HOUSE BILL NO. 31 "An Act making a special appropriation to the Alaska permanent fund; and providing for an effective date." 3:40:32 PM REPRESENTATIVE JOHNATHAN KREISS-TOMPKINS, BILL SPONSOR, indicated that HB 31 was a simple bill that transferred $5.5 billion from the Earnings Reserve Account (ERA) to the corpus of the Alaska Permanent Fund (PF). He introduced the PowerPoint presentation: "HB 31: $5.5 billion transfer from the ERA to the Corpus." The presentation had a number of slides that would contextualize the impacts of the legislation or such a transfer especially given actions taken in the other body on the previous Friday. He would discuss the impacts of different sizes of transfers. He noted that the House was interested in the concept before the Senate. Representative Kreiss-Tompkins turned to slide 2: "If the deficits continue, the CBR is most likely gone." He reported that since he became a legislator in 2013, he had seen the legislature collectively spend down all the state's savings. He found it discouraging and thought it was a collective action problem. The genesis of the ERA to principal transfer reflected his grave fear and concern that the legislature might soon regard the ERA as just another savings account that was available to spend down as opposed to an intergenerational asset for the benefit of future generations of Alaskans. Representative Kreiss-Tompkins spoke to slide 3: "Other ERA-to-principal transfer proposals." He reported that in the previous year in the operating budget, Amendment 58 was considered but not voted on. The amendment reflected a $5.5 billion transfer from the ERA to the principal of the Alaska PF. On the previous Friday, the Senate Finance Committee dropped a bomb shell by amending the budget to reflect a $12 billion transfer from the ERA to the principal. The amendment was passed without objection from the minority Democrats to the Mat-Su Republicans to the co- chair. He thought the action taken by the Senate Finance Committee made his bill containing a $5.5 billion transfer look like minor league baseball in comparison. 3:44:35 PM Representative Kreiss-Tompkins discussed slide 4: "History of Legislative Appropriations to the Principal." He relayed that it was not out of the ordinary for the legislature to have transferred funds from the ERA to the principal of the PF. The legislature had an inflation-proofing transfer most years. There were a couple of missed years in recent history. Most years the legislature abided by the operating budget. The current year included the inflation transfer. The slide showed an inventory or summary of all the other ERA-to-Principal transfers above and beyond inflation proofing. The high-water mark was $1.3 billion even if the figure was inflation adjusted. The numbers that had been proposed, $5.5 billion or $12 billion, were well in excess of the highest recorded number. He noted that the balance of the ERA was at an all-time historic high. Representative Kreiss-Tompkins moved to slide 5: "Permanent Fund Account Structure." He reported that the slide reflected the year-end projections of the account balances for the PF. He noted that there were large amounts in both the principal and the ERA. Representative Kreiss-Tompkins turned to slide 6: "Earnings Reserve Account: $18.9 billion balance." He reported that HB 31 called for a $5.5 billion transfer. The number was a carryover from the operating budget in the previous year. The number in the previous year was not random. It was based on an analysis of prudence and conservatism. Under SB 26 [Legislation passed in 2018: Short Title: Appropriations Limit and Permanent Fund Dividend and Earnings], there was a structure and framework to sustain and properly manage the PF and manage it for future generations. He indicated that the legislature would not want to take more than 5 percent of market value in any 1 year after the first 3 years. He continued that the $5.5 billion figure, as proposed in the operating budget in the previous year, would have drawn down all of the money in the ERA until an amount equal to 4 times the 5 percent draw was left in the account. If the math was calculated with the numbers in the PF in the prior year, the pink number on the slide would have been $5.5 billion. Moving forward a year, the ERA accumulated more earnings. Applying the same analysis would lead to about an $8 billion transfer presently. He indicated that the $8 billion was a number that should be considered by the committee. He suggested that transferring $8 billion for the ERA to the principle would still leave 4 times the 5 percent POMV [Percent of Market Value] draw amount in the ERA while protecting a huge amount of money permanently and for the benefit of future generations. 3:48:05 PM Representative Kreiss-Tompkins turned to slide 7: "Scenario: Moderate bear market from FY 21- FY 23." He suggested that when the legislature considered the amount of money to transfer from the ERA to the principal, it was a balance and a legitimate conversation that needed to happen. The transfer amount needed to be balanced against the function of the ERA - the only pot of cash the legislature had to pay for dividends and state services. He added that the ERA could fluctuate depending on market conditions. If the state had poor returns, the ERA would get smaller which could happen quickly. He indicated that the scenario on the slide, as worked out by the Legislative Finance Division, projected 3 consecutive years of 3 percent returns. He noted it wound not be that bearish of a market. Representative Kreiss-Tompkins mentioned the recession in 2008 and 2009 the state had -17.9 percent return and the year preceding there was a -3.6 return. He admitted it was a severe recession, but it helped to provide context. If the stock market was not doing well, the legislature would be starting to play with fire the more money it transferred. Some liquidity needed to be maintained in the account - a shock absorber for bad market years. He pointed out that the 3 graphs demonstrated how the ERA would perform in a moderate bear market. He noted that with a transfer of $5.5 billion there would be a significant amount of shock absorption left in the ERA after 3 consecutive bear market years. A transfer of $8 billion would leave slightly less of a cushion. A transfer of $12 billion would leave just enough in the account but would be riskier. He noted that a $13 billion transfer when the bear market was slightly worse would leave the balance at zero. There would be no money to pay for dividends or public services. At such a point, the legislature would be up against a hard wall. Representative Merrick asked where the other body got the $12 billion and $14 billion figures. Representative Kreiss- Tompkins did not know. Co-Chair Wilson thought it was not appropriate to comment on the reasoning of the other body. Representative Kreiss-Tompkins commented that a person could consider the ERA in isolation and what amount might make sense to transfer to the principal. There were constitutional amendments moving through the legislature currently. He was a sponsor of a constitutional amendment that would create a constitutional POMV and combine the earnings reserves and the principal. If and when the combination were to happen, it would eliminate the problem of the ERA hitting zero because of a simpler classic endowment model. There could be some merit in moving a large amount of cash to the principal if it was done in tandem with restructuring the PF to have a constitutional cap and combine the ERA and the principal. Representative Sullivan-Leonard asked if the Director of the Alaska Permanent Fund Corporation offered an opinion on the transfer of $12 billion versus $5.5 billion. Representative Kreiss-Tompkins responded that he had not spoken directly with her, though, he thought she was online. 3:52:40 PM ANGELA RODELL, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND CORPORATION (via teleconference), responded that the Alaska Permanent Fund Corporation (APFC) did not take a position on the amount. Vice-Chair Ortiz indicated that the slide showed what might happen if a bear market were to start in FY 21. He asked if Representative Kreiss-Tompkins agreed that if a bear market were to begin in FY 20, the model would potentially look significantly worse. Representative Kreiss-Tompkins responded in the positive. He suggested that if the bear market were 4 years instead of 3 years or 1 percent instead of 3 percent, all of the charts would look worse. He eluded to his previous reference of playing with fire. Vice-Chair Johnston understood why 2.72 percent was used in the prior year. She asked if the draw should have been 2.9 percent in the current year. 3:54:39 PM KEVIN MCGOWAN, STAFF, REPRESENTATIVE JONATHAN KREISS- TOMPKINS, responded that the percentage was used because of the effective date was immediate. If the bill were to pass in the current year, it would be effective immediately. If it did not pass until the following year, it would make sense to adjust it. Vice-Chair Johnston referred to the charts on slide 7. She had been reminded that in 2008, when the ERA went under, it was the first time the legislature looked at paying the dividend with general fund dollars. She was a firm believer in putting funds into the corpus but wanted to bring up the issue. Representative Josephson asked if the other proposal, where all funds would be placed in the corpus, would be workable because it would have to be accompanied by the allowance for the legislature to use the corpus in a sustained way. Representative Kreiss-Tompkins did not want to respond to what the other body might be thinking. He thought it made sense if the legislature moved all or almost all of the funds (about $14 billion) into the corpus in tandem with restructuring the fund to be all constitutionally protected and combining the ERA with the principal. His suggested scenario would eliminate risk of a bad market year and not having enough money to pay for dividends or public services. Representative Josephson had some concerns relative to the 2007-2009 period. He asked if Representative Kreiss-Tompkins used 3 percent in a bear market in his hypothetical scenario. He noted it was not a bad experience, not like presently. He thought Representative Kreiss-Tompkins had mentioned -17 percent in a calendar year. He asked if he had heard the representative correctly. Representative Kreiss-Tompkins replied that he was accurate. He emphasized that it was a moderate bear market rather than a severe market. In 2008 and 2009 the market returns were -18 percent and -3.5 percent. In 2001 and 2002 immediately following September 11th, the market turndown was -3.25 percent and -2.25 percent respectively for 2 consecutive years. All of the graphs would look substantially worse if they were modeled over those scenarios which had happened before and would certainly happen again. 3:58:25 PM Representative Josephson shared the concern of the history of postponement of fiscal planning and that the legislature might draw down all of its earnings. He wondered about undermining the use of a POMV or devastating the dividend. Representative Kreiss-Tompkins asked Representative Josephson to repeat his question. Representative Josephson suggested that even with the 2 deterrents from an overdraw and reckless spending - the lack of a dividend and the lack of sustainability of a POMV - the legislature might still abuse the ERA. Representative Kreiss-Tompkins replied, "Yes, that's my concern." He had only been around the legislature for 7 years but had heard a marked shift in public dialog about the inviolateness of the PF. He wanted to severe the conversation from how large the dividend should be. However, he thought all of the legislators could or should agree on not spending down the PF. It would be easy to do for a year or two, even if it put the state in a tough position a generation from present day. Based on recent discussions, he thought it was very possible to spend down the fund. He explained when the legislature struggled to balance the budget or reach a fiscal plan, it kicked the can down the road. His goal was to have enough money protected permanently in the PF that the legislature could continue to have the argument about how to spend the money. However, if the legislature spent that money down currently, the state would not have money in 20 years to argue about how it should be spent or how large the dividend should be. Co-Chair Wilson clarified that the committee was currently talking about the PF Earnings Reserve. The Permanent Fund Corpus could not be touched by anyone without a vote of the people. 4:01:20 PM Representative Carpenter thought it was disconcerting that legislators were having conversations about what to do with the money when there were laws in place dictating where it should be spent. Lawmakers had subsequently disregarded the laws. The money in reference was supposed to go out to the people over the previously several years in the form of dividend checks that instead, stayed in the ERA. There were individuals that were rightly upset about it. Presently, the committee was having a conversation about taking the money and not paying it to them as requested. Instead, what was being suggested was to lock it away forever, a portion of which would come back in the form of future PF dividends. Co-Chair Wilson corrected Representative Carpenter about what was being discussed. The bill did not take all of the money in the ERA. Currently, the bill was in committee and reflected $5.5 billion. It did not reflect the back pay or the dividend. Both could still be paid even with the transfer. She did not want the wrong message sent to Alaskans. Representative Carpenter explained that the question he was getting to was about the requirement to back the Constitutional Budget Reserve (CBR). The state had a very small balance in the CBR and an unfunded liability of sorts to fund it. He asked why it would be more appropriate, considering it was important for the legislature to follow the law, to put it into the PF corpus rather than the CBR to meet its obligation. Representative Kreiss-Tompkins responded that the representative first talked about money that was not distributed as dividends but stayed in the ERA. He thought the instance referred to the time Governor Walker vetoed part of the dividend. The money was retained in the ERA. Speaking to that scenario, it was a small fraction of the total amount of cash in the ERA presently. He elaborated that the vast majority, $16 billion or $17 billion of the $18.9 billion in the ERA, was from market returns independent of the point Representative Carpenter was making. The reason there was so much money in the ERA was mostly independent of the decisions made by past governors regarding dividends. Representative Kreiss-Tompkins addressed Representative Carpenter's question about the CBR account replenishment. The Constitutional Budget Reserve Account was designed to be spent down when the legislature deemed the need sufficient. The goal was to protect the PF monies forever for the benefit of future generations. There were different purposes for the CBR and the ERA. Taking money from the PF and putting it into the CBR was effectively equivalent to spending down the PF. There would be a time delay, but it would be tantamount to spending the PF. Co-Chair Wilson added, for the purpose of accuracy, that Governor Walker vetoed the dividend 1 year and the legislature in the following 2 years chose an amount out of the sky versus following the prescribed formula. Representative Carpenter did not understand the equation between spending down the PF when the corpus was not getting spent, while spending down the CBR, the account in which the legislature was required to pull from in lean times. Co-Chair Wilson explained that the POMV draw came from the PF ERA. The difference between putting $5.5 billion into the corpus versus the CBR was to protect the savings from being used except with a vote of the people. She emphasized that once money was placed into the corpus, it could not be accessed without a vote of the people. If the money was placed into the CBR, it could be used to fulfill the budget as had been done in the past. If the legislature wanted to protect the ERA, which only required a vote of 21/11, the money could be placed into the corpus of the PF or into the CBR. The money in the CBR could be spent by the legislature. If the legislature truly wanted to protect the earnings, it would be best to transfer the money into the corpus because it required a vote of the people to spend. The question came down to how much the legislature wanted to protect the PF. 4:07:01 PM Representative Carpenter understood the reasons. He pointed to the requirement for the legislature to pay back the CBR. He thought they were effectively ignoring the requirement to repay the CBR if the money went towards the PF corpus. Co-Chair Wilson asked the sponsor to follow up with a reference to the statutory requirement for the money to go to the CBR first. She appreciate Representative Carpenter bringing up the point. Representative Kreiss-Tompkins would look up the statutory requirement. He noted that the state had other obligations such as paying down the oil tax credits, the unfunded liability of the state pension, and the replenishment of the CBR. All of the obligations exist, but there was sort of a Chinese wall with the PF. The money in the ERA was not available for government spending whether it was replenishing the CBR or paying down the pension obligation. Everything under the 5 percent draw was fair game, but everything above that amount should be off limits. The legislature had set rules around the 5 percent mark in order to guarantee a sustainable PF. He did not want to take more than 5 percent from the PF in any given year. Representative LeBon recalled that funding for the CBR began about 15 years previously. High oil prices and a significant throughput allowed for a build up in the CBR over a 5 or 6 year period. He asked if his recollection was accurate. Representative Kreiss-Tompkins deferred to the Legislative Finance Division. Representative LeBon iterated his point of the ramp up of the CBR due to a higher price for oil and revenue rather than from earnings from the PF or the ERA. If he was correct, the legislature enacted a decision to spend down the money. If the money were to be replaced, he wondered if it should be from business and oil revenues at a future date versus earnings of the PF. 4:10:25 PM Co-Chair Wilson addressed the constitutional mandate to repay the CBR. She was unclear about where the money could come from to repay the CBR. DAVID TEAL, DIRECTOR, LEGISLATIVE FINANCE DIVISION, addressed the question about which money went to the CBR and indicated that the requirement was defined in the Alaska Constitution rather than in statute. He explained that at the end of each year general fund balances were swept into the CBR as long as there was a liability to the CBR. The legislature has typically reversed the sweep each year so that the state was not repaying unless there was a surplus. The state would not be repaying unless it truly had a surplus as the state did when oil prices increased as they did a few years prior. At the time, the state repaid all of its liability to the CBR. He suggested that the legislature could appropriate earnings reserve balances. They would not normally be swept into the CBR, but they could be appropriated there if the legislature chose to do so. Representative LeBon asked if repaying the CBR from normal revenue sources would be predicated on the price and production of oil. Mr. Teal answered it was the way foreseen by the constitution. The surplus revenue was automatically swept into the CBR without an appropriation. The legislature also appropriated general funds to the CBR in addition to the constitutional requirement. The logic behind that action was that if the money was swept constitutionally, the legislature received no credit for repaying the CBR. In times of a large surplus there was an effort to appropriate money to the CBR as well. Representative Carpenter asked about earnings. He asked if the legislature was trading the PF earnings as revenue. He suggested that it all spent the same by the government. Mr. Teal answered they did not consider the ERA as revenue. If it was considered revenue, the state would currently have a general fund surplus of $ 18 billion. He indicated that the ERA was not shown as a general fund balance, it was a balance in the PF. In the PF section of the constitution stated that earnings of the PF went into the general fund unless otherwise specified by law. There was a statute that stated that the earnings reserves are part of the PF. If the legislature wanted to it could require the entire ERA appear as general fund revenue; however, LFD looked at revenue as a cashflow issue. Therefore, the PF balance should not be counted as general fund revenue. The only portion of the earnings reserve that was counted as revenue was the 5 percent or 5.25 percent POMV payout. The state counted approximately $3 billion from the ERA as general fund revenue. 4:15:47 PM Representative Josephson wanted to confirm that the CBR language in Section 17 of Article 9 referred to repayment but did not designate a timeline. He was struck that given the state's other obligations and because there was no interest requirement, he suggested the legislature did not receive credit for repayment. Mr. Teal responded that there was no timeline on repayment. He relayed that the timing envisioned by the constitution was that if there was a surplus, the state would make repayment. If there was not a surplus, the state might have additional draws from the CBR if needed. However, the constitution did not envision a repayment schedule, nor was interest assessed. 4:17:05 PM Co-Chair Wilson OPENED Public Testimony. 4:17:16 PM Co-Chair Wilson CLOSED Public Testimony. Co-Chair Wilson indicated the bill would be set aside. Amendments for HB 31 were due in her office by Thursday, May 2, 2019 at 5:00 p.m. The meeting scheduled at 5:00 pm in the current day was canceled. HB 31 was HEARD and HELD in committee for further consideration.