SENATE BILL NO. 109 "An Act relating to the Alaska permanent fund; relating to income of the Alaska permanent fund; relating to the amount available for appropriation and appropriations from the earnings reserve account; relating to the permanent fund dividend; and providing for an effective date." 9:14:24 AM Co-Chair Stedman relayed that it was the first hearing on SB 109. 9:14:59 AM PETE ECKLUND, STAFF, SENATOR LYMAN HOFFMAN, addressed SB 109 and read from the Sponsor Statement (copy on file): Senate Bill 109 continues the discussion of a long- term sustainable fiscal solution for the State of Alaska, and how the annual Percent of Market Value (POMV) from the Permanent Fund plays a role in the State's fiscal stability. SB 109 establishes a split for the annual POMV draw, with 75% of the draw remaining in the general fund and 25% appropriated to pay Permanent Fund Dividends (PFDs). The Permanent Fund was established by voters in 1976 to set aside a portion of annual oil royalties for a time when yearly oil revenue would no longer be sufficient to cover the State's needs. In 2018, the legislature and governor acknowledged that time had come, and Senate Bill 26 became law, establishing the POMV formula for using Permanent Fund earnings for State expenses, including the PFD. However, Senate Bill 26 did not update the 1980s dividend formula. As we have seen for many years, the 1980s PFD formula has not been fiscally attainable. Since passage of SB 26, the dividend has fluctuated from between 22% to 50% of the POMV payout. Often the amount of the PFD is not determined until late in the legislative session. The uncertainty surrounding dividends has further complicated overall budget decisions and left many in the public frustrated. SB 26 was passed in part to stabilize the State's revenue and budgeting. Having an outdated dividend statute in place that is fiscally unattainable has the opposite affect and contributes to fiscal and public confusion. SB 109 proposes a dividend based on a percentage of the POMV payout, potentially adding stability to both the budget process and the dividend. To fully realize fiscal stability, decisions regarding the level of State services and revenue also need to be considered. 9:17:28 AM Co-Chair Stedman asked Ms. Wallace to guide the committee through the difference between may and shall in the bill. 9:17:50 AM MEGAN WALLACE, CHIEF COUNSEL, LEGISLATIVE LEGAL SERVICES (via teleconference), addressed Co-Chair Stedman's question. She addressed the wordage on page 2, line 14. The Alaska Supreme Court held in Wielechowski v. State that despite the seemingly mandatory statutory language (AS 37.05.145(b), the use of the permanent fund income in the earnings reserve account was subject to normal appropriation and veto budgetary procedures. This meant that the legislature retained the power to appropriate from the earnings reserve, each year, the amount it determined appropriate for public purposes. She said that that the legislature could decide the appropriate amount on an annual basis. 9:19:53 AM Senator Kiehl asked about the difference in how the permanent fund was invested 40 years ago versus the current investment process. Mr. Ecklund relayed that in the early years of the Permanent Fund, the investments were limited to low-risk investments. He said that as time had passed the statute had been modified to allow for investing in an array of investments and risk types. Senator Kiehl understood that the current practice involved the fund buying into ownership of a company or huge real estate parcel, and only seeing a return on investment once the company or property sold. asked whether the current practice had led to spikes or drops in the dividend. Mr. Ecklund thought Senator Kiehl was referring to statutory net income and acknowledged that there had been spikes due to the timing of going into, or out of, investments that had affected the statutory net income that went into the calculation of the current dividend statute. Senator Kiehl expressed concern with the practice. He noted that currently APFC was able to make the best investments for the state. He thought that the practice skewed investment choices. He asked if the change in formula would affect the way the corporation invested the fund. Mr. Ecklund relayed that the POMV split proposed in the bill would not have an impact on the dividend formula contemplated in the legislation. Senator Kiehl appreciated that element of the legislation. 9:23:27 AM Co-Chair Stedman commented that there was another piece to the bill. Over the previous few years, the trustees have considered an endowment concept to address the issues raised by Senator Kiehl. 9:23:43 AM Senator Cronk appreciated the legal opinion and believed it added clarity for the public. Mr. Ecklund recounted that the first dividend checks in 1982 were transferred according to statute, however at the time there had been an attorney general opinion that stated that the dividend should be appropriated like all other appropriations. Co-Chair Stedman relayed that the legislature did not "steal" but rather it was the appropriating body, which followed statutes and the constitution. He noted that the state constitution trumped state statutes. He added that the operating budget has a one-year lifetime and that during that time, statutes were sometimes modified to keep in line with the constitution. 9:25:54 AM Senator Cronk thought hopefully the bill would include an education process for Alaskans to learn more about the process. Co-Chair Stedman added that there were times in which one statute collided with another. He used the example of the statutory dividend versus the 5 percent payout. SB 109 was HEARD and HELD in committee for further consideration.