HOUSE BILL NO. 202 "An Act relating to the Alaska permanent fund; relating to dividends for state residents; relating to the use of certain state income; and providing for an effective date." 1:35:50 PM AT EASE 1:36:31 PM RECONVENED REPRESENTATIVE KELLY MERRICK, SPONSOR, introduced the legislation. She read from the following prepared remarks: Good afternoon, vice chair Ortiz, co-chair Foster, and members of the House Finance Committee. For the record, Representative Kelly Merrick, District 14 in Eagle River. Before the committee is House Bill 202, "An Act relating to the Alaska Permanent fund; relating to dividends for state residents; relating to certain state income." This is a conversation that is necessary as part of our budgeting process and long overdue in paying a sustainable dividend into the future. As this committee is very aware, the state has struggled to pay for both required services and the dividend using the 43-year-old formula. Since FY17, with the actions of former Governor Walker, the dividend has been an ad hoc draw. The 2016 legislature recognized this problem, and restructured our budget around the POMV framework that meets our constitutional obligations for services and provides a type of spending cap. Legislators have since had difficult decisions to make, as part of our responsibility to make our state fiscally sustainable in the long-term. There are three areas we can change to solve our financial problems: our spending, our revenues, and the PFD. The operating budget has been cut year after year, and while I still support a smaller budget, we have recognized that the big, easy, change-making cuts are gone. The capital budget has been cut by more than 90%. When we protect the POMV, we maintain fiscal stability and a low-tax environment for both families and businesses. Many don't support additional or increased taxes, and my district is one of them. That leaves the PFD. Mr. Vice Chair, and members of the committee, we have all heard our constituents say, "Follow the law, or change the law." This bill changes the law. While the foundation of the permanent fund is oil money and other resource development, the dividend is no longer based on Alaska's natural resources. Instead, it's based on investments by the Permanent Fund Corporation. This bill goes back to the intent of the dividend, and ties it directly to resource development, by setting aside a portion of the royalties received by the state for payout. Specifically, 30% of the royalties currently going to the General Fund would be paid to Alaskans before the general fund receives its cut of royalties outside the POMV. There's been growing recognition in the last few years that following the 1982 dividend statute does not make our state fiscally sustainable and requires violating the POMV spending cap. HB 202 addresses these problems by repealing the current formula and replacing it with one that is simpler and sustainable. 1:39:32 PM That's the big picture, and that's the tough decision, Mr. Co-chair. I don't think there's one person in this building who wants to hand out a small dividend, especially after the last year of business closures and unemployment. But putting Alaska on a stable financial track is just as important. With that, I'll have my staff, Tally Teal, go over the bill in more detail. Vice-Chair Ortiz acted as chair for part of the meeting. He noted that Representative LeBon and Representative Rasmussen had joined the meeting. 1:40:03 PM TALLY TEAL, STAFF, REPRESENTATIVE KELLY MERRICK, highlighted the two main sections of the bill beginning with Section 1. She explained that Section 1 removed language related to the income available for distribution of the Permanent Fund Dividend (PFD). She pointed to Section 7, which defined the new PFD formula in HB 202 that designated 30 percent of all mineral lease royalties received by the state during that fiscal year for distribution of dividends. She noted that the language "may appropriate" in Section 7 rather than shall was more suitable based on the 2018 Wielechowski case. She elucidated that the court decided that the dividend was subject to appropriation and the permissive language was more appropriate. Vice-Chair Ortiz noted that Representative Johnson and Representative Thompson had joined the meeting. 1:41:19 PM Ms. Teal referenced a handout depicting a flowchart in members' bill packets from Co-Chair Merrick's office titled "HB 202" (copy on file). She pointed to the statutory definition of natural resource income that was collectively referred to as royalties. The lines underneath the definition pointed to the distribution of the royalties. She elaborated that 25 percent of all royalty income would be deposited into the Permanent Fund (PF) corpus plus an additional 25 percent from new fields from oil leases signed after December 1, 1979, that also included the Percent of Market Value (POMV) payout. She emphasized that the formula reflected current law and was unchanged in HB 202. She turned to the second line that indicated 30 percent of all income went to dividends and the third line showed that the remainder was deposited into the General Fund (GF). She turned to a second handout from the Legislative Finance Division (LFD) showing a model [pertaining to HB 202] containing various graphs with projections (copy on file). She highlighted that on the bottom left chart the reserve balances continued to grow through FY 2030. The middle right graph showed that the value of the PF continued to grow into the future. She continued that the top right graph depicted a significantly smaller PFD under HB 202 than the current statutory formula but grew over time. The top left graph showed a sustainably balanced budget. She concluded that that the legislation would create a reasonable, sustainable, and stable fiscal environment. 1:43:48 PM Vice-Chair Ortiz OPENED public testimony. CLIFF GROH, SELF, ANCHORAGE (via teleconference), shared that he had been involved in creating the Permanent Fund Dividend in 1982. He believed that the state needed a comprehensive strategy to address the deep structural deficit that looked beyond the next fiscal year. The comprehensive plan should include a revised PFD formula, protection of the PFD from overspending, and new revenues to help pay for public services. He commended the sponsor for introducing legislation that recognized the need for a sustainable PFD formula. However, he believed the bill went too far balancing the budget on the backs of PFDs in order to avoid collecting taxes from high earning individuals that included non-residents. He referenced the upcoming special session called by the governor and hoped the legislature and governor engage in tradeoffs that produced a fair and sustainable dividend formula and legislation generating new revenues. Representative Rasmussen had heard many people mention that the [lower] dividend placed a burden on the backs of children. She asked about the level of funding for kindergarten through twelfth grade (K-12) education and felt that education spending was a direct benefit for children and families in the state. Mr. Groh answered that the state had a constitutional requirement to fund K-12 education. He indicated that LFD had shown that the K-12 budget had been cut over the last 8 years. He supported a strong and healthy K-12 education system and universal Pre- K. He was concerned that cutting the PFD to avoid taxes on high earners was not the correct approach. He advocated for a revised PFD formula and additional revenues. 1:48:28 PM QUEEN PARKER, SELF, STERLING (via teleconference), spoke against the bill. She wanted her statutory PFD. She agreed with all of those who opposed the bill. 1:49:37 PM TERRI LYONS, SELF, WASILLA (via teleconference), testified against the bill. She believed the legislature did not care and would not follow the law. She thought that the legislature looked after special interests first. She supported Governor Dunleavy's plan for a 50/50 split [between paying for government expenditures and the dividend]. 1:50:54 PM AT EASE 1:51:44 PM RECONVENED CAMMY TAYLOR, SELF, ANCHORAGE (via teleconference), testified in support of the bill and supported protecting the principal of the Permanent Fund. She shared that she was a resident of the state prior to the PFD program and while income tax was still collected. She believed that HB 202 was sustainable and would protect both the PF corpus and the POMV draw. She urged support for the bill. 1:53:06 PM CRIS EICHENLAUB, SELF, WASILLA (via teleconference), testified against the bill. He believed the state was grossly mismanaging its resources. He did not support digging into the pockets of the people to support more government. He stated that the PFD was last on the legislature's agenda and thought it should be first. He emphasized that the people of Alaska owned the resources. He felt that the POMV model would deplete the fund. He supported the earnings model that had worked for 42 years until the legislature had overspent on the budget. He opposed the bill. Representative Rasmussen asked if the royalty split was increased from 50 to 70 percent whether it would be agreeable. Mr. Eichenlaub replied that he supported the non-POMV model. He pondered what would happen if the fund had a 40 percent loss like in 2008. He opined that they [legislature] were putting all the state's eggs in one basket. He felt that a POMV model was unsustainable. 1:57:20 PM Representative Rasmussen shared many of the concerns. She believed a stronger spending cap was needed and she believed it should be in the constitution. She believed that the general feeling from Alaskans was that the PFD was their share of oil revenues. She believed that if the PFD was more tied to mineral royalties as in HB 202, it would incentivize more production. She asked Mr. Eichenlaub if he thought the bill would be more supported if the majority of exclusively the resource wealth was paid to Alaskans versus government. Mr. Eichenlaub stressed that the people of Alaska owned all the resources. He believed the people needed to be paid first. He spoke to the reason government could not be trusted. He thought that the legislature needed to show some constraint. 2:00:01 PM Representative Wool believed that the reason for a POMV model was because oil revenue dropped from $10 billion to under $1 billion. He reminded the testifier that the PF had averaged 8 percent in earnings over the last 40 years. He emphasized that Alaska was not a business it was a state. 2:00:45 PM Vice-Chair Ortiz noted that Representative Carpenter and Representative Edgmon joined the meeting. BERT HOUGHTALING, SELF, BIG LAKE (via teleconference), testified against the bill. He felt that statements like the legislature had cut the budget to the max was grossly misrepresentative of the situation. He believed that the states healthcare and education costs were the highest in the nation and would not be the case if more was cut. He believed in taxing the one percent instead of cutting the PFD. He opined that a statutory PFD would lift people out of poverty and that a lower PFD was a tax on children. 2:03:01 PM JEAN HOLT, SELF, PALMER (via teleconference), spoke against the bill. She believed the bill was wrong. She thought that the bill was being fast tracked and would eliminate Alaskans fair share of the states mineral wealth. She supported the governor's PFD bills and asked legislators to vote no in HB 202. 2:05:29 PM ALEX MCDONALD, SELF, FAIRBANKS (via teleconference), opposed the bill. He remarked that the state's population had not changed significantly, but the budget had increased. He believed that the legislature had mismanaged the state's money and the budget was bloated. He remarked that the people knew how to spend their money better than government. 2:07:07 PM CHARLES MCKEE, SELF, ANCHORAGE (via teleconference), spoke against the bill. He referenced a May 4, Alaska Daily News article about foster youth finding out their money was being pocketed by state agencies. He mentioned his personal lawsuit against the state and associated remarks that were unrelated to HB 202. 2:08:48 PM PHILLIP DELAND, SELF, ANCHORAGE (via teleconference), opposed the legislation. He shared that he had lived in Anchorage his whole life and had graduated from the University of Alaska. He believed that the PFD was established to compensate citizens for ceding their mineral rights to the state. He stated that the people did not have the rights to minerals on their own property. He stressed that the PFD was not the state's money but belonged to the people as a share of their mineral resources. He emphasized that the Permanent Fund did not belong to the legislature and its role was to manage the resource for the citizenry. He believed the law should be followed and wanted full PFD payouts. He felt that the recent lower PFDs reflected an unlawful capping of the dividend and was confiscation of money that belonged to Alaskans. Representative Rasmussen shared that she had also been born and raised in Anchorage. Currently the state was constitutionally mandated to pay 25 percent of oil revenues to the funds corpus. She asked if he would be more supportive of a higher percentage of royalties dedicated to dividends. Mr. DeLand did not support changing the PFD formula. He supported following the law and not caping the payout. He stated that he could really use that money. He did not believe it was the state's decision to confiscate funds from people's PFDs in recent years. He supported the way payments were currently working. He thought there was enough money in the Permanent Fund to pay out statutory dividend. He listed ways people used the PFD funds and were dependent on the dividend. 2:13:22 PM Representative Rasmussen agreed that a sustainable plan was needed. She shared that a member of the committee had proposed a full dividend during the budget process, but staff had pointed out that paying a full dividend without major cuts and taxes would drain the fund within a few years. The balance the committee was working towards ensured there would be a PFD for many generations and continued resource development. 2:14:45 PM AT EASE 2:14:59 PM RECONVENED Vice-Chair Ortiz CLOSED public testimony. Representative LeBon thanked Co-Chair Merrick for bringing forward an option for the committee and legislature to consider. He hoped that the legislature could reconcile its differences and acknowledged that a resolution would not please everyone. Representative Edgmon echoed the comments by Representative LeBon. He appreciated that Co-Chair Merrick had brought the issue forward to consider. He shared that he had been born and raised in Alaska. He wanted the PFD to be around forever. He stressed that 72 percent of the governor's budget was funded using PF earnings. He reported that Alaska was the only state in the nation and entity in Western Civilization funding its government through an endowment. He stressed the importance of protecting the endowment. 2:17:19 PM Representative Wool favored the bill and tying the PFD to the performance of oil. He pointed to the FY 22 to FY 28 projections of $333 million to $477 million that would pay a PFD and would not be deposited into the GF. He asked if there was enough surplus in the GF for the out years. He favored a bill like the one proposed if it was sustainable and if the state could absorb the reduction to the general fund. Co-Chair Merrick replied that Angela Rodell, Executive Director, Alaska Permanent Fund Corporation (APFC) had spoken to the issue - the royalties were a small amount in comparison to the remainder going to a fund with billions of dollars. She offered that what made the plan unique was that 100 percent of the POMV would be used for state services and would not be competing with the PFD. She thought that many people were having a hard time with the current situation where state services were competing for funding. She liked the plan because the PFD was directly tied to oil and mineral development in the state. She addressed some of the comments by callers. She emphasized that the plan paid the PFD first, before government services and separated it from the POMV draw. She addressed comments regarding Alaskans share of the mineral rights and emphasized that the bill utilized Alaska's share of the mineral rights. She shared that she was also born and raised in Alaska and had used her PFD money to go to college, which she otherwise could not afford. She wanted her kids to be able to have money to go to college with PFDs. She stressed that the plan was about a sustainable PFD. She voiced that the other high dollar dividend plans depleted the dividend in a few years. She reminded the committee that PFDs were sent to every resident and was not needs based. She stated that many times Alaskans who relied on their PFDs also needed state services. The state could not afford to provide for Alaskans in need and pay a huge dividend. HB 202 was HEARD and HELD in committee for further consideration. 2:21:37 PM RECESSED 4:01:47 PM RECONVENED