HB 31-APPROP: EARNINGS RESERVE TO PERM FUND  4:26:06 PM CO-CHAIR FIELDS announced that the final order of business would be HOUSE BILL NO. 31, "An Act making a special appropriation to the Alaska permanent fund; and providing for an effective date." 4:26:08 PM CO-CHAIR KREISS-TOMKINS, as prime sponsor, relayed that HB 31 is identical to an amendment to the operating budget [introduced during the Thirtieth Alaska State Legislature, 2017-2018] with ten co-sponsors from both caucuses and both political parties; however, it was never put to a vote on the House floor. He maintained that the impetus for the amendment is greater currently than last year. CO-CHAIR KREISS-TOMKINS relayed that he joined the Alaska State Legislature in 2013; that year was the first in some time that Alaska had a budget deficit. In the ensuing years, the state had a multibillion-dollar deficit, cut spending slightly, did not raise revenues, and spent down $14 billion in savings. He referred to a PowerPoint presentation on HB 31, slide 1, entitled "If the deficits continue, the CBR is most likely gone." The chart on the slide demonstrates by bar graph the decline in the funds over the years, 2014-2019. He expressed that these actions have been immensely frustrating to him, especially considering the earning potential of the $14 billion. He maintained that regardless of one's views on permanent fund dividends (PFD) payments and level of state services, Alaska would be in a better position if it had invested that amount. CO-CHAIR KREISS-TOMKINS stated that there is still a budget deficit. There are many competing visions for Alaska regarding PFD payments and public services. The impetus of HB 31 is to ensure that Alaska's intergenerational financial assets and the permanent fund itself are protected from the "tugging and pulling" of the political priorities for spending. He expressed his grave concern that the legislature, which has spent $14 billion in the past 4-5 years, is equally capable of spending down some fraction of the $17 billion in the Earnings Reserve Account (ERA) over the coming years, if the political climate was conducive to doing so. He maintained that he is cautiously optimistic that this would not happen during the current legislative session; however, he is concerned about it happening in future years. He offered that spending the account down in an unsustainable manner, that is, spending faster than the permanent fund is generating earnings, is the most perilous and concerning outcome as far as bankrupting the future of the state. 4:30:53 PM KEVIN MCGOWAN, Staff, Representative Jonathan Kreiss-Tomkins, Alaska State Legislature, on behalf of Representative Kreiss- Tomkins, prime sponsor of HB 31, referred to slide 2 of the PowerPoint presentation, entitled "Permanent Fund Account Structure," which illustrates the two accounts of the permanent fund - the Principal and the ERA. The Principal is a constitutionally established and permanently protected savings account that can never be spent. The ERA is available for appropriation by a simple majority of the legislature. MR. MCGOWAN moved on to slide 3, to discuss the calculation used last year [2018] in determining the amount needed in the ERA to maintain the percent of market value (POMV) annual draws. He said that under Senate Bill 26 [passed during the Thirtieth Alaska State Legislature, 2017-2018] the formula used required the ERA to be four times the POMV draw to maintain the ERA. A POMV draw of $2.5 billion would require an ERA of $10 billion. This amount would need to remain in the account in order to make PFD payments or state service appropriations. REPRESENTATIVE KREISS-TOMKINS explained that when the operating budget was discussed in 2018, the minimum sufficient balance of the ERA was viewed as a "shock absorber," because the ERA is the account from which all PFD payments are made and - with the passage of Senate Bill 26 - from which payments for some state services are made. The ERA is where market risk is consolidated, and unrealized earnings are represented. If there is a severe market downturn or a [calamitous] geopolitical event, the ERA could contract rapidly. Even though $2.5 billion may be all that is needed annually, having four times more provides the buffer to absorb financial shocks. REPRESENTATIVE LEDOUX asked what the benefit of HB 31 would be as opposed to the constitutional amendment that has been proposed creating a spending cap. REPRESENTATIVE KREISS-TOMKINS replied that although the two are interrelated, the proposal under HB 31 - moving funds from the ERA into the Principal - does not mention how much or how little spending is appropriate. REPRESENTATIVE LEDOUX maintained that, in effect, it does limit the amount which can be expended. REPRESENTATIVE KREISS-TOMKINS agreed. He said that if there was a constitutional spending cap in place - like what [Governor Michael J. Dunleavy] has proposed or the Senate of the Thirtieth Alaska State Legislature proposed, there would be certain enhanced levels created for the permanent fund. He said that if the spending cap were in excess of state revenues, "it would help but it wouldn't entirely solve it depending on what the spending cap ultimately was." He added that there is another political consideration: the spending cap may not pass in the legislature; passing a spending cap constitutional amendment requires a high threshold - two-thirds of each body. He believes that there are more permanent fixes for protecting the state's assets, but currently, there is a great deal of money in the ERA that could be liquidated [by the legislature]. The proposed legislation offers a short-term ability to put some money into savings. 4:36:47 PM REPRESENTATIVE STORY opined that HB 31 appears to provide inflation proofing. She asked what the state is currently doing to inflation proof the fund and what the state's history is on inflation proofing. REPRESENTATIVE KREISS-TOMKINS said that currently inflation proofing under the statutory formula is about $1 billion. He stated that the amount of money that HB 31 would transfer - $5.5 billion - is like an inflation proofing amount. He mentioned that under present market conditions, the transfer could be as large as $7 billion; the ERA amount this year is larger than last year when a transfer was considered under the operating budget. He maintained that the amount that would be transferred under HB 31 is very similar in principle to inflation proofing; however, because the legislature has failed to inflation proof in a couple previous years, because there is a bull market, and because the ERA has rapidly grown, even inflation proofing like has been done in the past would not move the excess money from the ERA. 4:38:37 PM REPRESENTATIVE VANCE relayed that Representative Kreiss- Tomkins's presentation sounds like he supports protecting the states funds from excessive spending by balancing the budget. She mentioned that the legislature has rapidly spent $14 billion; however, there continues to be spending, and one way to avoid that is to reduce spending. She expressed her concern that the intent of HB 31 - moving funds from the ERA - is to remove it from the conversation regarding restoring the PFD payments of the past few years. She maintained that the 2018 elections demonstrate that Alaskans want to be part of that conversation. She stated that her constituents support having a conversation about restoring the PFD payments that were not fully paid, and not moving the excess ERA money into the [Principal]. She maintained that her constituents have not had the opportunity to have this conversation. REPRESENTATIVE KREISS-TOMKINS responded that he has a deep cynicism about legislature's ability to restrain its spending. He suggested that he and Representative Vance have different perspectives about the solution. He mentioned that his first two years in office were under a Republican administration and Republican majorities in both chambers of the legislature, and the savings were liquidated. He stated that his solution would have been to cut spending a little and raise revenues; there was a small cut in spending and no new revenues. He continued by saying that in subsequent years there was mixed political control. He opined that to some extent political control does not matter; the state has not been able to sustainably balance its budget. He maintained that the state is closer to balancing its budget than ever before; however, until the state can balance its budget, there is a lot of risk with large amounts of money available for appropriation, especially when only a simple majority vote of 21-11 is required. CO-CHAIR KREISS-TOMKINS offered that regarding the backpay of PFDs, it never occurred to him before Representative Vance asked the question that HB 31 would be considered a way to preempt the ability to do that. He maintained that the proposal [under HB 31] was first introduced last year before there was public dialogue on backpay of the PFDs. He added that there were concerns voiced during the previous administration that the funds would be spent down to pay for the natural gas pipeline; another time it could be another project that people supported. He said that such proposals are concerning; for example, building a giant bridge from Baranof Island to Admiralty Island would be a multi-billion-dollar project and a tremendous waste of state money. He asserted that Alaska should spend within its means and have a balanced budget; having a great deal of available funds presents risks. 4:43:19 PM REPRESENTATIVE WOOL relayed that the argument last year is different from the argument this year. In past years the state drafted a budget, didn't have the revenue to pay for the budget, and took the money out of the Constitutional Budget Reserve Fund (CBRF). The CBRF represented a liquid savings account that was easy to access. He said that currently the state has a structured draw out of the entirety of the permanent fund; therefore, the revenue - from the draw and the other revenues, such as oil taxes - could pay for the budget. He suggested that the intent of HB 31 is to protect against the draw on the ERA outside of the structure. REPRESENTATIVE KREISS-TOMKINS answered, "Effectively, yes." He said that if the legislature had forever abided by the framework of Senate Bill 26 and never drew from the Permanent Fund greater than 5 percent of the permanent fund's market value, there would effectively be no risk of unsustainably spending down the real fund of the Permanent Fund. It is possible that should political or economic conditions shift, there may be a situation in which the legislature would want to draw greater than a sustainable amount from the Permanent Fund as set forth in Senate Bill 26, regardless of how the money is spent. He maintained that HB 31 would control for that risk. REPRESENTATIVE LEDOUX asked if HB 31 would have the effect of avoiding a three-quarter vote [of the legislature] to draw money from the CBR. She suggested that if the ERA were below a certain amount, a three-quarter vote would not be needed to draw from the CBR. 4:47:21 PM ANGELA RODELL, Chief Executive Officer, Alaska Permanent Fund Corporation (APFC), answered that traditionally there has been language associated with the CBR that if the level of total savings of the state reaches a certain threshold then the need to repay the CBR is negated. She added that she did not know what the threshold was but currently there is a repayment obligation for the CBR for the current balance. REPRESENTATIVE LEDOUX stated that her concern was not with the necessity of repaying the CBR; her recollection is that if the amount of money in ERA is less than a certain amount, than the requirement for a three-quarter vote to take money out of the CBR would be negated. 4:49:14 PM ALEXI PAINTER, Fiscal Analyst, Legislative Finance Division, stated that under the constitution, the CBR can be accessed by a simple majority vote, if the amount available for appropriation is less than the previous year's budget. He said that the courts have interpreted that to include the ERA as the amount available for appropriation; it also includes that current year's revenue. For fiscal year 2020 (FY 20), the current year's revenue is about $2.5 billion in traditional revenue and $2.7 billion from the permanent fund. In order to access the CBR with a simple majority vote, the balance in the ERA would have to be under $1 billion, requiring a $17.5 billion transfer; currently the amount is far too small for that to occur. MS. RODELL, in answer to Representative Story, said that the original legislation 40 years ago included inflation proofing as a second draw after the draw for PFD payments. The [inflation proofing] calculation is based on consumer price index (CPI). Each year there has been an appropriation for inflation proofing up until 2010; that year the appropriation was zero because inflation was zero. The calculation is based on the most recent calendar year's CPI and is calculated off the balance in the Principal of the [permanent fund] account only; therefore, it is not calculated on the total of the Principal plus the ERA. She said that in FY 16, FY 17, and FY 18, the decision was made to not appropriate for inflation in any of those three years; that amount would have totaled $1.4 billion had those appropriations occurred. An appropriation was included in the FY 19 budget; that money will be moved at the conclusion of the fiscal year once Alaska has received all the royalties into the Principal and APFC is able to do the calculation. She added that this usually occurs in July of every year; the amount is estimated to be about $942 million. She continued by saying that in the FY 20 budget proposal, there is an estimated inflation proofing calculation of about $982 million. CO-CHAIR FIELDS asked for the amount each $1 billion earns Alaska on average per year; that is, what earning opportunity is lost for each $1 billion that Alaska spends down. MS. RODELL replied that since inception 40 years ago, the earning rate has been 8.9 percent; rounded up to 9 percent, the amount lost would be about $90 million. CO-CHAIR FIELDS stated that HB 31 would be held over.