM
RECONVENED
^PRESENTATION: LEGISLATIVE LEGAL SERVICES - PERMANENT FUND
LAW
1:03:49 PM
EMILY NAUMAN, DEPUTY DIRECTOR, LEGISLATIVE LEGAL SERVICES,
ALASKA STATE LEGISLATURE (via teleconference), discussed
the presentation "Permanent Fund Law" (copy on file). She
reminded that the Division of Legal Services provided bill
drafting services, legal advice, and opinions to the Alaska
State Legislature, and was a non-partisan division of the
Legislative Affairs Agency. She relayed that the material
being presented was a shortened version of a presentation
she given to the Permanent Fund Working Group in 2019. The
original presentation had contained more history as well as
more information regarding eligibility requirements. She
encouraged anyone interested in the original material to
access the presentation through the legislative archives.
Ms. Nauman showed slide 2, "Permanent Fund Law":
?Constitution of the State of Alaska
?AS 37.13
?Summary of Statutes
?AS 37.13: A Visual Guide
AS 43.23
?Wielechowski v. State
?Questions
Ms. Nauman noted that Permanent Fund statutes were broken
into two areas of law. There had been changes to the
statutes and she looked forward to preparing a new document
with all the relevant statutes.
Ms. Nauman looked at slide 3, "Constitution of the State of
Alaska":
Article IX, Section 15
Section 15. Alaska Permanent Fund. At least twenty-
five percent of all mineral lease rentals, royalties,
royalty sale proceeds, federal mineral revenue sharing
payments and bonuses received by the State shall be
placed in a permanent fund, the principal of which
shall be used only for those income-producing
investments specifically designated by law as eligible
for permanent fund investments. All income from the
permanent fund shall be deposited in the general fund
unless otherwise provided by law.
Ms. Nauman noted that Article IX, Section 15 created the
Permanent Fund and set out the constraints for the use of
the principal and income.
Ms. Nauman turned to slide 4, "Constitution of the State of
Alaska":
Article IX, Section 15: Principal Concepts:
At least twenty-five percent of all [mineral revenue]
received by the State shall be placed in a permanent
fund
the principal [of the fund] shall be used only for ...
income-producing investments ....
All income from the permanent fund shall be deposited
in the general fund unless otherwise provided by law.
Ms. Nauman displayed slide 5, "AS 37.13: Alaska Permanent
Fund and Corporation."
Ms. Nauman reviewed slide 6, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.010. Alaska permanent fund.(a) Under art.
IX, sec. 15, of the state constitution, there is
established as a separate fund the Alaska permanent
fund. The Alaska permanent fund consists of (1) 25
percent of all mineral lease rentals, royalties,
royalty sale proceeds, net profit shares under AS
38.05.180(f) and (g), and federal mineral revenue
sharing payments received by the state from mineral
leases issued on or before December 1, 1979, and 25
percent of all bonuses received by the state from
mineral leases issued on or before February 15, 1980;
(2) 50 percent of all mineral lease rentals,
royalties, royalty sale proceeds, net profit shares
under AS 38.05.180(f) and (g), and federal mineral
revenue sharing payments received by the state from
mineral leases issued after December 1, 1979, and 50
percent of all bonuses received by the state from
mineral leases issued after February 15, 1980; and (3)
any other money appropriated to or otherwise allocated
by law or former law to the Alaska permanent fund. (b)
Payments due the Alaska permanent fund under (a) of
this section shall be made to the fund within three
banking days after the day the amount due to the fund
reaches at least $3,000,000 and at least once each
month. (c) The Alaska permanent fund shall be managed
by the Alaska Permanent Fund Corporation established
in this chapter. (?5 ch18 SLA 1980; am ?2 ch134 SLA
1992; am ??1 -4 ch22 SLA 2003)
Ms. Nauman referenced slide 7, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.010(a): Principal Concepts:
The Alaska permanent fund consists of
(1) 25 percent of all mineral revenue and
bonuses from mineral leases issued on or before
December 1, 1979/February 15, 1980;
?(2) 50 percent of all mineral revenue and
bonuses mineral leases issued after December 1,
1979/February 15, 1980; and
?(3) any other money appropriated to or otherwise
allocated by law or former law to the Alaska
permanent fund.
Article IX, Section 15, Constitution of the State of
Alaska: At least twenty-five percent of all mineral
lease rentals, royalties, royalty sale proceeds,
federal mineral revenue sharing payments and bonuses
received by the State shall be placed in a permanent
fund. . .
1:08:00 PM
Ms. Nauman spoke to slide 8, "Alaska Permanent Fund and
Corporation
Sec. 37.13.020. Findings. Principle Concepts: The
legislature finds with respect to the fund that
(1) the fund should provide a means of conserving
a portion of the state's revenue from mineral
resources to benefit all generations of Alaskans;
(2) the fund's goal should be to maintain safety
of principal while maximizing total return;
(3) the fund should be used as a savings device
managed to allow the maximum use of disposable
income from the fund for purposes designated by
law.
(?5 ch18 SLA 1980; am ?3 ch134 SLA 1992)
This statute remains substantially the same as enacted
in 1980.
Ms. Nauman discussed slide 9, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.030. Purpose. It is the purpose of AS
37.13.010 -37.13.190 to provide a mechanism for the
management and investment of those fund assets by the
Alaska Permanent Fund Corporation in a manner
consistent with the findings in AS 37.13.020.
(?5 ch18 SLA 1980; am ?7 ch66 SLA 1991; am ?4 ch134
SLA 1992)
This statute remains substantially the same as enacted
in 1980.
Ms. Nauman turned to slide 10, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.030. Purpose of the Alaska Permanent Fund
Corporation (APFC)
Sec. 37.13.040. Establishes APFC.
Sec. 37.13.050. Composition, qualifications of the
Board of Trustees, APFC.
Sec. 37.13.060. Terms of office for the Board of
Trustees of APFC.
Sec. 37.13.070. Removal of APFC board members; vacancy
provisions.
Sec. 37.13.080. Quorum and voting of the APFC.
Sec. 37.13.090. Compensation of board members.
Sec. 37.13.100. Staff authorization.
Sec. 37.13.110. Conflicts of interest, APFC.
Sec. 37.13.120. Investment responsibilities.
Ms. Nauman thought the committee would not address the
details of the statutes listed on slide 10, and offered to
provide more detail at a later time if necessary.
Ms. Nauman spoke to slide 11, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.140. Income.(a) Net income of the fund
includes income of the earnings reserve account
established under AS 37.13.145. Net income of the fund
shall be computed annually as of the last day of the
fiscal year in accordance with generally accepted
accounting principles, excluding any unrealized gains
or losses. Income available for distribution equals 21
percent of the net income of the fund for the last
five fiscal years, including the fiscal year just
ended, but may not exceed net income of the fund for
the fiscal year just ended plus the balance in the
earnings reserve account described in AS 37.13.145.
(b) The corporation shall determine the amount
available for appropriation each year. The amount
available for appropriation is 5.25 percent of the
average market value of the fund for the first five of
the preceding six fiscal years, including the fiscal
year just ended, computed annually for each fiscal
year in accordance with generally accepted accounting
principles. In this subsection, "average market value
of the fund" includes the balance of the earnings
reserve account established under AS 37.13.145, but
does not include that portion of the principal
attributed to the settlement of State v. Amerada Hess,
et al., 1JU-77-847 Civ. (Superior Court, First
Judicial District). (?5 ch18 SLA 1980; am ?8 ch81 SLA
1982; am ?1 ch28 SLA 1986; am ?18 ch134 SLA 1992; am
?1 ch16 SLA 2018)
Ms. Nauman emphasized that AS 37.13.140 was extremely
important to consider.
Ms. Nauman showed slide 12, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.140(a): Principal Concepts:
?Income of the fund includes income of the earnings
reserve account (ERA).
?Net income of the fund is computed annually as of the
last day of the fiscal year
?in accordance with generally accepted accounting
principles
?excluding any unrealized gains or losses.
?Income available for distribution equals 21% of the
net income of the fund for the last five fiscal years,
including the fiscal year just ended
?but may not exceed the net income of the fund
for the fiscal year just ended plus the balance
in the ERA.
Ms. Nauman noted that AS 37.13.140 (a) set out how to
calculate net income. The statute helped the Alaska
Permanent Fund Corporation (APFC) and the Department of
Revenue (DOR) determine what was net income and available
for appropriation by the legislature. Secondly, the statute
set out the income available for distribution, which was
the first important calculation made for the purpose of
determining the Permanent Fund Dividend (PFD) and the
amount that could be drawn statutorily from the Earnings
Reserve Account (ERA) every year. The calculation was the
basis of the "historical dividend calculation," which she
would address in greater detail on another slide.
Ms. Nauman looked at slide 13, "Putting it Together," which
showed a flow chart of the Permanent Fund statutes. She
cited that the blue bubble represented the minimum
constitutional requirements of the fund. She discussed the
basic structure set up by the constitution, which included
AS 37.13.140(a), the calculation for the income available
for distribution. The formula was 21 percent of the
Permanent Fund average from the last five fiscal years.
1:12:16 PM
Ms. Nauman turned to slide 14, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.140(b): Principal Concepts:
?The corporation shall determine the amount available
for appropriation each year.
?The amount available for appropriation is 5%* of the
average market value of the fund for the first five of
the preceding six fiscal years, including the fiscal
year just ended
?computed annually for each fiscal year in
accordance with generally accepted accounting
principles. In this subsection
?"average market value of the fund" includes the
balance of the earnings reserve account
established under AS 37.13.145, but does not
include that portion of the principal attributed
to the settlement of State v. Amerada Hess, et
al., 1JU-77-847 Civ. (Superior Court, First
Judicial District).
?*Under 2, ch. 16, SLA 2018, eff. July 1, 2021, this
was changed from 5.25% to 5%.
(?5 ch18 SLA 1980; am ?8 ch81 SLA 1982; am ?1 ch28 SLA
1986; am ?18 ch134 SLA 1992; am ?1 ch16 SLA 2018)
Ms. Nauman explained that AS 37.13.140(b) was the result of
SB 26 [legislation passed in 2018] that introduced another
calculation into the amount of money the legislature would
consider available for appropriation from the Permanent
Fund. She thought it was important to note that for the
first three years that 140 (b) was in effect, the percent
of market value (POMV) draw was 5.25 percent and on July 1,
2021, the amount had changed to 5 percent.
Ms. Nauman displayed slide 15, "Putting it Together," which
showed the same flow chart as slide 13, with the addition
of the calculation of the amount available for
appropriation. The legislature had the option to
appropriate five percent of the average market value of the
fund for the last five fiscal years.
Ms. Nauman reviewed slide 16, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.145. Disposition of income: Principle
Concepts: (a) The earnings reserve account is
established. (b) At the end of each fiscal year, the
corporation shall transfer from the earnings reserve
account to the dividend fund, 50 percent of the income
available for distribution under AS 37.13.140.
Ms. Nauman referenced slide 17, "Putting it Together,"
which showed the flow chart with the addition of the amount
transferred to the Dividend Fund as shown in AS
37.13.145(b).
Ms. Nauman spoke to slide 18, "AS 37.13: Alaska Permanent
Fund and Corporation":
(c) After the transfer under (b) and an appropriation
under (e) of this section, the corporation shall
transfer from the earnings reserve account to the
principal of the fund an amount sufficient to offset
the effect of inflation on the principal of the fund
during that fiscal year. The corporation shall
calculate the amount to transfer to the principal
under this subsection by
?(1) computing the average of the monthly United
States Consumer Price Index for all urban
consumers for each of the two previous calendar
years;
?(2) computing the percentage change between the
first and second calendar year average; and
?(3) applying that rate to the value of the
principal of the fund on the last day of the
fiscal year just ended, including that portion of
the principal attributed to the settlement of
State v. Amerada Hess, et al., 1JU-77-847 Civ.
(Superior Court, First Judicial District).
Ms. Nauman noted that the legislative appropriation was not
constitutionally mandatory. She understood that the
legislature had not made the appropriation in the past.
Ms. Nauman showed slide 19, "Putting it Together," which
showed the previous flow chart with the addition of
inflation proofing, which took funds from the ERA and put
it back into the Permanent Fund, based on the structure
proposed by AS 37.13.145(c).
Ms. Nauman turned to slide 20, "AS 37.13: Alaska Permanent
Fund and Corporation":
(e) The legislature may not appropriate from the ERA
to the general fund a total amount that exceeds the
amount available for appropriation under AS
37.13.140(b) in a fiscal year.*
(e) authorizes money to go from the ERA to the
general fund
(f) The combined total of the transfer under (b) of
this section and an appropriation under (e) of this
section may not exceed the amount available for
appropriation under AS 37.13.140(b).
(?9 ch81 SLA 1982; am ?2 ch28 SLA 1986; am ?19 ch134
SLA 1992; am ??2, 3 ch49 SLA 2005; am ??3 -5 ch16 SLA
2018)
Ms. Nauman explained that subsection (e) authorized money
to go from the ERA to the General Fund "in general."
Subsection (f) hypothetically capped the amount that the
legislature could expend from the ERA to go to the General
Fund and dividends.
1:16:36 PM
Ms. Nauman displayed slide 21, "AS 37.13: Alaska Permanent
Fund and Corporation":
Sec. 37.13.150. APFC budget.
Sec. 37.13.160. Audits of APFC.
Sec. 37.13.170. Reports and publications of APFC.
Sec. 37.13.180. State tax exemption for APFC and fund.
Sec. 37.13.190. Political activity prohibition.
Sec. 37.13.200. Public records of APFC.
Sec. 37.13.206. Promulgation of regulations by APFC.
Sec. 37.13.300. Authorization for APFC to manage other
state assets.
Sec. 37.13.900. AS 37.13 definitions.
Ms. Nauman showed slide 22, "Putting it Together," which
showed same flow chart as previous slides, with the
addition of the amount that was potentially able to go into
the Dividend Fund under the statutory formula. She
emphasized that constitutional language specified that "all
income from the Permanent Fund shall be deposited into the
General Fund unless otherwise provided by law," which was
the minimum constitutional requirement and the only
appropriation requirement binding to the legislature.
Ms. Nauman looked at slide 23, "Putting it Together," which
showed the same flow chart. She noted that there was a typo
on the top of the flow chart where "1992" should be
corrected to read "1982." The top line of the structure was
the original dividend structure set out in the 1980s. The
general structure of the Permanent Fund draw structure was
set out in 1980 and amended after the United States Supreme
Court declared that the original structure of the Permanent
Fund was unconstitutional because it favored residents that
had stayed in the state longer. The initial payout of the
Permanent Fund had a structure whereby dividends increased
the longer a person stayed in the state. As a result of the
finding, the legislature tweaked some of the original
statutes to accommodate the new payout structure.
Ms. Nauman continued to address the flow chart on slide 23
and considered the income available for distribution and
the 50 percent multiplication of the amount as the
statutory dividend program that was initially envisioned.
The bottom line represented the new regime from passage of
SB 26 that included a new cap on the amount that could be
drawn from the ERA and authorizing appropriations to go to
the General Fund.
Ms. Nauman displayed slide 24, "AS 43.23: Permanent Fund
Dividends - Department of Revenue."
Ms. Nauman displayed slide 25, "AS 43.23: Alaska Permanent
Fund":
Sec. 43.23.005. Eligibility.
Sec. 43.23.008. Allowable absences.
Sec. 43.23.011. Application period.
Sec. 43.23.015. Application and proof of eligibility.
Sec. 43.23.021. Delayed payment of certain dividends.
Ms. Nauman noted that the statutes listed on the slide were
not particularly noteworthy.
Ms. Nauman reviewed slide 26, "AS 43.23: Permanent Fund
Dividends":
Sec. 43.23.025. Amount of dividend: Principal
Concepts:
By October 1 of each year, the commissioner shall
determine the value of each permanent fund dividend
for that year by
(1) determining the total amount available for
dividend payments, which equals
(A) the amount transferred to the dividend fund
during the current year;
(B) plus the balances of prior fiscal year
appropriations that lapse into the dividend fund;
(C) & (D) less the amount necessary to pay prior
year dividends;
(E) less costs of administering the dividend
program and the hold harmless provisions;
(2) determining the number of individuals eligible to
receive a dividend payment for the current year;
(3) dividing the amount under paragraph (1) by the
amount under paragraph (2).
(? 1 ch 102 SLA 1982; am ? 1 ch 55 SLA 1983; am ? 2 ch
43 SLA 1984; am ? 2 ch 57 SLA 1987; am ? 2 ch 54
SLA 1988; am ? 4 ch 68 SLA 1990; am ? 1 ch 198 SLA
1990; am ? 5 ch 68 SLA 1991; am ? 27 ch 134 SLA
1992; am ? 2 ch 91 SLA 1998; am ? 33 ch 75 SLA 2008)
1:20:24 PM
Ms. Nauman referenced slide 27, "AS 43.23: Permanent Fund
Dividends":
Sec. 43.23.028. Public notice: Principal Concepts: By
October 1 of each year, the commissioner shall give
public notice of the value of each permanent fund
dividend and notice certain other information.
(? 2 ch 198 SLA 1990; am ? 3 ch 68 SLA 1991; am ? 1 ch
82 SLA 1993; am ? 4 ch 46 SLA 1996; am ? 6 ch 44 SLA
1998; am ? 26 ch 92 SLA 2001; am ? 22 ch 175 SLA 2004;
am ? 34 ch 75 SLA 2008; am ? 1 ch 79 SLA 2008; am ? 5
ch 21 SLA 2018)
Sec. 43.23.045. Dividend fund: Principal Concepts. The
dividend fund is established as a separate fund,
administered by the commissioner and shall be invested
in the same manner as provided in AS 37.10.070.
(? 1 ch 102 SLA 1982; am ? 24 ch 99 SLA 1985; am ? 3
ch 57 SLA 1987; am ? 1 ch 38 SLA 1989; am ?? 2, 3 ch
18 SLA 1991;am ? 29 ch 134 SLA 1992)
Ms. Nauman spoke to slide 28, "Putting it Together," which
showed the same flow chart.
Ms. Nauman discussed slide 29, "Putting it Together," which
showed the same flow chart, with the addition of the
calculation of the PFD for each individual. She thought a
common misconception was that money from individuals that
did not apply went to the state, while in truth the money
was spread across eligible applicants.
Ms. Nauman turned to slide 30, "AS 43.23: Alaska Permanent
Fund":
Sec. 43.23.048. Restorative justice account.
Sec. 43.23.055. Duties of the department.
Sec. 43.23.101. Voter registration.
Sec. 43.23.110. Applicant information confidential.
Sec. 43.23.130. Contributions from dividends.
Sec. 43.23.140. Exemptions of and levy on permanent
fund dividends.
Sec. 43.23.150 - .210. Claims on and assignment of
dividends.
Sec. 43.23.220 - .230. Dividend raffle.
Sec. 43.23.240 - .250. Public assistance eligibility.
Sec. 43.23.260 - .270. Enforcement; penalties.
Ms. Nauman showed slide 31, "Wielechowski v. State":
"The plain language of the 1976 constitutional
amendment creating the Permanent Fund does not exempt
Permanent Fund income from the constraints of the
anti-dedication clause. ? [T]he conclusion that a
revenue transfer from the earnings reserve to the
dividend fund requires an appropriation and must
survive a gubernatorial veto flows naturally from our
decision. Absent another constitutional amendment, the
Permanent Fund dividend program must compete for
annual legislative funding just as other state
programs."
Wielechowski v. State, 403 P.3d 1141, 1152 (Alaska
2017).
Ms. Nauman summarized that the case held that the revenue
of the Permanent Fund was not exempt from the dedicated
fund because of the state constitution. The court said the
dividend program must compete for annual legislative
funding just as other programs.
Ms. Nauman discussed slide 32, "Putting it Together, which
showed the flow chart. She thought the chart illustrated
the complex statutory structure. It was not required to
appropriate any funds according to the statutory structure.
She reiterated the importance of returning to the
constitution for guidance, which she considered to be very
broad. The constitution said that the income of the
Permanent Fund shall be deposited in the General Fund, from
which it was free to be used for any public purpose.
Ms. Nauman showed slide 33, "Questions?"
Co-Chair Bishop thanked Ms. Nauman for the presentation. He
liked the flow chart, which he thought could provide the
public with a better understanding of how the calculation
worked.
Co-Chair Stedman thanked Ms. Nauman for her presentation.
Ms. Nauman relayed that her office was available for
additional questions if necessary.
^PRESENTATION: LEGISLATIVE FINANCE DIVISION - PERMANENT
FUND "WHAT IF" SCENARIOS
[insert time stamp here 1:25:00ish]
Co-Chair Stedman shared that staff from the Legislative
Finance Division (LFD) would provide a historical lookback
of the Permanent Fund, the dividend flows, and the values
following the constitutional structure without the
arbitrary contributions and actions taken by the
legislature over time.
1:25:52 PM
ALEXEI PAINTER, DIRECTOR, LEGISLATIVE FINANCE DIVISION,
discussed the presentation "Permanent Fund 'What If'
Scenarios" (copy on file).
Mr. Painter turned to slide 2, "Disclaimers":
Scenarios and adjustments in this presentation were
requested by the Finance co-chairs. LFD is policy
neutral and does not endorse a particular fiscal plan.
These historical "what if" scenarios do not take
secondary impacts into account. They are hypothetical
exercises intended as rough illustrations.
Due to historical changes in Permanent Fund accounting
practices, this analysis has some margin for error in
replicating the Fund's history.
Mr. Painter relayed that the presentation would consider
different historical scenarios with assumptions of
different policy choices by the legislature in the past.
The exercises were hypothetical and assumed everything
except the particular change applied was the same. He
pointed out that there had been changes in Permanent Fund
accounting practices and statute changes that made it
difficult to reconstruct the funds' performance over the
years. He cautioned that there was a margin of error and
encouraged people to view the outcomes as approximations.
He wanted to ensure everyone was aware that there was
uncertainty about exact numbers.
1:27:16 PM
Mr. Painter displayed slide 3, "Where did our Current
Permanent Fund Balance Come From?" The slide showed a pie
chart entitled "Permanent Fund Balance By Source as of
6/30/21 ($billions)," which showed where the current
Permanent Fund balance came from. He explained that each
color of the pie chart represented a difference source. The
25 percent dedicated royalties mentioned by Ms. Nauman was
$15.7 billion, or 19 percent of the fund's value. The next
category was statutory royalties from the additional 25
percent from new oil fields. He recounted that in 1980s the
legislature chose to appropriate $2.7 billion from the
General Fund to the Permanent Fund over a four-year period
in addition to the required royalties. The $2.7 billion
represented a large percentage of the funds value because
inflation-proofing was layered on to the amount. The
appropriation happened early in the life of the fund and
had a surprising impact on the size of the fund. The
largest portion was $18 billion in statutory inflation-
proofing.
Mr. Painter continued to address slide 3. The legislature
had appropriated amounts from the ERA beyond the statutory
inflation proofing. The amount was 10 percent of the fund
and did not include the $4 billion transferred in FY 22. He
addressed the portion of the fund that was Unrealized
Balance. He discussed unrealized gains and described that
based on current accounting rules, the unrealized balance
was split proportionally between the principal and the ERA.
The funds only existed on paper, until which time the gains
were realized, and the funds would go to the ERA.
Mr. Painter referenced the Amerada Hess funds, from a
settlement a few years previously. Part of the agreement
was that the state would set aside the funds, which would
not be used for dividends, and was currently designed for
deferred maintenance via the Capital Income Fund. The
income on the $4 million created an average of $27 million
to $30 million per year for deferred maintenance. He listed
the unrealized ERA and the realized ERA balance, which was
available for appropriation. He pointed out that only 19
percent of the Permanent Fund actually consisted of the
constitutionally dedicated portion, and the rest was there
via a series of statutes. If the legislature had solely
followed the constitution, there would only be $15.7
billion in royalties in the fund.
1:31:38 PM
CONOR BELL, FISCAL ANALYST/ECONOMIST, LEGISLATIVE FINANCE
DIVISION, referenced slide 4, "Follow Constitution/Statute
Only "What If" Scenario":
? Assume statutory PFD was paid in all years
? Statutory inflation transfer made annually, with no
additional ad-hoc transfers
? Constitutional and statutory royalty deposits made
annually
? Assumes $2.7 billion of FY81-FY85 appropriations
from the General Fund to Perm Fund never occurred
Mr. Bell emphasized the significance of the $2.7 billion in
appropriations listed on the last bullet of the slide and
mentioned compound returns, which had generated an average
of 11 percent. The appropriations had a market impact on
the fund 30 years later.
1:33:50 PM
Mr. Bell discussed slide 5, "Follow Constitution/Statute
Only and other 50% to Government "What If" Scenario":
? Starts with all assumptions from 'Follow
Constitution/Statute Only' scenario
? Assumes the other 50% of 'Income Available for
Distribution' was drawn annually to pay for government
services
Mr. Bell noted that the second "what if" scenario started
with all of the assumptions from the previous slide. He
clarified that as Ms. Nauman described, statute outlined
income available for distribution.
1:34:40 PM
Mr. Bell showed slide 6, "How Would The Permanent Fund
Balance Have Been Different?" The slide showed a line graph
that depicted how the fund value would be different under
the what-if scenarios. He noted that the blue line showed
the status quo, while the red line showed the first
scenario, and the green line showed the same with the
addition of drawing 50 percent for government. The gap
between the blue line and the red line grew over time due
to the compounding returns associated with the initial
higher balance due to the $2.7 billion deposit. He observed
that the status quo balance grew faster than the
constitution-only scenario even consistently paying higher
PFDs until 2017. The green line showed the scenario
including the 50 percent draw for government. The green
line started to fall below the red line because in early
years the fund was close to paying twice as much.
1:36:56 PM
Co-Chair Bishop commented that the additional $2.7 billion
deposit had added $21 billion to the fund over time.
Mr. Bell answered in the affirmative, and noted that the
amount was actually more since it also contributed for a
higher PFD. He noted that the amounts were rough
approximations. The estimated ending fund balance was $20
billion higher without accounting for the higher dividends.
Co-Chair Bishop emphasized the $21 billion in earnings as a
result of a $2.7 billion deposit.
1:37:42 PM
Mr. Bell spoke to slide 7, "How Would PFDs Have Been
Different?" The slide showed a line graph which depicted
how PFDs would have been different under the "what if"
scenarios. He commented that the status quo scenario did
consistently pay higher PFDs up until FY 17. The dotted
blue line showed the statutorily calculated PFD. All of the
other calculations for status quo used the actual PFDs paid
over time. The lines followed the same trends. He shared
that the green line was falling below since while the
calculation was the same, the fund balance was smaller
resulting in less statutory income.
1:39:02 PM
Co-Chair Stedman hypothesized that if the legislature had
taken the 50 percent out for the state rather than letting
it compound interest, the dividend would currently be
roughly $1,100 as shown by the green line.
Mr. Bell agreed.
1:39:27 PM
Mr. Bell spoke to slide 8, "How Much of the Permanent Fund
Would have Been Drawn and Spent on Government Services?"
The slide showed a line graph. He explained that the reason
why the "other 50 percent to government" scenario showed a
lower balance was after drawing funds for government
services. He pointed out that the amount to fund government
was the same as the statutory PFD draw. The red line
assumed the passage of SB 26, which included the structured
POMV draw. After accounting for a dividend, the remaining
POMV draw would be less than $1 billion. The other "what
if" scenario assumed SB 26 had not passed and the state
kept using the 50 percent of income available for
distribution as a structured draw from the fund.
Co-Chair Stedman relayed that the committee had been
discussing the Permanent Fund scenarios being considered
for about a year, including what the fund would resemble if
the legislature had taken the 50 percent of income
available for distribution. He explained that the basis for
the presentation was to give a historical context. He
mentioned recent discussions about following the
constitution.
1:43:15 PM
Co-Chair Bishop thanked Mr. Painter and LFD for the
presentation. He thought it was obvious that the
legislature had been reinvesting the money instead of
taking its 50 percent. He commented on the power of
investing the $2.7 billion and how the funds had compounded
by prudent investment by former legislators. He hoped that
30 years in the future the members would consider doing the
same. He thought the most prudent thing to do was for the
state to maximize its assets. He commented that there was
only one Prudhoe Bay, and it was important to heed the
intent of the creators of the fund.
Co-Chair Stedman hoped that in 30 to 40 years the fund
would see the benefits of the investment by current
members.
ADJOURNMENT
1:45:38 PM
The meeting was adjourned at 1:45 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 090721 Permanent Fund What If Scenarios Presentation Updated.pdf |
SFIN 9/8/2021 1:00:00 PM |
|
| 090721 Permanent Fund Law Presentation 9-7-21.pdf |
SFIN 9/8/2021 1:00:00 PM |