Legislature(2019 - 2020)BUTROVICH 205

06/03/2019 12:00 PM Senate RULES

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Audio Topic
12:00:18 PM Start
12:01:19 PM SB1002
12:46:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SB1002 Out of Committee
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
                SENATE RULES STANDING COMMITTEE                                                                               
                          June 3, 2019                                                                                          
                           12:00 p.m.                                                                                           
MEMBERS PRESENT                                                                                                               
Senator John Coghill, Chair                                                                                                     
Senator Cathy Giessel, Vice Chair                                                                                               
Senator Mia Costello                                                                                                            
Senator Natasha von Imhof                                                                                                       
Senator Tom Begich (via teleconference)                                                                                         
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Gary Stevens                                                                                                            
Senator Chris Birch                                                                                                             
Senator Elvi Gray-Jackson                                                                                                       
Senator Bill Wielechowski                                                                                                       
Senator Donald Olson                                                                                                            
Senator Lora Reinbold                                                                                                           
Senator Click Bishop                                                                                                            
Senator Scott Kawasaki                                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Neal Foster                                                                                                      
Representative Andy Josephson                                                                                                   
Representative Gary Knopp                                                                                                       
COMMITTEE CALENDAR                                                                                                            
SENATE BILL NO. 1002                                                                                                            
"An Act making special appropriations for the payment of                                                                        
permanent fund dividends; and providing for an effective date."                                                                 
     - MOVED SB 1002 OUT OF COMMITTEE                                                                                           
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SB 1002                                                                                                                 
SHORT TITLE: APPROP: PFD FROM GF, HIGHER ED. & RESERVE                                                                          
SPONSOR(s): FINANCE                                                                                                             
06/03/19       (S)       READ THE FIRST TIME - REFERRALS                                                                        
06/03/19       (S)       MOTION TO  WAIVE UR  24(D) AND  REFER TO                                                               
                         RLS UC                                                                                                 
06/03/19       (S)       RLS                                                                                                    
WITNESS REGISTER                                                                                                              
Senator Bert Stedman                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Introduced SB 1002  on behalf of  the Senate                                                             
Finance Standing Committee.                                                                                                     
ACTION NARRATIVE                                                                                                              
12:00:18 PM                                                                                                                   
CHAIR  JOHN COGHILL  called the  Senate Rules  Standing Committee                                                             
meeting to order at 12:00 p.m.  Present at the call to order were                                                               
Senators  Giessel,  Costello,  von   Imhof,  and  Chair  Coghill.                                                               
Senator Begich  attended via teleconference and  Senator Kawasaki                                                               
joined the committee at the table.                                                                                              
       SB 1002-APPROP: PFD FROM GF, HIGHER ED. & RESERVE                                                                    
12:01:19 PM                                                                                                                   
CHAIR  COGHILL announced  the consideration  of  SENATE BILL  NO.                                                               
1002, "An  Act making special  appropriations for the  payment of                                                               
permanent fund dividends; and providing for an effective date."                                                                 
12:01:27 PM                                                                                                                   
SENATOR BERT  STEDMAN, Alaska  State Legislature,  Juneau, stated                                                               
that SB  1002, which  is an appropriation  bill sponsored  by the                                                               
finance  committee,  will  pay a  $1,600  dividend  to  qualified                                                               
Alaskans  this coming  fall. The  total cost  is estimated  to be                                                               
$1,070,500,000.  Noting  the  considerable discussion  about  the                                                               
size of  the dividend this  year, he  said it's not  the dividend                                                               
itself that  causes concern. Rather,  it is the  financial impact                                                               
of trying to  cash flow an amount  that is almost as  much as the                                                               
cost of K-12 education for a year.                                                                                              
SENATOR STEDMAN identified the three  funding sources for SB 1002                                                               
that would equate to a  $1,600 dividend: 1) $770,000,000 from the                                                               
general  fund;  2) $172,400,000  from  the  budget reserve  fund,                                                               
which  requires a  simple majority  from both  bodies; and  3) an                                                               
estimated   $128,100,000  from   the   Alaska  higher   education                                                               
investment  fund.  He noted  that  the  latter amount  will  vary                                                               
depending on the number of qualified applicants.                                                                                
12:04:36 PM                                                                                                                   
SENATOR STEDMAN explained that the  $770 million in general funds                                                               
comes  predominantly  from  taxes  from  oil  revenue,  but  it's                                                               
comingled with  the 5.25 percent  statutory draw on  the earnings                                                               
reserve account  (ERA) that is  deposited into the  general fund.                                                               
He  said  it's  difficult  to  bifurcate  and  track  where  each                                                               
individual dollar  is spent  in the budget  and whether  it comes                                                               
from taxes  or the 5.25  percent from the permanent  fund because                                                               
the monies  are comingled and  expensed. He highlighted  that the                                                               
statutory 5.25  percent draw will  be reduced  to 5 percent  in a                                                               
year or two. Any draw above  this amount violates the statute and                                                               
is referred to as an unstructured or ad hoc draw.                                                                               
SENATOR STEDMAN  related that while  the $172.4 million  from the                                                               
statutory budget  reserve fund would  very nearly  liquidate that                                                               
account, the SBR  would stay on the books and  could be funded in                                                               
the future when there are  excess revenues. He clarified that the                                                               
statutory budget  reserve is the state's  smaller primary savings                                                               
account  that  is not  to  be  confused with  the  constitutional                                                               
budget reserve  (CBR). The CBR  has a balance of  approximately a                                                               
$2.3  billion and  a  three-fourths vote  of  the legislature  is                                                               
required to draw from it.                                                                                                       
SENATOR  STEDMAN  said  the third  funding  source  takes  $128.1                                                               
million from  the Alaska higher education  investment trust. That                                                               
leaves a  balance of  about $200 million,  which is  a sufficient                                                               
amount to avoid a large structural  change in that program in the                                                               
next year or two.                                                                                                               
12:08:00 PM                                                                                                                   
SENATOR STEDMAN said the bill does  not propose to draw from just                                                               
the earnings  reserve because the  annual draw from  that account                                                               
is statutorily  capped at 5.25  percent. That statute is  just as                                                               
valid as the dividend statute,  which requires a $3,000 dividend.                                                               
Both statutes  are on  the books and  both should  be recognized.                                                               
When the  finance committee  looked at  the funding  sources, the                                                               
decision was  to tap the sources  that yield less and  would thus                                                               
have a smaller  impact on returns going forward. He  said that is                                                               
why the  committee chose the  general fund, the  statutory budget                                                               
reserve, and the higher education fund versus the ERA.                                                                          
12:09:47 PM                                                                                                                   
SENATOR STEDMAN  explained that if the  entire $1,071,000,000 was                                                               
drawn  from the  earnings reserve,  everything in  excess of  the                                                               
statutory 5.25 percent  would be an unstructured or  ad hoc draw.                                                               
He said  he believes the 5.25  percent cap is a  little high, but                                                               
not  so much  as to  require the  permanent fund  to structurally                                                               
change  its asset  allocation or  management  policies. He  noted                                                               
that the cap  will drop to 5  percent in a few  years, which will                                                               
make  it a  little  easier. However,  if  the legislature  starts                                                               
drawing more than  5.25 percent virtually right  away, that would                                                               
send a cautionary message to  the permanent fund corporation that                                                               
it can't  rely on  how much  the legislature  will demand  in any                                                               
given year.  They will be  forced to review its  asset allocation                                                               
modeling, change some of their  investment targets, and otherwise                                                               
be a  little more conservative  to potentially respond to  a cash                                                               
call on  that $65 billion portfolio.  He said we need  to respect                                                               
12:11:35 PM                                                                                                                   
SENATOR STEDMAN  talked about the tight  times during Territorial                                                               
Days,  advancing into  Statehood,  and walking  into  a huge  oil                                                               
boom. He said  Alaskans have been living in a  very fruitful time                                                               
since the oil  boom and there have been a  lot of improvements in                                                               
the  quality and  standard of  living. This  has taken  a lot  of                                                               
money and  it came from the  oil industry and the  development of                                                               
Alaska's assets. He  said collectively we set aside  some of that                                                               
money and  that portfolio now  has a  $60 billion to  $65 billion                                                               
balance.  He said  the legislature  faces a  significant decision                                                               
about how to  finance its current obligations and  not devour the                                                               
seed  capital  that  should  be left  to  future  generations  of                                                               
Alaskans. All  those nuances  have been  calibrated into  the so-                                                               
called  political decisions  associated with  selecting the  fund                                                               
sources  for  the $1,600  dividend,  he  said.  The bill  has  an                                                               
effective date of July 1, 2019.                                                                                                 
12:13:49 PM                                                                                                                   
SENATOR STEDMAN concluded his opening  comments with a summary of                                                               
the largest  expenditures this year.  The general  fund operating                                                               
budget is roughly  $4.4 billion, the $1,600 dividend  would be an                                                               
additional $1 billion, the capital  budget is roughly 200 million                                                               
and the  fiscal note for  the crime bill  is estimated to  be $40                                                               
12:15:39 PM                                                                                                                   
CHAIR  COGHILL  recognized  the  presence  of  Senators  Stevens,                                                               
Birch, Gray-Jackson,  Wielechowski, Olson, Reinbold,  and Bishop;                                                               
and Representatives Edgmon, Foster, and Josephson.                                                                              
He  described  SB 1002  as  a  reasonable  proposal to  create  a                                                               
sustainable  dividend  that   considers  future  generations.  He                                                               
advised the  listening public that  consideration of  a different                                                               
dividend formula is not possible during this special session.                                                                   
CHAIR COGHILL recognized that Senator Begich was online.                                                                        
12:18:07 PM                                                                                                                   
SENATOR  KAWASAKI asked  how the  committee arrived  at a  $1,600                                                               
SENATOR STEDMAN  said the finance  committee struggled  with this                                                               
issue throughout  the regular session.  They spent about  a month                                                               
looking at the  recurring cash flow which would  yield a dividend                                                               
of  about $1,100.  He said  there was  also a  lot of  discussion                                                               
among  the committee  and other  colleagues  about matching  last                                                               
year's  $1,600  dividend.  That  amount  doesn't  overstrain  the                                                               
permanent fund or the ability  to help areas throughout the state                                                               
respond  to  unexpected  budgetary impacts.  It's  within  fiscal                                                               
reach of the appropriations.                                                                                                    
CHAIR COGHILL  added that some  legislators believe  that "within                                                               
fiscal  reach" includes  the requirement  for continued  downward                                                               
pressure on the operation of government.                                                                                        
12:20:25 PM                                                                                                                   
SENATOR  KAWASAKI  asked  how  the  needs-based  grants  and  the                                                               
legislature's  performance  scholarships   will  be  impacted  by                                                               
removing  $140 million  from the  $340  million higher  education                                                               
trust fund.                                                                                                                     
SENATOR  STEDMAN  said  he  believes   those  programs  could  be                                                               
sustained with the $200 million  balance after the draw. He added                                                               
that it's  clear that the  savings sources are  diminishing. This                                                               
is  evidenced  by  the  more  than  $10  billion  that  has  been                                                               
liquidated from  the constitutional  budget reserve (CBR)  in the                                                               
last  few years.  If SB  1002  passes as  drafted, the  statutory                                                               
budget reserve  (SBR) would be  liquidated. There would  still be                                                               
some  money in  the higher  education  trust and  the power  cost                                                               
equalization endowment  is a  little under  $1 billion.  "We have                                                               
been living off  of our excess liquidity or  savings accounts for                                                               
six  years  now  and  we're  now to  the  point  where  the  hard                                                               
decisions have to  be made," he said. He noted  the concern about                                                               
depleting  the education  fund and  advised that  money could  be                                                               
appropriated to that  fund in the next  year or so if  there is a                                                               
12:22:28 PM                                                                                                                   
SENATOR  COSTELLO expressed  appreciation  that  the full  Senate                                                               
would be able to debate the  bill this week. She highlighted that                                                               
Governor  Jay Hammond  described  the dividend  as  the check  on                                                               
government  growth  and  that it's  the  people's  investment  in                                                               
government.  She  questioned  how  the  dividend  can  serve  its                                                               
purpose  if it  comes  from  any funding  source  other than  the                                                               
permanent fund.                                                                                                                 
12:23:59 PM                                                                                                                   
SENATOR  STEDMAN restated  that the  draws out  of the  permanent                                                               
fund are comingled with other  monies so it's impossible to track                                                               
individual dollars. He said the  concern about the permanent fund                                                               
draw is that not  only does it have to pay  the dividend but also                                                               
follow  the  statutory 5.25  percent  [POMV]  structure. He  also                                                               
pointed out  that when  the current dividend  formula was  put in                                                               
place the permanent fund portfolio  was about $1 billion, whereas                                                               
it's now about $65 billion. Part  of the discussion today is what                                                               
happens when the  portfolio is $120 billion. He said  there is no                                                               
easy answer; we just  have to do the best we  can for the benefit                                                               
of all Alaskans now and in the future.                                                                                          
12:25:44 PM                                                                                                                   
SENATOR  GIESSEL offered  her understanding  that in  about 2008,                                                               
qualified  Alaskans  received  a  $2,600 dividend  and  a  $1,200                                                               
energy  rebate, all  of  which  came out  of  the  ERA. This  was                                                               
followed  by a  sharp market  correction and  the permanent  fund                                                               
corporation was forced to sell assets  to pay a dividend in 2009.                                                               
She asked  Senator Stedman his  recollection of those  events and                                                               
the risks the permanent fund faces today in a similar scenario.                                                                 
12:27:46 PM                                                                                                                   
SENATOR  STEDMAN  said he  was  co-chair  of the  Senate  Finance                                                               
Committee at that time and  he distinctly recalls having a little                                                               
bit of  indigestion because the  permanent fund trustees  for the                                                               
first  time let  politics  influence  their investment  decisions                                                               
just to  pay a dividend. "That  is my opinion of  what happened,"                                                               
he said.                                                                                                                        
He explained  that at the  time there  was a very  aggressive oil                                                               
tax structure, prices were high, and  there was a lot of oil. The                                                               
combination of  those factors caused  [Governor Palin]  to decide                                                               
to help Alaskans pay for their  winter energy costs by issuing an                                                               
energy  rebate in  addition to  the sizeable  dividend. When  the                                                               
great  recession hit  the following  year, the  finance committee                                                               
tried  to keep  the state  out of  a recession  by passing  large                                                               
capital budgets.  A recession was  avoided but the  losses within                                                               
the permanent  fund were  so significant  that there  was concern                                                               
that  there would  not be  any  money to  pay a  dividend to  the                                                               
people of Alaska.                                                                                                               
SENATOR STEDMAN said  politics did creep into  the permanent fund                                                               
then and that's  why he talked about the message  it sends to the                                                               
permanent fund trustees if the  legislature makes ad hoc draws in                                                               
excess of the  5.25 percent cap. If the board  can't rely on that                                                               
cap, the  only thing  they can  rely on  is that  the legislature                                                               
will target the  large pool of money in the  permanent fund after                                                               
it  has spent  all its  other  monies. That  leads to  investment                                                               
behavior that  is detrimental  to long-term  rates of  return and                                                               
hurts generations of future Alaskans.                                                                                           
SENATOR GIESSEL asked how a  significant market contraction would                                                               
jeopardize  the  approximately  $19  billion  ERA  and  thus  the                                                               
SENATOR  STEDMAN  said the  ERA  would  decline  if there  was  a                                                               
significant contraction and it would  decline further as money is                                                               
drawn out.  Similarly, it would  it would  increase in a  bull or                                                               
expanding market.  Under a percent  of market  value calculation,                                                               
the dividend  flow would be  smoother. He  said it's not  part of                                                               
the  discussion here,  but there  is talk  in the  building about                                                               
putting $12  billion of the  $19 billion  that's in the  ERA into                                                               
the   permanently  protected   constitutional   portion  of   the                                                               
permanent  fund. It  would  be unavailable  for  spending if  the                                                               
markets decline. It's for future generations.                                                                                   
CHAIR COGHILL  remarked that it  would still be valued  under the                                                               
5.25 percent cap.                                                                                                               
SENATOR STEDMAN answered yes.                                                                                                   
12:34:52 PM                                                                                                                   
SENATOR VON  IMHOF disagreed  with the  earlier comment  that the                                                               
dividend  was intended  to connect  citizens  to government.  She                                                               
said the  original intent of the  fund can be discerned  from the                                                               
original trustee papers  that said the permanent fund  was to act                                                               
as a countercyclical to the boom  and bust cycle of a commodities                                                               
market. When  the Trans Alaska  Pipeline System (TAPS)  was under                                                               
constructed,  groups of  Alaskans visited  Saudi Arabia,  Norway,                                                               
Iran,  and  Venezuela  to  see  the  mechanisms  by  which  those                                                               
countries set aside  part of their sovereign  wealth funds. Those                                                               
Alaskans collectively decided  to set aside 25  percent of annual                                                               
oil  revenues into  a  fund  that would  grow  in perpetuity  and                                                               
ensure  there was  something to  show  for that  oil wealth  even                                                               
after  the commodity  ran out.  Forty  years later  there is  $64                                                               
billion to show  for it. This year there is  a $6 million surplus                                                               
after  the nearly  $3 billion  POMV  draw, but  without the  POMV                                                               
there would  be a  $2.5 billion  deficit. I  don't know  how we'd                                                               
feel in that scenario, she said.                                                                                                
SENATOR VON IMHOF  said the trustee papers  reflect that creating                                                               
the permanent fund in the late  70s and then the dividend in 1980                                                               
was just as  contentious then as it is today.  There are probably                                                               
15 years  of trustee papers  with perspectives that are  all over                                                               
the map. Governor Hammond's is  one perspective, but it's not the                                                               
only   perspective.   She   said  the   $1,600   dividend   we're                                                               
contemplating today is  a negotiated amount that  the state can't                                                               
afford.  She said  a $1,000  dividend is  affordable with  a very                                                               
skinny capital  budget. Savings are  being depleted.  There isn't                                                               
$18  billion in  the  ERA anymore  and a  lot  of the  unrealized                                                               
earnings are gone. She said  each time the legislature takes more                                                               
than 5.25 percent it comes closer  to the 6.5 percent that Callen                                                               
& Associates,  Inc. said the  permanent fund can make  over time.                                                               
But as the  fund erodes, the POMV draw will  get lower every year                                                               
and  get the  state  closer  and closer  to  an  income tax.  She                                                               
emphasized that to impose an  income tax on hard-working Alaskans                                                               
and then turn  around and deposit into  their neighbor's checking                                                               
account  is not  a  fiscally conservative  Republican value.  "At                                                               
least not in my book," she said.                                                                                                
12:38:46 PM                                                                                                                   
CHAIR COGHILL  added that Governor  Hammond's idea was to  have a                                                               
dividend and an income tax, which  was just one of many opinions.                                                               
He  opined  that SB  1002  is  one  way of  maintaining  downward                                                               
pressure on  government and it  ought to be  done with an  eye on                                                               
formulating a dividend that is appropriate and sustainable.                                                                     
SENATOR GIESSEL pointed out that  the permanent fund trustees are                                                               
required  to follow  a prudent  investor rule  to invest  for the                                                               
greatest return for  the fund. At the same  time, the legislature                                                               
is the board  of directors for the State of  Alaska and they must                                                               
look  at  the most  prudent  steps  for  the longevity  and  best                                                               
interest of the  state. She agreed with the  chair's comments and                                                               
summarized  the  points  made  by Senator  von  Imhof  about  the                                                               
current surplus,  what is  affordable, and  the effect  of excess                                                               
draws. These  are all things  that a  board of directors  held to                                                               
their fiduciary responsibilities would take  into account as they                                                               
decide on the size of the  dividend. She said Senator Stedman did                                                               
an  excellent  job  of  explaining   that  all  these  funds  are                                                               
comingled.  The  percent of  market  value  money goes  into  the                                                               
general fund just as the constitution says it does.                                                                             
She  said  SB  1002  identifies  fund sources  to  pay  a  $1,600                                                               
dividend and some people have said  that unless it comes from the                                                               
ERA, it's a  government check. But the fact is  the dividend is a                                                               
government  check  issued by  the  State  of Alaska.  The  $1,600                                                               
dividend  is  what the  state  can  afford  and it  reflects  the                                                               
legislature's fiduciary  obligation to  act in the  best interest                                                               
of the state.                                                                                                                   
CHAIR  COGHILL  said   the  legislature  is  trying   to  find  a                                                               
reasonable balance of sharing the  wealth of the state as broadly                                                               
as possible while also budgeting  for essential services. It is a                                                               
deliberative process.                                                                                                           
12:44:50 PM                                                                                                                   
SENATOR STEDMAN  recognized Pete Ecklund  as the primary  lead on                                                               
the operating  budget. In closing  he related that the  last time                                                               
he  was before  the Rules  Committee was  in pursuit  of a  50/50                                                               
match  program  for   libraries.  He  said  he   hopes  that  has                                                               
encouraged a  literate populace who can  read historic documents,                                                               
be informed  by hearings such  as this, and draw  conclusions. He                                                               
thanked the committee for hearing the bill.                                                                                     
12:46:05 PM                                                                                                                   
SENATOR GIESSEL moved to report  SB 1002, work order 31-LS1029\U,                                                               
from committee with individual recommendations.                                                                                 
12:46:27 PM                                                                                                                   
CHAIR  COGHILL found  no objection  and  SB 1002  moved from  the                                                               
Senate Rules Standing Committee.                                                                                                
12:46:45 PM                                                                                                                   
There being  no further  business to  come before  the committee,                                                               
Chair  Coghill  adjourned  the Senate  Rules  Standing  Committee                                                               
meeting at 12:46 p.m.                                                                                                           

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