SB 282-PERMANENT FUND DIVIDEND AMOUNT FOR 2010  9:01:57 AM CHAIR MENARD announced the first order of business to come before the committee would be SB 282. SENATOR WIELECHOWSKI, sponsor of SB 282, said Alaskans have relied on their annual Permanent Fund Dividend (PFD) checks since 1977. Many Alaskans are relying more heavily on this year's PFD due to the economic downturn. SB 282 will ensure that Alaskans receive a full dividend this year. SENATOR MEYER joined the meeting. SENATOR WIELECHOWSKI explained that the PFD is calculated by a formula that considers the average amount the fund's investments have earned over the past five years. A current statute preventing the PFC from paying out more than 50 percent of the fund's earnings reserve in any given year could be invoked for the first time ever this year due to the market downturn over the last couple years. This means the full calculated amount could not legally be appropriated from the earnings reserve even though sufficient funds exist. When SB 282 was initially filed, enough money was in the earnings reserve to pay out the full dividend; however, considering the 50 percent limitation, the account was several hundred million short of the necessary amount. That gap is now smaller but still exists. SB 282 addresses only 2010 by transferring one half of 21 percent of the net income of the five year dividend average calculated for fiscal years 2006-2010 from the earnings reserve account to the dividend account. 9:04:58 AM This issue should not be a problem in 2011 because inflation proofing is expected to be zero. Alaskans deserve to receive the full benefit from the state's oil revenue during these tough economic times. SB 282 will ensure Alaskans receive their full dividend for 2010 in the event that earnings fall below the threshold required for a full payout. SENATOR KOOKESH joined the meeting. CHAIR MENARD asked if Senator Wielechowski was concerned that a precedent would be set for future similar situations. SENATOR WIELECHOWSKI replied that ultimately the way in which the PFD is paid out needs to change. "We have enough money to pay out the full dividend, however the way the law is written, we can't pay out the full dividend". With oil high, and costs and expenses high, Alaskans will not be happy if they do not get their full dividend. SENATOR PASKVAN asked what the loss per PFD might be. SENATOR WIELECHOWSKI replied that when SB 282 was initially filed, the fund was short over $100 million, equaling several hundred dollars to PFD's. The gap has closed to $50 million, roughly equaling an $80 shortfall per PFD. Whether the gap will open or close between now and June is unknown. SENATOR MEYER said a lot of things can happen between now and June 30th. In 2003, the same concern existed but the market improved. He is concerned about tinkering with a system that has been working for nearly 30 years. 9:08:58 AM SENATOR WIELECHOWSKI replied that oil prices are high, a $10 million savings account and $2.2 billion surplus exist. It will be difficult to tell Alaskans they do not get their full PFD this year because of a provision that the fund must have twice as much as the payout amount. SENATOR MEYER said he warns people that the PFD fluctuates and not to count on it. He has been telling his constituents, "It's out of our hands; we have a system set up. You don't want us to intervene because we'll screw it up". He understands Senator Wielechowski's purpose, especially considering the economy, but it is a slippery slope. 9:11:55 AM SENATOR FRENCH asked about the policy debate or rationale behind the statute that no more than 50 percent of the money in the earnings reserve account be paid out. LAURA ACHEE, director of communications, Permanent Fund Corporation (PFC), replied that she does not know what the legislative intent was for the 50 percent limitation. That section of statute has not been altered since the 1980's. SENATOR FRENCH clarified that the 50 percent limitation is the rule that would prevent a full payout of the dividend this year. MS. ACHEE replied yes. The ultimate point of the statute is that no more than 50 percent of the balance of the earnings reserve may go to the PFD in any given year. SENATOR FRENCH suggested that part of the rationale was to ensure that money was available for inflation proofing which is paid from the same account. MS. ACHEE agreed and said that statute stipulates the next step after paying the PFD is to calculate and pay inflation proofing. SENATOR FRENCH said 2010 is a year of historically low inflation and little demand for inflation proofing. He asked what amount might be appropriated for inflation proofing this fiscal year. MS. ACHEE replied that the rate used for this year is zero; the PFC will not make an inflation proofing transfer on June 30th of this year. 9:16:00 AM SENATOR FRENCH summarized that plenty of money is in the earnings reserve account to pay the PFD but the 50 percent rule is holding this up. Paying out the full PFD would not result in any loss to the permanent fund because no money from that account is needed for inflation proofing this year. MS. ACHEE said that is correct. CHAIR MENARD said the PFD is upmost on all constituents' minds and the Legislature should look at getting the full PFD to constituents. SENATOR MEYER asked what year the same situation existed previously. MS. ACHEE replied 2003. She said, "the cupboard was bare" and paying the dividend at all was a concern. The issue was solved by early 2003 after markets recovered dramatically. SENATOR MEYER asked if 2010 is similar to 2003. He said these past five years seem to be doing better than the tech bubble bursting in 2001-2003. 9:18:35 AM MS. ACHEE replied that the dividend calculation has two parts: the five year average calculation, and the presence of the money to pay it. In 2003, regardless of the five year calculation, the earnings reserve was empty. In 2010, regardless of the calculation, the earnings reserve account, according to statute, does not have enough money to pay the projected dividend amount. Since 2003, the Attorney General (AG) has issued an opinion that moved unrealized gains and losses out of the earnings reserve to principle. In 2003, unrealized gains would have been part of the earnings reserve and would have caused that dramatic swing. Now, only realized gains and losses are booked to the earnings reserve, meaning the balance of that fund is more stable. CHAIR MENARD asked if the dividend calculation is still six or seven months away. MS. ACHEE said it's about four months away. SENATOR MEYER asked if the PFC has any projections. MS. ACHEE replied that the dividend is probably calculated at $791 million, based in part on a stream of regular income every month and not including any gains from selling an asset. In November, that stream of regular income was not going to add up to be enough. Since then, movement in the portfolios has resulted in some gain and the account is now short only $50 million. The CFO thinks that gap is or will be closed; that information will not come until the end of the month. 9:22:58 AM SENATOR PASKVAN said inflation proofing is expected to be zero. The law, with respect to inflation proofing, is not being changed; the cap at 50 percent is the problem. The earnings reserve account is $50 million short of being able to pay out the full PFD. He asked what percentage, above the 50 percent cap, does would the additional pay out constitute. MS. ACHEE said the PFC is projecting a $790 million dividend and ending the year at $1.5 billion. $790 million is more than half of $1.5 billion. The $50 million shortfall is about 3 percent, or a small percentage, of the overall earnings reserve. 9:25:35 AM SENATOR PASKVAN said the permanent fund now is $35 billion. He asked what a 1 percent inflation protection would calculate out to. MS. ACHEE replied that historically, when inflation has been in the 2 and 3 percent range, about $800 million to $1 billion has been paid to inflation proofing. When considering inflation proofing in the future, she suggested looking at the total volume of the principle because the percentage is multiplied against that principle, which has grown huge. Going forward, bigger and bigger numbers will be thrown off on inflation proofing even if we stay in a stationary environment. Any positive percentage is going to throw off a big number for inflation proofing. SENATOR PASKVAN said the gap between the $791 million and the forecasted $1.5 billion is $700 million or 2 percent of the $34 billion. There is enough for a 2 percent inflator if needed, but this year it is zero. MS. ACHEE said even if a full dividend is paid this year, over $700 million will be left in the earnings reserve. CHAIR MENARD asked if Ms. Achee felt this legislation was a mute point. MS. ACHEE replied that creating the dividend and the 50 percent rule were the Legislature's call. Whether or not to put this mechanism in place is also. The PFC is neutral. 9:29:08 AM MS. ACHEE said Mr. Burns, executive director of the PFC, felt that letting the Legislature know about the gap was crucial even though he felt confident that the gap would be made up. SENATOR MEYER read from SB 282 and asked if one-half of 21 percent of the net income is the right number to get us to where we want to be. MS. ACHEE replied that the dividend calculation is one-half of 21 percent of the net income. SB 282 says you will pay out the calculated dividend regardless of what statutes say. 9:31:17 AM CHAIR MENARD closed public testimony. SENATOR FRENCH moved to report SB 282 from committee with individual recommendations and attached fiscal note(s). There being no objection, the motion carried.