HOUSE BILL NO. 300 "An Act relating to deposits into the dividend fund and income of and appropriations from the earnings reserve account; relating to the community assistance program; and providing for an effective date." 2:06:19 PM REPRESENTATIVE ADAM WOOL, SPONSOR, thanked the previous presenter for laying down some groundwork pertaining to the current fiscal situation. He noted that the House Finance Committee had heard many presentations about the percent of market value (POMV) draw and the situation that needed resolution. He remarked that in his six years with the legislature, many months had been spent trying to solve the dilemma of balancing revenues with expenditures. He pointed out that the PFD was very much a part of the issue. Representative Wool provided a PowerPoint presentation titled "HB 300 - POMV Allocation: A Sustainable Solution for Alaska" (copy on file). He noted that graphs would be reviewed for the committee by the Legislative Finance Division (LFD) the following day. He relayed that the bill was a conversation starter and was perhaps a novel way to look at the Permanent Fund Dividend (PFD) and the POMV draw. He began on slide 2 titled "The 2018 Passage of SB26 Largely Solved the Budget Crisis." He highlighted that the POMV structure provided a stable funding stream to support state government and had been a historic compromise. He characterized the passage of SB 26 as a paradigm shift for the state. He detailed that the state had been in a tight position where revenue had declined very quickly, and the state had been faced with the need to make some cuts. He elaborated that the legislature had made some severe cuts to the capital and operating budgets over the first few years. He reviewed that the PFD had first been vetoed by former Governor Bill Walker to 50 percent of the statutory formula and the legislature had passed the same amount the next year. He expounded that since that time, the legislature had selected $1,600 as number it believed was affordable in the past couple of years. He noted that the first couple of years the number had been $1,000 (50 percent of the formula at the time). Representative Wool discussed that the state had gone from an economy paid for with oil (oil had paid for the state budget for many years) and the Permanent Fund paid for the PFD. When oil had declined, the Permanent Fund had been tapped to pay for the state budget with a 5.25 percent structured draw (scheduled to drop to 5 percent in 2022). He continued to the third bullet point on slide 3 and stated that the bill [SB 26] passed by the Senate had been stripped down - it had not included a new PFD formula and had not removed the old PFD statute. He referenced cries for the legislature to follow the law and pay a full statutory PFD. He pointed out that the formula called for a $3,000 PFD, an amount that had never been paid. He noted a $1,200 supplemental heating check had been distributed during the Palin Administration [in 2008] when oil prices had been particularly high. The high oil prices had helped the state budget but hurt people trying to heat their homes. He elaborated that the state had worked to get money to residents in different ways, particularly in rural Alaska where heating oil was extremely expensive. He noted the cost had exceeded $4 per gallon in Interior Alaska and heating bills had skyrocketed. He added that the supplemental check had not been paid the following year. 2:10:51 PM Representative Wool continued to discuss slide 2. He remarked that people had been happy to receive the supplemental energy check and had understood when it had not been provided the following year. He reiterated that SB 26 did not delete the old [PFD} formula and did not include a new one. He highlighted that the existing formula was not being followed and legislators on both sides of the aisle and the executive branch were all calling for a new formula. Representative Wool moved to slide 3 read the first two bullet points: • The amount available for the general fund equals the total POMV draw less whatever is appropriated for Permanent Fund Dividends • For as long as the PFD remains subject to intense annual debate, the state cannot depend on a predictable revenue stream Representative Wool spoke to the need for revenue predictability. He noted that the past several weeks had thrown the issue into turmoil. He detailed that oil revenue had been steadily declining for decades; the oil price had fluctuated over time and production had been declining. He elaborated that the price had declined in 2014 and had recently dropped again. He discussed that the volatile revenue source could not be relied upon. He stated that the POMV was a much more stable revenue source. 2:12:04 PM Representative Wool moved to assumptions on slide 4 titled "There is no consensus on the size of the dividend...but large dividends equal large budget deficits." He highlighted that the governor's budget proposal of $4.6 billion was largely what the House had passed. The fall 2019 revenue forecast was $2 billion, but he believed it would be updated soon. He noted that the committee had been told that the forecast for the following year would be lower than originally thought and with recent events it would be considerably lower. Currently, there was no new revenue. There was a motor fuel tax and other small taxes and revenue sources in the works, but there was no broad- based income tax or sales tax. Representative Wool addressed possible options on slide 4. He began with the governor's plan to pay a $3,000 PFD, which would cost about $1.9 billion to fully implement. The second option he reviewed was a 50/50 plan that had been discussed over the past year, which would result in a $2,400 PFD and a deficit of $1.1 billion. The third option was a 67/33 plan, which was roughly what had been used in the past several years and would add to the deficit. The surplus plan was the last option on the slide. He detailed that at one point the surplus plan had resulted in a $700 PFD, which was no longer the case. He stated there were problems with the specific plan. 2:13:31 PM Representative Wool turned to slide 5 and detailed that his proposal in HB 300 was an allocation model that combined different ideas. He noted that he did not invent the model in its entirety. He believed the Anchorage mayor had mentioned doing a 45/45/10 POMV split going to the government, PFD, and communities, respectively. The proposal was a slight variation with prioritizing other items in addition to government and the PFD. He reviewed the proposal on slide 5: FY2021 POMV will be $3,095 million • 40% designated for K-12 education ($1,238 million, fully funds BSA) • 10% designated for the University of Alaska ($310 million; restores FY2019 funding level) • 10% designated for capital projects (doubles recent amounts) • 10% designated for a Community Dividend (expands the Community Assistance" Program and replaces current programs • The remaining 30% split 50/50 o 15% to the General Fund o 15% to Permanent Fund Dividends ($464 million, about $725 each) Representative Wool elaborated on slide 5. The first bullet point identified 40 percent for education (approximately $1.2 billion in FY 21, which was approximately what had been funded in the current year). The bill would set education funding as a percentage of the POMV in statute. Under the legislation, the University of Alaska would receive 10 percent of the POMV ($310 million in FY 21, which was close to the $302 million funded in FY 20). He stated that both education items were in the constitution and he believed they should be supported. He reasoned that putting the items in the formula guaranteed that the two entities would not have to wonder what funding they would receive on an annual basis. He stressed that the two items were very important in growing Alaska's future. He relayed that other states that had faced tough times had doubled down on their investment in education. He added that investing in education primary and higher education would keep young people in Alaska. Representative Wool continued to address the allocation of the POMV on slide 5. The bill would allocate 10 percent of the POMV draw to capital projects, which would double recent amounts to approximately $300 million. He expounded that in recent years capital budgets had been funded at the bare minimum of about $150 million to receive the federal match. He remarked that legislators repeatedly heard about the need for a capital budget to increase jobs for talented workers who were leaving the state for employment in other locations. Additionally, there was a need to build and maintain the state's infrastructure (e.g. roads and bridges). He highlighted that deferred maintenance was a major problem - the University alone had $1 billion in deferred maintenance. Representative Wool detailed that the remaining 30 percent of the POMV draw would be split 50/50 between the General Fund and the PFD. He recognized that the amount was lower than the 80/20 split proposed in the previous presentation [on HB 306]; however, the community dividend would offset a portion of the cut. 2:16:34 PM Representative Wool advanced to an illustration on slide 10 showing how funds would be allocated. He detailed that 40 percent of the POMV would go to education. He listed other items that would receive funding including the University, the community dividend, and 30 percent divided 50/50 between the General Fund and PFD. He shared that he had done different variations on ways to split the 30 percent (e.g. 20/10). He believed it was important to look at the community dividend portion. Representative Wool returned to slide 6 and stated that the problem with a surplus dividend was that no one knew what it would be and there was fear there would be more spending, which would make the PFD smaller. He stated that the need for a statutory PFD was agreed upon. He relayed that a 20 percent POMV (a 20/10 split instead of a 15/15 split) would result in a PFD of approximately $966 (similar to the 80/20 split in HB 306). Representative Wool moved to slide 7 and relayed that some form of the community dividend had been in place since 1969. He detailed that the formula had been changed several times. The current formula distributed $30 million per year through the Community Assistance Program. The bill would increase the amount to $300 million (10 percent of the total POMV draw). He noted there were variations he would explore in the analysis the following day that would change the number to 5 percent. The bill would increase the borough base from $300,000 to $1 million, the city base from $75,000 to $250,000, and the base for unincorporated communities from $25,000 to $83,333. He explained that the calculation multiplied the original base by thirty-three and one-third. The left over funding would be divided between all state residents to determine a per capita number (capped at $1,200 per capital in each community). 2:19:09 PM Representative Wool turned to slide 8 and reviewed benefits of a community dividend. He detailed that the community dividend would bring the funds closer to the individual. He explained that the money would not be distributed as a check in residents' pockets but would be money in the community. He believed that when the PFD had been created, former Governor Jay Hammond had expressed desire to take the money out of the state's hands and put it in the hands of the people because the people knew how to spend the money best. He believed it had worked for a while and people had been spending money from the dividend since its inception. Representative Wool explained that the bill would not eliminate a dividend; it would bring money into community coffers instead of state coffers. He highlighted various communities including Anchorage, Aniak, Fairbanks, and Bethel and explained that all communities would receive a substantial amount of money. He furthered that community members could solicit community leaders with their needs and priorities instead of people coming to the legislature with a list of needs. He stated the community leaders would be responsive and that community members knew what they needed best. Additionally, there would be a higher per person distribution for smaller communities. Representative Wool explained that if Anchorage received a base of $1 million, the per capita would be a little over $300 (in addition to the base). He elaborated that the amount would be slightly over $300 once the $1 million was factored in. He furthered that dividing $1 million by 300,000 residents resulted in a little over $3 per person, which would be added to the per capita of $300. Whereas, for smaller communities that would receive between $83,000 to $250,000, the money would be divided between residents in addition to the $300. He elaborated that for smaller communities it meant residents would receive $900 to $1,200 in a community dividend and a PFD of $700, which was close to $2,000 per person. Representative Wool clarified that the $1,200 per person went to the community, not to individuals' bank accounts. He explained that residents could benefit from the funding. For example, a community could install energy devices or buy fuel in bulk and sell it at a discount to community members. He reiterated that a community dividend would bring the money closer to communities and rural/smaller communities would receive more per capita. He highlighted that it somewhat offset the problem of cutting the PFD - cutting the PFD had an adverse impact on small communities that had smaller economies, less cash, and fewer jobs. He stated that the community dividend would provide more autonomy to communities and would give local residents a voice on how the money was spent. 2:22:10 PM Representative Wool turned to slide 9 and discussed budget impacts of the bill. He relayed that HB 300 would increase the current budget. He detailed that the bill would add to the capital budget, the University budget, and a substantial amount to community assistance. He highlighted areas that could potentially be decreased in the budget. He detailed that school bond debt could be passed to communities because communities would be receiving money [via a community dividend]. He noted he had a complete table of every community and had included an excerpt showing examples later in the presentation [slide 14]. Representative Wool continued to list potential decreases in the budget including miscellaneous municipal and university debt support and a municipal portion of the Public Employees' Retirement System (PERS)/Teachers' Retirement System (TRS). He relayed that he had not gone into any of the PERS/TRS calculations and he understood that communities strongly advocated against any change. He considered that if Anchorage received $90 million, perhaps it could afford to spend more on PERS/TRS. He identified community block grants as a budget item that could be addressed at the community level. He reasoned that communities knew what they needed best and would have the funds to provide things like opioid treatment and support homeless shelters. He pointed to public safety as another area that could be decreased because more money would be available for communities to provide their own public safety services. For example, communities could hire a village police officer. Representative Wool identified transportation maintenance as an area of the budget that could potentially be decreased. He referenced a budget amendment that had been offered in committee on the Quinhagak airport. The community could not afford to maintain its airport. He explained that under the legislation, Quinhagak would receive $450,000 per year. He explained that some of the money could be used by communities to maintain local rural airports. He highlighted that the state would save about $600 million if it did not pay a $1,600 PFD. 2:24:05 PM Representative Tilton asked how the bill accounted for the state's growing Department of Health and Social Services (DHSS) budget. She wondered how the DHSS budget would be administered and taken care of. Representative Wool agreed that DHSS reflected a growing portion of the budget. The remaining 15 percent of the POMV in addition to oil revenue would still be available for the other budget items. He had not allocated to DHSS separately. He agreed on its importance and relayed that it would be paid out of the budget as under the current process. Representative Tilton asked if the scenario would mean communities would play a bigger role in providing DHSS services. Representative Wool answered that he had not looked at the particular option, but it was not off the table. He stated it would depend on how the numbers panned out. He would not expect Medicaid funding to go through local communities, but there were other health costs including treatment centers and other. He noted that a sobering center had recently opened in Fairbanks. He relayed that some of the health and behavioral health items could be funded with the community dividend. 2:26:02 PM Vice-Chair Ortiz thanked the sponsor for bringing forward the proposal, which he believed contained merit. He believed the 40 percent going to education would act as a spending cap. He asked for verification the bill would not allocate any other funding sources to education other than the 40 percent [of the POMV draw]. Representative Wool answered that he was not thinking of the amount as a cap, but as a floor. He supposed that more funding could be provided, not less. He noted that the education community would know what the funding would be [under the 40 percent allocation]. He relayed that 40 percent was slightly less than the current funding; however, it would increase over time. He remarked that the POMV was a five-year rolling average; therefore, even if there was a bad month or year the impact would not be as strong (unless there were multiple bad years). He informed committee members that the upcoming graph would show a steady increase, which he believed would alleviate much of state educators' anxiety. He believed the same was true for some of the other entities. Representative Tilton spoke to the increase of community involvement under the bill. She asked how the funds going to communities and individuals would be administered. She explained that there were administrative fees associated with distributing community assistance funds. Representative Wool answered that the bill would be modeled on the existing community assistance program. The funds would be distributed in the same way as they were currently, but in amplified amounts. 2:28:55 PM Representative Knopp highlighted that all of the fiscal notes talked about designated general funds. He noted that the [state] constitution prohibited designated funds. He supposed they could probably refer to it as an appropriation if they used the method in the legislation. He reasoned that things would be fine if revenue grew over time but considered what would happen in the next five or six years if the markets were down and revenue dropped. He noted that the proposal did not include the DHSS budget, which was the largest budget item. He provided a scenario where there was an additional $2 billion in revenue outside of the POMV draw. He asked if there would be enough money left to cover the state's obligations to bond debt, other formula driven programs, and DHSS. He wondered if there would be willingness to live with the structure if the POMV draw declined in several years. He wondered how the proposal would be implemented and adhered to over time when it was not possible to bind the hands of future legislatures. Representative Wool replied that it was a valid point. He referenced the POMV draw implemented under SB 26 [Permanent Fund legislation passed in 2018] that the legislature had been adhering to for since its implementation [in 2018]. He hoped the legislature would continue adhering to the legislation. He remarked that the legislature was not currently adhering to the PFD formula. He would like to have HB 300 adhered to and would like to adhere to SB 26. He hoped the legislature would adhere to the bill. He supposed that if things got really bad, they could opt to not fund the capital budget. Representative Knopp considered that the bill dedicated the POMV draw, which he kind of liked. He was concerned about a time when the $3 billion started to drop and the legislature was no longer happy with funding the University was receiving. He reasoned the legislature would have to adjust the structure under the bill or to other funds. He considered what the trickledown effect would be. 2:31:55 PM Representative Wool stated that much of the bill was intended as a conversation starter. He had another model that he had not included in the presentation. He thought the structure proposed in the bill may be a tool to "get us on the road" that could perhaps be revisited in five years. He had another model that lowered the percentage of the POMV designated for the capital budget and the community dividend to 5 percent each to give more flexibility depending on the market. Representative Wool turned to a bar chart on slide 11 showing the PFD amount from FY 21 to FY 29 using 15 percent of the POMV draw. The PFD was calculated at $724 in FY 21 and almost $900 in FY 29. He moved to a chart on slide 12 showing education funding from FY 21 to FY 29 using 40 percent of the POMV draw. Education funding would be $1.2 billion in FY 21 and increase up to $1.5 billion over ten years. Capital projects (including the University) at 10 percent of the POMV draw were illustrated in a bar chart on slide 13, beginning at $309 million in FY 21 and increasing to $381 million by FY 29. 2:33:25 PM Representative Wool moved to proposed community dividends for various communities on slide 14. The slide included some larger communities with the $1 million base and other communities with the $250,000 and $83,000 bases. He used Anchorage as an example and pointed out that the current FY 20 assistance was $4.5 million, while under the bill the assistance would increase to $96 million or $328 per person. He considered that Anchorage could do a lot with the substantial sum annually, including work on the Port of Anchorage and payment towards bond debt reimbursement. He highlighted that the community dividend would be $362 per person in Juneau. He pointed to the small communities of Nulato and Gulkana that would hit the cap at $1,200 per capita. He detailed that St. Mary's would receive the $83,000 base, resulting in $765 per person. He explained that the structure would help with the rural/urban divide where a larger city would receive less per person and a smaller community would get more per person (not more total, but more per person). He reasoned that despite a proposed cut to the PFD, the local communities would benefit and have the ability to help their residents. Representative Wool shared there would be more modeling the following day. He reported that the fall forecast had been used, which would be updated in the near future. He noted there would be a model where the percentage of the POMV designated for the capital budget and the community dividend was lowered to 5 percent each. He elaborated that the change would bring capital funding to $150 million (closer to the current expenditure) and the community dividend would also receive $150 million, which was still a substantial amount of money. He stated that the funding would help offset a PFD cut in rural Alaska. Co-Chair Johnston asked the sponsor to model what the state should be paying in statute for school bond debt and capital program for rural villages the following day. Representative Wool agreed to provide the information. HB 300 was HEARD and HELD in committee for further consideration. Co-Chair Johnston reviewed the schedule for the rest of the week. She shared that public testimony on HB 300 and HB 306 would take place on Thursday afternoon.