HOUSE JOINT RESOLUTION NO. 1 Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 3:00:37 PM Co-Chair Merrick reported that the bill was last heard on September 10, 2021. She invited Representative Kreiss- Tompkins to begin his presentation. 3:00:56 PM REPRESENTATIVE JONATHAN KREISS-THOMPKINS, SPONSOR, thanked the committee and noted that he had a committee substitute for the committee to consider. 3:01:36 PM AT EASE 3:02:07 PM RECONVENED Co-Chair Foster MOVED to ADOPT proposed committee substitute for SSHJR 1, Work Draft 32-LS0167\N (Nauman, 5/15/22)(copy on file). There being NO OBJECTION, it was so ordered. Representative Kreiss-Tompkins indicated the most notable change was found in Section 2, page 2, line 1. He explained that the CS constitutionally guaranteed a permanent fund dividend (PFD) payment as provided by a formula set out in law. He added that whatever the statutory formula that was set in law would be constitutionally guaranteed. He announced that it was the major change in the bill. 3:03:34 PM JEFF STEPP, STAFF, REPRESENTATIVE JONATHAN KREISS-THOMPKINS, read the CS for Speaker Stutes for HJR 1 Explanation of changes: Version G to Version N: Section 1: Version G included references to two subsections, (b) and (c). Because a new subsection was added, there is now a reference in Section 1 to a third subsection, (d). Each of these subsections provides for the use of income from the Permanent Fund. Section 2: The major change to Version N is the addition of the language in (b)(1) which says the legislature "shall appropriate an amount from the permanent fund for dividend payments to residents of the State as provided by a formula set out in law." Subsection (b)(2) is new language that says each fiscal year the legislature "may appropriate from the permanent fund to the general fund." Subsection (c) of Version N, like subsection (b) of Version G, limits appropriations from the Permanent Fund to 5% of its average market value for the first five of the preceding six fiscal years. Subsection (d) is new language providing that subject to appropriation the permanent fund may be used to pay costs associated with investing and managing the Fund, which is consistent with current practice. Section 3: Language in Version G relating to "an amount equal to the unencumbered balance on November 8, 2022," was changed to "November 30" in the new version of the resolution. The November 8 date was added in a previous committee to provide protection from a withdrawal from the ERA between the date of the election and the deposit of the ERA into the permanent fund on June 30, 2023. In the new version of HJR 1, the date was changed from November 8 (i.e., the day of the 2022 general election) to November 30 because it is not possible for the Alaska Permanent Fund Corporation to compute an accurate balance of the ERA other than at the month-end when bank reconciliations are received with all of the underlying account data. Section 4 is unchanged from the prior version and says the constitutional amendments proposed by HJR 1 shall be on the ballot in the next general election (i.e., November 2022) 3:06:42 PM Representative Josephson indicated Representative Kreiss- Tompkins had become an expert on the subject through serving as Chair of the State Affairs Committee. He firmly believed in eliminating the Earnings Reserve Account (ERA) and having a single endowment in the corpus of the Permanent Fund (PF). However, he planned on offering an amendment deleting the language, "as provided by a formula set out in law because the formula was unaffordable and needed reform. He favored language comparable to the states general welfare clause or the public health clause that ambiguously provided the guarantees. He was unable to support the CS as written. 3:08:21 PM Representative Kreiss-Tompkins appreciated and respected Representative Josephsons perspective. He thought version N was a motion towards where he thought the median block of the 27 votes would be in the house and was the pragmatism behind the CS. 3:09:07 PM Representative Rasmussen would not be able to support the legislation without some reference to the statutory payment. She deduced that the legislature would retain the ability to change the payment statute. She asked whether she was correct. Representative Kreiss-Tompkins deferred the question to Legislative Legal Services but deemed that Representative Rasmussen was correct. 3:10:01 PM AT EASE 3:10:39 PM RECONVENED Co-Chair Merrick invited Ms. Nauman to comment 3:10:51 PM EMILY NAUMAN, DEPUTY DIRECTOR, LEGISLATIVE LEGAL SERVICES, ALASKA STATE LEGISLATURE (via teleconference), asked Representative Rasmussen to restate her question. Representative Rasmussen asked whether there was any provision in the CS prohibiting changing the current PFD formula in statute. Ms. Nauman responded that there was nothing that would prohibit the legislature to change the statute or formula. The resolution required a PFD payout based on the formula in statute but did not prohibit changing the statute at any time with a majority vote. Representative Rasmussen suggested that currently there were two conflicting statues surrounding the PFD and exemplified the current statutory formula and the Percent of Market Value (POMV) formula. She inquired how that would be reconciled with the resolution. She hypothesized the adoption of a new statutory formula without repealing the old formula. Ms. Nauman indicated the resolution did not contemplate what would happen if there were two conflicting formulas in law. She offered that it could potentially be a difficult issue that would result in litigation. She stated that even though there was math problem with the current formula for the dividend and the formula for the ERA account, they did not technically conflict if the resolution was enacted. Representative Carpenter asked if two formulas existed how would the legislature choose one. He deduced from Ms. Naumans answer that the courts would decide. Ms. Nauman responded in the affirmative that the situation would result in litigation and the court would determine which formula was intended to be followed. She furthered that rules of statutory construction existed that would guide a court in its decision. She related that courts were generally deferential to more recent statutes, but it was a complicated situation. Representative Carpenter had hoped for a simple answer. He referred to Section 4 which talked about placing the issue to a vote and wondered when the election would take place. Ms. Nauman indicated the resolution was structured so it would be on the ballot in the general election in November 2022. 3:15:58 PM Representative Wool referenced the language as provided by a formula set out in law. He stressed the difference between a formula and the formula. He inquired whether a formula referred to the only formula in current law. Ms. Nauman responded that the 21 percent of net income with the trailing 5-year average was the current dividend formula. She interpreted the bill to mean the current statutory formula. She pointed out that the current formula in law created a math problem with the current 5 percent POMV draw. 3:17:29 PM Representative Wool asked that if the PFD formula did not exceed 5 percent of the draw, whether it would eliminate the conflict. He deduced that if the 5 percent draw covered the PFD formula there would not be a conflict even if the legislature would need to find other ways to provide government services. He asked if he was correct. Ms. Nauman responded in the affirmative and stated that was the reason she referred to the issue as a math problem rather than a conflict. Representative Wool cited the Senates version of the operating budget and noted that the $5,500 PFD would exceed the POMV draw. He shared some of the same concerns as Representative Josephson that would override the Wielechowski Decision that ruled the PFD was subject to appropriation. He was concerned by the language mandating a payout without changing the formula first. He guessed that there might be a temptation, if the provision was enshrined in the constitution, not to change the formula. Ms. Nauman added that the bill contained the 5 percent POMV draw limit in Subsection (c) and the amount available for the dividend would be capped in the constitution by the 5 percent draw. 3:20:35 PM Representative Kreiss-Tompkins thought it would be helpful to contemplate the resolution along with a change to the formula, specifically a POMV-based formula so that everyone used the same numbers. The amount would always be a percentage of the POMV and there would never be a conflict. Politically, it was a very high bar to amend the constitution. He guaranteed that there were not enough votes without the formula being rewritten in a collaborative way between the four caucuses in the two bodies. He suggested that it was a lens to view the recent version of the CS. 3:22:14 PM Representative Wool understood Representative Kreiss- Tompkins's desire to change the formula based on the POMV percentage. He was concerned that the bill could easily be amended to change the provision that the PFD payout would be based on a formula set in statute. He wondered if Representative Kreiss-Tompkins shared his concern. Representative Kreiss-Tompkins voiced that he was not concerned. He was aware of 14 house members that shared Representative Wools policy beliefs. He deduced that if such an amendment were to pass, he was confident that the two/thirds support necessary for the underlying resolution would evaporate. He characterized it as a safety mechanism. 3:24:41 PM Representative LeBon agreed with rolling the ERA into the corpus of the fund and pointed out that traditional endowments worked in the same way. He worried about locking an expectation and a formula into the constitution. He wondered whether Representative Kreiss-Tompkins had considered separating the bill into two steps. The first step would be to consolidate the ERA into the corpus and then establish the POMV draw formula into the Constitution and abandon the other provisions in the bill. Representative Kreiss-Tompkins responded that the current version of HJR 1 prior to the adoption of the CS was the exact bill Representative LeBon described. However, the two/thirds support was lacking. He believed that it was a political question of where to find the support to resolve the long standing issues that kept repeating session after session. He effectively supported constitutionalizing the POMV and that was in the prior version of HJR 1. 3:26:56 PM Representative Josephson asked Ms. Nauman if SB 26 [- Approp Limit & Per Fund:Dividend;Earnings/ CHAPTER 16 SLA 18/06/13/2018] mentioned the PFD and if there was any concern that HJR 1 would stack a generous dividend on top of another dividend. Ms. Nauman replied that the provision created in SB 26 was AS 37 13.140. (b), which set out the POMV cap drawn from the PF each year. She added that SB 26 did not directly deal with the dividend or change the dividend formula. Another provision in the bill allowed any excess amount after the dividend was paid from the POMV draw to be deposited into the GF. She noted that the legacy formula was in AS 37.13.145 that specified 50 percent of 21 percent of the earnings. She did not believe that the bill could be interpreted to double the dividends. Representative Carpenter read from a portion of Section 2 of the resolution on page 2, line 2 and page 1 line 16, may appropriate from the permanent fund to the general fund versus shall appropriate an amount from the permanent fund for dividend payments. He wondered if there was a need to direct where the money was going to from a technical point of view. 3:30:03 PM Ms. Nauman responded that there were actually several questions in Representative Carpenters query. She answered whether the resolution needed to be specific regarding if money needed to be deposited into the dividend fund. She explained that the dividend fund was in statute and drafters avoided referring to state statute in the Constitution because statutes were more subject to change. Section 2, b (1) simply required that an amount shall be appropriated for a dividend to state residents and purposefully not specific to a dividend fund in the event that a dividend fund was one day eliminated. Section 2 (b) (2) referred to the general fund because it was the established state fund in existence. Once the money was transferred to the general fund it could be spent any way the legislature saw fit. The word may in Section 2 (b) (2) indicated that the legislature was not required to appropriate from the PF and deposit the money into the GF whereas the shall in Section 2 (b) (1) required the money to be appropriated in accordance with the formula. Representative Carpenter suggested that in the current CS if a scenario existed where the fund failed to grow enough to meet the 5 percent draw, then the legislature could decide to pay a dividend but not draw any more funds since the money would be drawn from the corpus of the fund. He noted that the SB 26 structure allowed the legislature to withdraw funding from the corpus thus, degrading the corpus. He deduced that the bill gave the legislature the wiggle room to pay the dividend but not appropriate any more funding into the GF for other purposes in order to avoid degrading the corpus. Under the scenario, the resolution mandating a payment of the dividend and with the 5 percent POMV draw going into the corpus, the legislature would be degrading the corpus to pay the dividend. He deemed that a number of bad investments earning years would create the scenario. He believed that the POMV 5 percent draw gave the legislature the ability to get into the corpus but also allowed the legislature to withhold appropriations for other purposes. 3:33:54 PM Representative Kreiss-Tompkins agreed that the word may was operative and did not obligate the legislature to spend the full amount of the 5 percent POMV draw. He clarified that the notion of degrading the real value of the fund was going down a rabbit hole. He thought in a rule-based framework that was in the constitution that in the long run the funds real value would be protected. Representative Carpenter was trying to draw a distinction. He stipulated that any year's particular 5 percent draw could be greater or less than that years earnings. He clarified that if the fund experienced a decline over a number of years and the decline was factored into the 5-year lookback, the draw could be from the corpus of the fund. He compared the scenario to the 21 percent of the years net earnings that was never deposited into the corpus if it went to zero earnings in a particular year there would be no dividend. 3:37:00 PM Representative Josephson directed his question to Ms. Nauman. He indicated that over the past 5 years he had received emails from citizens that wanted the draw limit exceeded and cited a previous statute from 1982. He wondered if under the resolution if someone wanted a dividend greater than 5 percent, they had a constitutional problem. Ms. Nauman replied that Representative Josephson was correct that the resolution constitutionalized the 5 percent draw cap, the legislature could not withdraw more than 5 percent of the average market value of the PF, and subject to cap the legislature would pay out the dividend based on law. However, nothing prevented the legislature from paying out an additional amount on top of the dividend under the formula in law. Co-Chair Foster indicated that some members had amendments and discussion ensued. 3:40:22 PM AT EASE 3:43:03 PM RECONVENED Co-Chair Foster asked that members submit their amendments as soon as possible. Representative Josephson indicated that the dividend payout in the current year according to statute would require $2.7 billion. He wondered whether the governors signature was necessary for a resolution and guessed that it was not required. He declared that he could not support the resolution as it was written without the formula being changed. He supported reforming the formula and that the 50/50 split was too dangerous and not conservative enough. He wondered whether the governor would veto a bill that changed the formula, while the resolution passed. Representative Kreiss-Tompkins confirmed that constitutional resolutions did not require the Governors signature and was forwarded to the voters of Alaska. Ultimately, coordination was necessary for any formula statute change. He suggested that if there was coordination and alignment, the PFD formula change bill would be sent to the governor for a signature with the caveat that only upon signature, the resolution would be voted on. He guessed that there might be other sequencing that could work via a coordinated effort. 3:46:05 PM Representative Josephson thought that a provision would need to be included in the resolution. Representative Kreiss-Tompkins answered in the negative. He deemed that if there was a corresponding PFD formula change the legislature could hold onto the resolution until after the governor signed a formula change bill and then allow the resolution to proceed to a final vote. He restated that the common denominator in the scenario was that coordination was necessary. Representative Josephson was concerned with the issue of contract law. The governor could state that he would sign the bill, but he could revoke his word. Representative Kreiss-Tompkins clarified that the governor could sign a formula change before the constitutional amendment resolution was voted on by the legislature. Representative Josephson asked if the process could be completed in the following 56 hours. Representative Kreiss- Tompkins believed it was implausible. 3:49:41 PM Co-Chair Foster reiterated amendments were due directly. Representative Kreiss-Tompkins relayed that he would be offering an amendment to insert the word "eligible" on page 2, line 1 before the word residents reading payments to eligible residents of the state. 3:50:43 PM Co-Chair Foster indicated he would be setting the resolution aside. HJR 1 was HEARD and HELD in committee for further consideration.