Legislature(2019 - 2020)BUTROVICH 205
06/03/2019 12:00 PM Senate RULES
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| SB1002 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB1002 | TELECONFERENCED | |
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
that.
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
million.
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
dividend.
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
shortage.
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
dividend.
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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