HJR 18-CONST AM: PERMANENT FUND; POMV;EARNINGS    3:05:29 PM CO-CHAIR FIELDS announced that the first order of business would be HOUSE JOINT RESOLUTION NO. 18, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and to appropriations from the Alaska permanent fund. 3:05:57 PM CO-CHAIR KREISS-TOMKINS, as prime sponsor of HJR 18, stated that he was available for questions. REPRESENTATIVE WOOL asked whether the Alaska State Constitution could be amended under the proposed resolution or whether a constitutional convention would be required to revise the constitution. CO-CHAIR KREISS-TOMKINS responded that there is limited case law on the question of amendment versus revision. He cited the Alaska Supreme Court decision Bess v. Ulmer [1999]. He stated that there are differing perspectives for "constitutionalizing" the permanent fund dividend (PFD) itself and whether doing so would constitute a revision as opposed to an amendment. He expressed his belief that the amendment proposed under HJR 18 is clearly just an amendment, because it would change the structure of the permanent fund, combine the earnings reserve fund (ERA) into the principle, and add a constitutional cap [on appropriations from the permanent fund]; it would not effectively add new content into the constitution that might be considered a revision. He suggested asking for an opinion from Legislative Legal Services. 3:08:11 PM EMILY NAUMAN, Deputy Director, Legislative Legal Services, Legislative Affairs Agency, responded that it was a difficult question to answer because there is only one case to depend on to parse out the difference between an amendment and a revision. She said that of the four resolutions to be considered by the committee, HJR 18 is the most innocuous; it proposes to make a small number of changes and would not have a sweeping effect on the balance of power between the three branches of government. She relayed that the best test for determining the difference is two-pronged: 1) looking at the number of changes, and 2) looking at the type of changes. She offered that Representative Kreiss-Tomkins's representation of the changes proposed in HJR 18 is accurate: the changes are minor quantitatively and do not tip the scale qualitatively as far as balance of power or other constitutional authority of the government. REPRESENTATIVE LEDOUX asked for a quick synopsis of HJR 18. CO-CHAIR KREISS-TOMKINS answered that HJR 18 would roll the ERA into the principle of the permanent fund, effectively creating an endowment governed with a hard cap - a draw of 5 percent of the average of its market value - for the first five of the preceding six fiscal years. REPRESENTATIVE LEDOUX asked whether that amount is less than what the state is currently drawing from the fund. CO-CHAIR KREISS-TOMKINS responded that under Senate Bill 26 [passed during the Thirtieth Alaska State Legislature, 2017- 2018, and signed into law 6/27/18], 5.25 percent of market value (POMV) will be drawn from the permanent fund for the current fiscal year [fiscal year 2018 (FY 18)] and the next two fiscal years [FY 19 and FY 20] to be available for appropriation, if the legislature follows statute; thereafter, the POMV would be reduced to 5 percent. He pointed out that after the next two fiscal years, HJR 18 would mirror what is already in law. REPRESENTATIVE LEDOUX asked if the motive for HJR 18 is to prevent the legislature from "getting its hands on money." CO-CHAIR KREISS-TOMKINS stated that the primary goal of HJR 18 is to protect the permanent fund forever; ensure that it cannot be spent down but will remain permanent. He described a secondary benefit: As the permanent fund is presently structured, even if the legislature is restrained in its spending, the ERA could bottom out in an extreme [stock] market downturn. This almost occurred in 2009. He expressed that the ERA could drop to $0, and money would not be available for dividends or public services. He maintained that HJR 18 would effectively prevent that from happening. 3:13:20 PM REPRESENTATIVE VANCE asked for confirmation that HJR would enshrine the POMV and supersede the statutory PFD formula. CO-CHAIR KREISS-TOMKINS answered, "That's incorrect." He stated that there would be no mathematical conflict between having a statutory POMV and a statutory PFD. He relayed that under HJR 18, there would be enough money for the legislature to draw a 5 percent POMV and pay out $3,000 dividends. REPRESENTATIVE VANCE expressed her understanding that historically the PFD was calculated from the 5-year average. Under HJR 18, a 5 percent POMV would be transferred to the general fund (GF), and from that draw the legislature would dispense PFD checks based on historical calculations. She referred to page 1, line 15, of HJR 18, which read in part, "Each fiscal year, the legislature may appropriate from the permanent fund to the general fund an amount that is not more than five percent..." and added that the POMV would then be transferred from the corpus to GF. Subsequently, the legislature could distribute a dividend based upon the statutory formula. 3:16:00 PM KEVIN MCGOWAN, Staff, Representative Jonathan Kreiss-Tomkins, on behalf of Representative Kreiss-Tomkins, prime sponsor of HJR 18, responded that HJR 18 would not affect how the legislature decides to allocate the 5 percent draw. CO-CHAIR KREISS-TOMKINS added that the answer to the question is, Yes, that money can be distributed for dividends. REPRESENTATIVE VANCE expressed that the bigger issue for the public is "where funding starts." She said, "We all agree that ... the 50-50 statutory formula, but where do you implement it into the math equation and come out with a different amount? And this puts it in after the POMV draw, whereas historically it was directly from the average of the earnings, and this, I think, would shift a lot of the conversation of what the public is trying to have in light of the governor's constitutional amendments as well." She continued by stating, "I'm not there yet. I know that the winds are ... blowing that way with SB 26, but I don't ... think I'm there yet because the public wants to have a fuller conversation on the possibility of PFD paybacks with the ERA, of how the dividend should be formulated in the future; and I agree that we need to look on the overall effects of the future, but I'm just not there with your amendment at this time." REPRESENTATIVE STORY expressed her understanding that [HJR 18] follows best practices for big endowments in setting their investment earnings for the year. CO-CHAIR KREISS-TOMKINS agreed that most endowments and most sovereign wealth funds are managed in the manner contemplated by HJR 18, with a POMV taken out every year and one combined fund for which the principle is protected. REPRESENTATIVE LEDOUX expressed her concern that under HJR 18, the PFD will take "second place"; it will be taken from the amount that is remaining. She referred to Senator Peter Micciche's comment in the Senate Finance Standing Committee meeting that a $3,000 PFD would probably exceed the limits of Senate Bill 26. She said that he pointed out that legislators would need to decide which of the statutes to violate. She concluded that in the scenario under HJR 18, the PFD would "be the stepchild." CO-CHAIR FIELDS offered that $3 billion is enough to pay out a statutory dividend. It is the decision of the legislature whether to do that, raise revenue to pay the dividend and maintain government services, or pay out a massive dividend and annihilate government services within the POMV framework. All of these are options. 3:20:56 PM CO-CHAIR FIELDS asked for confirmation that since the current statutory formula was put in place, the permanent fund has grown steadily over time considering bull and bear markets. 3:21:20 PM PAULYN SWANSON, Communications Manager, Alaska Permanent Fund Corporation (APFC), Department of Revenue (DOR), responded that the permanent fund has certainly grown a great deal over time since inception - from the initial deposit of $734,000 to the $64.5 billion as of March 31 [2019]. CO-CHAIR FIELDS asked whether nominal and real value PFDs have generally grown over time. MS. SWANSON offered that DOR could better answer the question regarding the PFD. She stated that up until the past few years, the PFD was based on the statutory net income from the fund averaged over years. She relayed that HJR 18 speaks to the amount of money that could be spent off the fund on an annual basis; it does not speak to the dividend. CO-CHAIR FIELDS asked for confirmation that nothing in the constitutional amendment under HJR 18 would limit the dividend or nullify the current statute with respect to disbursement of the dividend. MS. SWANSON confirmed that nothing within the proposed resolution speaks to the dividend. REPRESENTATIVE WOOL maintained that the proposed resolution specifies the amount of revenue that may be taken from the fund and does not address the statutory formula for the PFD at all. MS. SWANSON answered, "That's absolutely correct." REPRESENTATIVE WOOL expressed his understanding that the ERA is the account used to pay the PFD via GF; in other words, it is the source of expendable cash in the permanent fund. MS. SWANSON stated that with the implementation of Senate Bill 26, FY 19 was the first year that funds were distributed directly to GF as a revenue source. Up until then, the ERA had been used historically to pay dividends, pay for APFC operations and management, and to support the Department of Law (DOL) and Department of Natural Resources (DNR) regarding the work they do to bring in royalties. REPRESENTATIVE WOOL relayed that the ERA was used to pay the PFD checks. He asked what the changes would be under Senate Bill 26. MS. SWANSON answered that with Senate Bill 26 in place, there is a statutory rule limiting the draw to 5.25 percent for FY 19, FY 20, and FY 21; in FY 22, the draw goes to 5 percent. She stated that it is the responsibility of the legislature to appropriate the money from the ERA to GF following the statutory rule; further distribution of that money is the policy call of the legislature. REPRESENTATIVE WOOL stated that prior to Senate Bill 26, funds needed for the PFD checks were taken directly from the ERA. MS. SWANSON said, "Historically ... that is correct." REPRESENTATIVE WOOL offered that now the 5.25 percent draw goes to GF, funds for the PFD checks come from GF. MS. SWANSON answered yes, the current construct of the FY 20 budget is that the 5.25 percent goes directly to GF and is further distributed to the PFD fund from GF. CO-CHAIR FIELDS recalled that $1.9 billion would be needed to pay a $3,000 PFD in the current year. MS. SWANSON concurred. 3:26:33 PM CO-CHAIR FIELDS relayed that under HJR 18, a [5.25] percent draw would be $3 billion - vastly more than enough to pay a $3,000 PFD; HJR 18 would not limit the size of the PFD; the size of the PFD is a legislative decision. REPRESENTATIVE WOOL asked whether APFC has a position on the concept behind what HJR 18 attempts to accomplish. MS. SWANSON responded that the APFC board of trustees has no position on this resolution specifically. Historically the board has supported the POMV and classic endowment concepts. Resolution 1804, passed by the board, speaks to the importance of having a rules-based structure regarding withdrawals from the fund, and HJR 18 reflects a rules-based structure regarding withdrawals from the fund for ongoing sustainability. REPRESENTATIVE VANCE referred to testimony that ERA funds were used by DNR to collect royalties. She asked what mechanism is in place under Senate Bill 26 to support DNR. MS. SWANSON answered that the funds for DNR is an appropriation in the operating budget. Within the operating budget, the ERA currently funds the APFC operating budget for the investment and management of the permanent fund. There is a specific appropriation to DNR regarding royalty work. She stated that combined, DOL and DNR receive about $8 million to support their activities in generating royalties. 3:29:10 PM REPRESENTATIVE SHAW expressed that HJR 18 appears to put all the ERA into the principle of the fund. He cited page 1, line 10, of HJR 18, which read in part, "Except as provided in (b) and (c) of this section, all income...." He said that the rationale given for HB 31 was that there needed to be a "cushion" in the ERA. He asked if HJR 18 would provide a cushion or is a cushion not needed. CO-CHAIR KREISS-TOMKINS answered that HB 31 works within the current structure of the permanent fund in the constitution, whereas HJR 18 would change that very structure. He said that in the current structure, as long as there is an ERA - which is subject to volatility with markets or the spending of the legislature - it is advisable to have a "shock-absorber" - some liquidity - in the ERA; if the ERA goes to zero, there is no means to pay dividends or for public services. Under HJR 18, combining the ERA into the principle and operating under the POMV structure eliminates the need for liquidity in the ERA. He added that HJR 18 would solve the problem at its root. REPRESENTATIVE SHAW commented that part of the hardship in the committee and in the public view is that the issues have become so confusing, and there are so many bills, resolutions, and amendments dealing with the permanent fund, the PFD, and the earnings that it is difficult to "get a bite on anything in particular." He maintained that Representative Kreiss-Tomkins's explanation confused him more. He said that he sees a conflict between HB 31 and HJR 18, yet he doesn't know if there is one. He mentioned the difficulty of messaging these concepts to his constituents. CO-CHAIR FIELDS gave an example as an explanation: HJR 18 passes. Alaska loses $5-10 billion from the fund due to a bad market year. Because the ERA and the principle are combined and Alaska is using a POMV draw, there would still be adequate money to pay out PFDs from that one integrated fund, just as there would be if the ERA money was adequate. He maintained that under HJR 18, the funds for payouts are "safer," because the money would be taken from a larger fund, which constitutes less risk in a terrible market; in a terrible market the likelihood of the ERA being drawn down is greater. CO-CHAIR KREISS-TOMKINS added that currently the permanent fund has two accounts: the principle and the ERA. Since the ERA was created, it was necessary to have liquidity in the ERA. Under HJR 18, the two would be combined. REPRESENTATIVE SHAW offered that HJR 18 provides no cushion, since the resolution states that all income [from the permanent fund shall be retained in the GF]. CO-CHAIR FIELDS responded that HJR 18 provides the largest cushion possible for paying out dividends and for services within the context of the POMV. 3:33:46 PM REPRESENTATIVE WOOL referred to testimony that the legislature has a mixed history on following its own rules. He opined that these statements bother him. There are some examples of that being true: the legislature not following the 90-day session and the PFD formula being ignored during the past three years. He asked, "Do you really think that we're going to just start ... digging through the crates and pulling cash out because we need it above and beyond the 5.25 percent? Is that your fear?" CO-CHAIR KREISS-TOMKINS replied that it is impossible to know; however, there is enough probability or risk that it could happen and, therefore, warrants fully protecting the permanent fund. He stated that in this first year of the rules-based framework for the permanent fund, one legislative body is potentially on the verge of passing a budget that exceeds the 5.25 percent draw. REPRESENTATIVE WOOL asked what the state would do in the following scenario: the oil revenue goes to almost nothing for any number of reasons; the stock market and economy are booming; the permanent fund is growing; the expense of operating the state is substantial; however, Alaska is locked into the 5 percent draw in the constitution. CO-CHAIR KREISS-TOMKINS replied that the State of Alaska would have to do what the other 49 states in the country do, which is cut the budget, raise revenues, or execute some balance of both. 3:37:22 PM REPRESENTATIVE LEDOUX offered that the corpus of the permanent fund is already protected without the proposed amendment to the constitution; the legislature cannot access the corpus without a vote of the people. She suggested that HJR 18 relates to protecting the ERA - a subaccount of the permanent fund. CO-CHAIR KREISS-TOMKINS answered that her question gets to the "heart of the matter," which is, "Do we as the legislature - do Alaskans - consider the ERA part of the permanent fund ... as in something that should be protected forever, managed for the benefit of future generations, or is this ... a pot of cash akin to the statutory budget reserve, the constitutional budget reserve, that's available to be spent down because we want to pay down unfunded liability, we want to build a bridge, we want to have an amazing foster care system, whatever?" He maintained that the premise of HJR 18 is that the ERA is part of the permanent fund - which is supported by history and by law - and should be likewise protected and managed. CO-CHAIR FIELDS opened public testimony on HJR 18. 3:39:15 PM JUSTIN PARISH testified that he supports the resolution and believes that it will provide protection for the real value of the [permanent] fund. Currently, protection for only the corpus does not protect the real value of the corpus; if the earnings are spent down, because of inflation or market losses, the corpus would be steadily depleted year after year. He maintained that only a constitutional amendment such as under HJR 18, which follows best practices of fund management, would be enough to protect the fund into the future. 3:40:36 PM LYNN WILLIS testified that he is opposed to amending the constitution, because it will constrain the legislature in doing its job regarding stewardship of fiscal resources. He maintained that the legislature needs every option available to solve the budget crisis and expressed that he doesn't want the public blamed if the state cannot pay out a massive PFD or levy taxes. He stated that he opposes the constitutional amendment approach and supports addressing changes during the constitutional convention. 3:41:58 PM LAURA BONNER testified that the resolution is confusing. She said that she supports protecting the permanent fund. She stated that she supports eliminating the ERA and putting the POMV draw into the GF. 3:43:32 PM JAMES SQUYRES testified that he supports the original calculation of the PFD, and HJR 18 would remove that calculation. He opined that eliminating the ERA and the statutory income would ultimately reduce the PFD on which Alaskans depend and eliminate the PFD payback. He said Alaskans have ceased to trust the legislature's actions regarding the PFD. He maintained that HJR 18 would obstruct [Governor Michael J. Dunleavy's] agenda and hearten Senate Bill 26. 3:44:51 PM BERT HOUGHTALING testified that under HJR 18, the legislature would continue to use the permanent fund and ERA to fund government expenses and continue its theft [of the PFD money]. He maintained that no resolution is worth passing if it doesn't seek to amend the constitution to protect the PFD in its original formula. 3:46:25 PM INGRID PETERSON, Fox Creek Canyon Landowners Association, testified that the association objects to the lack of information and short timeline for testimony on HJR 18. She opined that more explanation and public input is needed when suggesting changes to the Alaska State Constitution. 3:49:16 PM PAM GOODE testified that she and many others did not support Senate Bill 26; she does not support the POMV philosophy; and she does not support putting the ERA into the permanent fund. She stated that since the voters would have to approve the constitutional amendment under HJR 18, they would need to understand not only the original practices but the proposed practices, which would be a challenge. She maintained that the problem is not the permanent fund and the ERA but overspending by legislators. She offered that only the inflation-proofing of the fund needs attention. 3:52:09 PM TRISHA PEARSON testified that she has many questions about the proposed resolution and expressed her belief that more education of the public is needed before passing a resolution calling for a constitutional amendment. 3:53:33 PM VIKKI JO KENNEDY testified that she opposes the passage of any confusing resolutions for constitutional amendments. 3:54:59 PM ADAM HYKES testified that it would be an accounting blunder to think that Alaska can spend down the permanent fund to fix a spending problem. He expressed that "Alaska voted loud and clear on the PFD issue," and members lost their seats in the legislature because of it. He stated, "We want our PFD back, and it was taken from us, and there is no trust between us and government until that is paid back and trust is restored." 3:56:08 PM LARRY SLONE testified that he supports locking up the ERA into the permanent fund and, thereby, making it inaccessible to the legislature. It would prevent the legislature from depleting the permanent fund; a 5 percent POMV draw would still provide a reasonable dividend. If the government needs more money, it would just have to go through the process of taxing individual citizens, and consequently it would be more difficult for the legislature to waste money. 3:57:25 PM GARY MCDONALD expressed that the legislators should leave the permanent fund alone and "give us what we deserve." 3:58:07 PM CO-CHAIR FIELDS closed public testimony on HJR 18. He explained that HJR 18 would not change the statute with respect to disbursement of PFDs; it does not limit or change the legislature's ability to raise revenue; it does protect the value of the permanent fund and, therefore, the ability to pay out PFDs indefinitely into the future by preventing the liquidation of a significant part of the permanent fund. REPRESENTATIVE STORY commented that each year every $1 billion invested yields Alaska about $100 million; therefore, being able to build and preserve the ERA along with the corpus would keep a long-term permanent fund and ultimately the statutory formula PFD. CO-CHAIR FIELDS added that draining the permanent fund locks Alaska into a death spiral in which the state could only pay out smaller and smaller PFDs over time. [HJR 18 was held over.]