CS FOR SENATE BILL NO. 196(FIN) "An Act relating to the amount appropriated for power cost equalization; relating to the use of certain unexpended earnings from the power cost equalization endowment fund; and providing for an effective date." Co-Chair Neuman MOVED to ADOPT the proposed committee substitute for CSSB 196(FIN), Work Draft 29-LS1383\R (Nauman, 4/16/16). There being NO OBJECTION, it was so ordered. 9:15:46 AM PETE ECKLUND, STAFF, REPRESENTATIVE MARK NEUMAN, relayed that after the cost of the power cost equalization program (PCE) was paid, the current version would allow that excess earnings to be used in 3 ways: $30 million would fund renewable energy grants, bulk fuel revolving loan fund, and the rural system power upgrades, any remaining funds would flow back to the PCE fund. 9:17:11 AM Representative Edgmon believed that he understood what was being proposed in the legislation. Representative Munoz requested another review of the changes to the legislation found in the current version of the bill. Mr. Ecklund responded that the changes included that the excess earning of the PCE fund, after paying out the program costs, would go toward the $30 million fund that would pay for the new community assistance program, a $25 million fund for renewable energy grants, bulk fuel revolving loan fund, and the rural system power upgrades, any remaining funds would flow back to the PCE fund. Representative Munoz asked how this version compared to the original bill. Mr. Ecklund explained that the original bill had contained a mechanism that allowed for 50 percent of the excess PCE funds to be placed in the $30 million fund for the community assistance program. The current version did not split out the percentages, but stipulated that the $30 million be honored first with any additional PCE funds. 9:19:21 AM Vice-Chair Saddler asked about the change in the assumed return on the fund from 7 percent to 5 percent. Mr. Ecklund suggested that 5 percent was a more realistic number, while the 7 percent was more aggressive and volatile. Representative Kawasaki asked whether the overflow funds would be replenished annually. Mr. Ecklund responded that it would dependent on the actual returns. He stated that if there was a return of 6 percent, $17 million would be given to community assistance in FY 18, with no funds flowing to rural energy or back to PCE. He said that the money flow would be determined by future returns. 9:21:02 AM Representative Kawasaki understood that any excess in a calculated year would first flow to community revenue sharing, up to $30 million. Mr. Ecklund stated that Representative Kawasaki was correct. Representative Kawasaki understood that if the PCE in 2017 generated $44 million, the balance going into the community revenue sharing account would be approximately $5 million. Co-Chair Thompson remarked that Mr. Teal was available to answer questions. Representative Kawasaki spoke to fiscal note 2, which estimated the cost of funding the PCE program for FY17 at approximately $40 million. 9:23:14 AM AT EASE 9:25:28 AM RECONVENED Representative Kawasaki noted the change between the previous and current bill versions. 9:26:25 AM Co-Chair Neuman stated that because the state no longer had revenue to "share" the community revenue sharing should now be called the community assistance program. He thought that the highest priority for the state should be to help communities across Alaska, particularly in rural Alaska, to support basic government services. He felt the formulation of the fund distribution was equitable. 9:28:52 AM Representative Edgmon wanted assurances that the endowment would be protected with the fund. 9:29:10 AM DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, explained that the first priority of the program was to pay PCE. He relayed that in order to protect the fund the senate version of the bill would always put some of the excess earnings back into the fund. He said that the house version was exactly the same as the senate version, as long as excess earning exceeded $55 million. He furthered that if the excess earnings were less than $55 million, the house version favored community assistance up to $30 million. He stated that the current version did not strongly protect the endowment because in years with excess earnings between $0 and $55 million, no money would be returned to the endowment. Co-Chair Thompson queried how many times in the past the earnings had not exceeded $55 million. Mr. Teal replied that the earnings had fluctuated between negative 13 percent, to plus 24 percent. He said that he could not speculate what the earnings in the future would be, but pointed to the document titled, "PCE Endowment Analysis of SB 196 for CS" pages 1 and 2(copy on file), which offered a sampling of high positive, medium, low, and negative rates. He said that when there was an excess of $55 million, the fund would be protected, and that the historical numbers would be of better use in predicting future income than the constant 6 percent. 9:32:29 AM Co-Chair Thompson understood that the second page of the document used an average of 6 percent. Mr. Teal stated that he was correct. Representative Edgmon stated that previous legislation had changed the earning threshold of the fund from 7 percent, to achieve at least a 4 percent nominal return over a 5- year period. He felt that if the fund were managed less aggressively, reaching the $55 million threshold would be a challenge. He asserted that speculation on reaching a 10 percent rate of return would be an academic argument. 9:34:16 AM Mr. Teal stated that there were 2 things that should be considered in order to address the concerns. He referred to the change from 7 percent, to 5 percent, in Section 2 of the bill. He related that the change had nothing to do with the return on the fund, but was related to the payout rate. He said that even with negative returns, the 5 percent payout would go to PCE. He explained that bad return years would result in the PCE program being prorated. 9:35:26 AM Representative Edgmon contended that the current version offered more protection to the PCE program because the excess was guaranteed to be put back into the corpus of the fund. 9:35:59 AM Mr. Ecklund interjected that regardless of the assumed percentage of return, as long as the percentage was under 5 percent, the PCE program would receive a payout. He added that there were no guarantees in life; if the state experienced negative returns the legislature would face the choice of short funding the PCE program, taking more out of the PCE fund to fully fund the program, or using general funds to pay the PCE program. 9:36:47 AM Representative Edgmon disputed that the original bill offered 4 steps that the money would have to take before being put back in the fund, the current bill version only offered 2 steps. Mr. Teal thought the issue could be resolved by inflation proofing the fund. He agreed with Representative Edgmon that if there was less than $55 million now, none of it went back to protect the PCE fund. 9:38:28 AM Representative Gara surmised that the argument was whether the PCE fund would be used to primarily fund and protect the PCE fund, or whether the fund became primarily used to fund revenue sharing before protecting the fund. He asked whether the fifth column of the chart reflected excess earnings above the PCE payment. Mr. Ecklund responded in the affirmative. Mr. Teal added that the column labeled "earnings" reflected the earnings that the earnings rate would produce. He noted that the next column listed program costs, which were not paid for out of earnings, but out of a 5 percent POMV. He stated that if earnings were negative in a year, the 5 percent payout would cover program costs. He felt that it was important to examine the last column on the chart in order to be sure that the payout did not exceed 5 percent because if it did PCE would be prorated. He stated that the negative 7.2 in the column, "2nd Prior Fiscal Year Earnings in Excess of Program Costs" was subtracted from $33.2 million in earnings from FY15, meaning that there was be no excess earnings in that year and no money would flow to any other accounts. He furthered that in FY 18, there were excess earnings of 17 million, which was the result of taking the $58 million earned in FY 16, subtracting the $41 million in program costs in FY 18 from the $58 million earned in FY 16, which left $17 million in earnings to be distributed. He noted that the entire $17 million could go into community assistance, and if the number were larger, it would continue to go into community assistance - up to $30 million. He relayed that if there were more than $55 million total, the excess after community assistance and rural energy programs would be used to inflation proof the fund. 9:42:09 AM CSSB 196(FIN) was HEARD and HELD in committee for further consideration. Co-Chair Neuman asserted that there was not extra money in FY 17 for the renewable energy fund, bulk fuel fund, and rural power system upgrades. He contended that the highest priority should be community assistance, and that the solution should be that any excess funds after community assistance should be rolled directly back into the PCE. Representative Edgmon hoped a resolution could be reached. CS FOR SENATE BILL NO. 196(FIN) "An Act relating to the amount appropriated for power cost equalization; relating to the use of certain unexpended earnings from the power cost equalization endowment fund; and providing for an effective date." 6:54:17 PM Co-Chair Neuman MOVED to ADOPT the proposed committee substitute for CSSB 196(FIN), Work Draft 29-LS1383\R (Nauman, 4/16/16). There being NO OBJECTION, it was so ordered. 6:55:17 PM ADAM BERG, STAFF, REPRESENTATIVE BRYCE EDGMON, spoke to the changes in the work draft. He noted that the only change was the reorder of the flow of how surplus earnings from the endowment would be spent. He said that the intent was to split the $50 million, after the $30 million had been paid out, and put half in the endowment and half into either the renewable energy fund, the bulk fuel revolving loan fund, or rural power system upgrades. 6:56:32 PM Representative Edgmon relayed that the latest version addressed his concern about having some of the surplus money flow back to the endowment for inflationary purposes. Co-Chair Thompson noted that many people had come together to craft a workable bill. Representative Wilson queried the $25 million cap written into the legislation. Mr. Berg replied that the previous version allowed for $25 million to flow to the renewable energy grant fund, among other funds, and the current version split the funds 50/50 between the endowment and the renewable energy grant fund; the renewable energy grant fund would be capped at $25 million. Representative Wilson offered an example of her understanding of how the fund functioned. Mr. Berg offered the example that out of $60 million, $30 million would go to the community revenue sharing fund, $15 million would go back into the endowment, and $15 million would go to the renewable energy grant fund. Representative Wilson hypothesized that out of $100 million, $30 million would automatically go to the community revenue sharing fund, leaving $70 million left over, of which no more than $25 million could be put back into the extra funds, and the remainder would go back into the PCE program. Mr. Berg answered that she was correct in her hypothetical. Representative Kawasaki pointed to the $55 million to $80 million change in the current bill version. Mr. Berg replied that earlier version had used $30 and $25 million in order to get a total of $55 million. He said that because the funds were now going to be split 50/50, the $25 million would become $50 million: $50 million plus $30 million is equal to $80 million. Representative Kawasaki surmised that those numbers were unlikely in a single year. He asked whether the 50 percent number had been modeled. Mr. Berg responded that it had not been tested, but the outlook seemed positive after reviewing the history of the earnings of the fund, the bill would assure that the endowment was replenished at 2.5 percent interest on the fund's current balance. 6:59:58 PM Representative Gattis wondered about years when there could be no earnings on the fund. Mr. Berg replied that the worst case scenario would mirror the current situation; if enough earnings were not spun off to fully fund PCE payments then money from the endowment would be used, or the payments could be supplanted with general funds. Representative Gattis asked whether the bill contained sideboards. Mr. Berg responded that the bill only addressed the PCE payout. He added that the legislation would not stop the legislature from using the PCE fund at their discretion. Representative Gara asked whether the sponsor of the bill supported the current bill version. Mr. Berg responded that he could not speak to whether the sponsor supported the current version of the bill. Vice-Chair Saddler addressed the 2 fiscal notes attached to the bill. 7:02:46 PM Representative Wilson asked how the $17 million, reflected in FN 1, had been estimated. DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, explained that FN 1 was for illustrative purposes only. He stressed that there was no way to know what the excess earnings would be. He noted that $17 million would not fully fund the community assistance program. He said that the numbers could range from $30 to $80 million, and that the fiscal impact for FY17 would be zero either way. Representative Wilson asked whether the $17 million would have originally been paid out of the general fund. Mr. Teal replied in the affirmative. He said that there would be a reduction of general funds for up to $0 million for community assistance and up to $25 million for rural energy programs. He stated that the fiscal note could show a fund change of anywhere from zero to $55 million. He stated that the $17 million was likely a low estimate. Mr. Teal furthered that if the earnings were zero, or negative, there would be no replacement of unrestricted general funds with excess earning from the PCE fund. He said that there would be budget variations from year-to- year, some years could have no excess earnings and the state may decide to appropriate undesignated general funds to the community assistance program, or not fund it in that year; the appropriation process was up to the legislature. 7:06:40 PM Co-Chair Neuman MOVED to REPORT HCS CSSB 196(FIN) out of Committee with the accompanying fiscal notes. There being NO OBJECTION, it was so ordered. HCS CSSB 196(FIN) was REPORTED out of committee with a "do pass" recommendation and with one previously published zero fiscal note: FN2 (CED); and one previously published fiscal note: FN1 (SFC for Various). 7:07:10 PM AT EASE 7:08:30 PM RECONVENED Co-Chair Thompson discussed housekeeping and RECESSED to the Call of the Chair. [Note: the meeting never reconvened].