HB4009-PERMANENT FUND DIVIDEND; ROYALTIES  10:41:03 AM CHAIR SPOHNHOLZ announced that the next order of business would be HOUSE BILL NO. 4009, "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." 10:41:59 AM REP HOPKINS, Alaska State Legislature, prime sponsor, introduced HB 4009. He paraphrased the sponsor statement [included in the committee packet], which read as follows [original punctuation provided]: Alaskans are beneficiaries of the foresight of our state's founders, who ensured that state-owned resources would be managed for the maximum benefit of all Alaskans (Article VIII Section 2). Unique among all states, Alaska's constitution creates communal ownership of state resources what former Governor Wally Hickel called "the Owner State." Following statehood and the discovery of Alaska's North Slope oil reserves, Alaska's political leaders and voters created the Alaska Permanent Fund to, in the words of Governor Hammond "transform oil wells pumping oil for a finite period into money wells pumping money for infinity." Since 1982, Alaskans have received dividend payments from the State of Alaska. With a stepped four-year approach, HB 4009 crafts a new dividend formula, where Permanent Fund earnings AND mineral revenues from oil and gas are used to calculate dividend payments. Starting in FY 2023, 35 percent of Oil and Gas Royalties, Rents and Bonuses (OGRRB) would be combined with 10 percent of the total Percent of Market Value (POMV) draw for the payment of dividends. The amount of the state's OGRRB and POMV contribution to the dividend fund would grow by five percent annually until FY 2026, when the final formula of 50 percent of OGRRB and 25% of the POMV takes effect. HB 4009 creates a new partnership and vision for Alaska's dividend program. By combining the earnings of the Permanent Fund with a percentage of Alaska's oil and gas mineral revenues, Alaskans will benefit from a diversified dividend revenue stream, shielding the dividend from market downturns and commodity price fluctuations. Additionally, Alaskans will see a direct benefit from the continued development of resources on state and federal land, renewing the founders' vision of an owner state. 10:46:03 AM JOE HARDENBROOK, Staff, Representative Grier Hopkins, Alaska State Legislature, on behalf of Representative Hopkins, prime sponsor, provided a brief sectional analysis of HB 4009. Section 1 deleted the old PFD formula. Section 2 created a new formula for the fund's earning appropriations for the dividend program. Sections 3-5 contained conforming changes. Section 6 excluded the Alaska Mental Health Trust Authority from the calculation of the fund's market value. Sections 7-9 contained conforming changes. Section 10 provided the new formula for oil and gas royalty revenue and bonus appropriations to fund the dividend program. Section 11 was the effective date. 10:48:15 AM MR. HARDENBROOK directed attention to a PowerPoint presentation, titled "HB 4009; A New Vision for Alaska Dividends [hard copy included in the committee packet]. He began on slide 2, indicating that the proposed legislation would grow and diversify the revenue streams for Alaska's dividends. Rather than solely relying on market returns from the Alaska Permanent Fund, future dividends would include a percentage of state royalties, rents, and bonuses on the development of its oil and gas resources. He turned to slide 3, which read as follows [original punctuation provided]: New Formula for Dividend Calculation: • FY23: 10% POMV Draw + 35% of Oil & Gas Royalties/Rents/Bonuses (OGRRB) • FY24: 15% POMV Draw + 40% OGRRB • FY25: 20% POMV Draw + 45% OGRRB • FY26: 20% POMV Draw + 50% OGRRB o 25%+50% Formula in Effect from FY26 Onward 10:50:30 AM MR. HARDENBROOK advanced to slide 4, which read as follows [original punctuation provided]: What Wouldn't Change: • Permanent Fund Corporation • Percent of Market Value Statute • Dividend Tied to Performance of Permanent Fund 10:50:54 AM MR. HARDENBROOK progressed to slide 5, which read as follows [original punctuation provided]: What Would Change: • Alaskans Receive Direct Share of Oil and Gas Revenue o Federal and State Resources • Dividend Funds Diversified under New Formula • Dividends Calculated on Fund Returns & Resource Development 10:51:24 AM MR. HARDENBROOK continued to slide 6, which highlighted the funds available for paying dividends under HB 4009. Slide 7 outlined the projected dividend amounts under the proposed plan, starting at $1,092 in FY 23. He concluded on slide 8, noting that HB 4009 in its current form would result in a deficit in future years, which could be addressed in two ways: firstly, through maintaining the proposed blended revenue stream of oil and gas royalties and fund returns, while tweaking the amount in the formula; secondly, through new revenue. He invited Mr. Bell to provide an explanation of the fiscal models on slide 8. 10:54:32 AM MR. BELL explained that the fiscal model was showing the impact of the proposed legislation using assumptions based on the enacted capital budget and operating budget. CHAIR SPOHNHOLZ directed attention to the bottom left chart on slide 8 and asked whether the unplanned ERA draw was in addition to the surplus or deficit. MR. BELL said the draw was part of the surplus or deficit. CHAIR SPOHNHOLZ sought to confirm that the CBR would be drawn from to fund the deficit first, followed by an ERA draw to maintain the minimum balance of $500 million in the CBR. She estimated that in FY 22, there would be a (indisc.) of $204 million that would grow up to $552 million in FY 26 and decline again to $234 million in FY 30. MR. BELL confirmed that her understanding was accurate. 10:58:25 AM REPRESENTATIVE JOSEPHSON asked whether the incremental increase was designed to provide the legislature with a timeframe to adopt new revenue. REPRESENTATIVE HOPKINS answered yes. 10:59:29 AM REPRESENTATIVE WOOL observed that the modeling on slide 8 showed a deficit in FY 22 with a CBR draw. He asked why that was depicted. MR. BELL believed that Representative Wool was referring to the ERA draw in FY 22. He explained that LFD's modeling did not include any of the federal revenue replacement. REPRESENTATIVE WOOL applauded the foundational formula in the proposed legislation; nonetheless, he expressed concern about the step-up portion of the plan and the overdraw that would result. Further, he asked whether there was any research that showed a benefit to paying out large dividends, as opposed to putting that money towards the BSA, education, and other state services. REPRESENTATIVE HOPKINS said the bill would need to be part of a package that included new revenue, noting that he did not support an unplanned overdraw from the ERA. He believed that with a full fiscal plan, a balance could be struck between revenue, the economy, and the dividend. He expressed his hope that the formula in HB 4009 would drive resource development that would bring in new revenue to support the budget. He maintained that the proposed legislation would allow for a fluid dividend while protecting the POMV draw. 11:05:25 AM REPRESENTATIVE WOOL agreed that this plan would require new revenue to avoid the overdraws. He said he supported the initial formula in the bill but was reluctant to increase it, because he believed new revenue could be used in a better way. REPRESENTATIVE HOPKINS credited [HB 37] from Representative Wool for the formula proposed in HB 4009. 11:07:01 AM REPRESENTATIVE STORY sought to clarify how the plan would allow the state to maintain essential public services and provide for a capital budget. REPRESENTATIVE HOPKINS directed attention to slide 8, which highlighted the size of the capital budget under this proposal. He acknowledged that the dividend formula would create a deficit, so essential services would have to be identified, as well as new revenue and cuts to maintain a balanced budget. MR. HARDENBROOK noted that the numbers in the model included inflationary increases for the FY 22 state budget. CHAIR SPOHNHOLZ added that it did not, however, include strategic investments, such as increases to the BSA, as referenced by Representative Story. REPRESENTATIVE HOPKINS, in response to a question from Representative Story, confirmed that oil prices were unpredictable. He reasoned that the dividend formula proposed in HB 4009 reflected the needs of Alaskans, such as high energy costs. 11:11:50 AM REPRESENTATIVE HOPKINS, in response to a question from Representative Schrage, shared his belief that the bill would shield from market downturns by balancing oil and gas revenue and permanent fund earnings. He acknowledged that the proposal would come with a new set of risks and discussed Alaskans retaining ownership of state resources and sharing in both the high and low times. REPRESENTATIVE HOPKINS, in response to a question from Representative Schrage, recalled times throughout recent history when the economy was thriving while oil prices were low and vice versa. 11:16:17 AM REPRESENTATIVE HOPKINS, in response to a question from Representative Josephson, confirmed that the purple line labeled "current scenario" [slide 8, top right] represented the proposed legislation. REPRESENTATIVE JOSEPHSON asked whether there was a scenario in which the royalty contribution in HB 4009 would result in a dividend equal to the 1982 statutory formula. REPRESENTATIVE HOPKINS answered yes, but it could also be substantially lower depending on the price of oil. 11:17:24 AM REPRESENTATIVE HOPKINS, in response to Representative Josephson, confirmed that in all likelihood, the dividend would not be $2,800 [despite projections indicating that it would reach that by FY 30] due to the difficulty in predicting oil prices. He noted that according to the forecast, oil was predicted to be $65 per barrel going forward. CHAIR SPOHNHOLZ stressed the volatility of oil as a revenue source. 11:18:55 AM REPRESENTATIVE EASTMAN asked whether any analysis had been conducted on how reduced dividend years would impact participation in state services and programs. REPRESENTATIVE HOPKINS said no specific analysis had been conducted on that topic. REPRESENTATIVE EASTMAN maintained his belief that such an analysis would be helpful. REPRESENTATIVE HOPKINS reiterated that the goal of the bill was to create economic incentive for resource development and job creation to grow Alaska's economy. CHAIR SPOHNHOLZ recalled hearing from the Institute of Taxation and Economic Policy (ITEP) and others on the impact of dividend cuts. 11:22:16 AM REPRESENTATIVE PRAX didn't recall hearing about the dividend's impact on municipalities. He requested information on how much money was collected from unpaid fines, parking tickets, speeding tickets, etcetera. 11:23:32 AM REPRESENTATIVE STORY reminded the committee that an influx of people would be accompanied by their need for services and the necessity to pay for those services. CHAIR SPOHNHOLZ announced that HB 4009 was held over.