HB4010-PERMANENT FUND DIVIDEND; POMV SPLIT  11:25:23 AM CHAIR SPOHNHOLZ announced that the final order of business would be HOUSE BILL NO. 4010, "An Act relating to use of income of the Alaska permanent fund; relating to the amount of the permanent fund dividend; relating to the duties of the commissioner of revenue; and providing for an effective date." 11:25:54 AM REPRESENTATIVE KEN MCCARTY, Alaska State Legislature, prime sponsor, introduced HB 4010. He paraphrased the sponsor statement [included in the committee packet], which read as follows [original punctuation provided]: House Bill 4010 would provide an established formula for the appropriate of annual permanent fund dividend for Alaskans. From 1982 until 2016 the annual appropriate of permanent fund dividends were established and implemented per Statute. In 2016 the Legislature and an uncontested governor veto changed the Statute and the allocation formula resulting in an undetermined dividend appropriation. House Bill 4010 will integrate the POMV formula consideration of Statute with an established percentage formula appropriation for both the state and dividend for Alaskans. The purposed formula for consideration is 65% state and 35% Alaskan dividend. In addition to the 65% formula for the state that at least 20% of that must be used for Capital Projects. The state's expenses involve operations and capital projects. Over the years the Capital projects have not been attended to for one reason or another, which at this time the state is over 2 billion dollars behind in Capital project repairs. The inclusion of the 20% will not only secure the importance of attending to Capital Projects but also avail funds for infrastructure, promote businesses, avail jobs, secure and improve roads, bridges, buildings, and school facilities. The origin of the Permanent Fund Dividend is in recognition of individual residents / stakeholders of Alaska. The appropriation of the funds are done with equality. No social economic, age, or political preference determine the dividend. Simply, being a resident of Alaska under law qualifies an annual dividend. Since the 2016 change to the Permanent Fund Dividend formula and inclusion of the POMV that the people of Alaska have greatly questioned the intent of its state government. Alaskans have made statements with themes that the state is disenfranchised of its people / stakeholders by depriving them of a reliable annual dividend. By approving House Bill 4010 it will make a resounding statement that residents of Alaska are valued stakeholders of this great state and will be honored with a reliable annual dividend. CHAIR SPOHNHOLZ clarified that the 1982 statute had not been repealed yet. 11:28:05 AM REPRESENTATIVE MCCARTY presented a sectional analysis for HB 4010 [included in the committee packet], which read [original punctuation provided]: Section 1 AS 37.13.140 Income and annual computed formula. (a) Maintain the origin of income source according to AS 37.13.145. Deletes the language describing the distribution formula equals 21 percent of the net income. The formula has resulted in an incongruent calculation with (b). (b) Inserting current language to affirm that appropriation may not exceed the balance in the earnings reserve account. The computed annual calculation remains the same. Section 2 AS 37.13.145 (b) Appropriation formula. Adds the new appropriation formula of 35% for the dividend and 65% toward the state. It also describes the state appropriation of 65% which 20% of it must be used toward Capital Projects. Section 3 AS 37.13.145(c) Appropriation from the Earnings Reserve Account Changes the language from transfer to appropriation and legislature role in the appropriation process. Section 4 AS 37.13.145(d) Appropriate in consideration of the State v. Amerada Hess decision Changing language to be congruent from transfer to appropriation. There is no change to the State v Amerada Hess judgment. Delete AS 37.13.145(e) as it is amended and addressed in Section 1 of AS 37.13.140(b). Section 5 AS 37.13.300(c) Mental Health Trust funds Change language according to congruency of other changes but does not change the autonomy of the mental health trust funds which is not to be calculated in the Permanent Fund appropriation. Section 6 AS 37.14.031(c) Date of annual computation Inserts language to define the date of the annual computation according to accepted accounting principles, excluding any unrealized gains or losses. Section 7 AS 43.23.025(a) Date of determination and announcement of the dividend Changing language to be congruent from transferred to appropriated. The amendment is to continue congruency of language changes to recognize the appropriation process. Section 8 AS 37.13.145(e) and 37.13.145(f) Repeal of limitation of the appropriation from Earnings Reserve Delete (e) and (f) as the language is already addressing in other changes within the bill. Section 9 Effective Date Provides for July 1, 2022 effective date. 11:31:00 AM REPRESENTATIVE MCCARTY introduced a PowerPoint presentation, titled "HB 4010" [hard copy included in the committee packet]. He began on slide 2, which read as follows [original punctuation provided]: Since 1982 the State of Alaska has recognized the resident / stakeholders through annual dividends from the Alaska Permanent Fund. Unlike no other state, the equitable nature of dividends for all residents, according to law, has been bestowed upon and not entitled to Alaskans. REPRESENTATIVE MCCARTY continued to slide 3, which read as follows [original punctuation provided]: The Alaskan Dividend Tradition has long been fulfilled through an annual percent of the viable appropriated distribution base of the Permanent Fund realized earnings. REPRESENTATIVE MCCARTY turned to slide 4, which read as follows [original punctuation provided]: In 2016 this long Alaskan tradition was altered. A new appropriation method was placed in Statute, which has resulted in confusion or contradiction of existing Statute and the appearance of disenfranchising Alaskans of their stakeholder investment dividend. REPRESENTATIVE MCCARTY advanced to slide 5, which read as follows [original punctuation provided]: The intent of HB 4010 is to make clear once again the established annual percentage formula for both the Permanent Fund Dividend for Alaskans and the percentage of budget revenue for the state government to the benefit of Alaskans. REPRESENTATIVE MCCARTY proceeded to slide 6, which read as follows [original punctuation provided]: P.O.M.V. The Percent of Market Value calculation based on the growth of the Permanent Fund was changed into Statute in 2019. At a 5% annual draw on the Permanent Fund this allows for prudent distribution and continued growth within the fund into the future. REPRESENTATIVE MCCARTY continued to slide 7, which read as follows [original punctuation provided]: The question is what should the annual distribution look like from the 5% POMV draw that does not result in deficiency elsewhere? REPRESENTATIVE MCCARTY proceeded to review the governor's 50/50 plan, highlighting the advantages and disadvantages (slide 9) and the fiscal modeling (slides 10-11). On slide 12, he pointed out that moneys from both the CBR and the SBR had been used historically for deficit spending. 11:35:05 AM REPRESENTATIVE MCCARTY outlined HB 4010 on slide 13, which read as follows [original punctuation provided]: HB 4010 A Permanent Fund Appropriation Formula that supports Alaskans in many ways! 35 % -Dividend Amount for Alaskans 20 % -Capital Projects to benefit Alaskans 45 % -Government Operations to support Alaskans REPRESENTATIVE MCCARTY continued to slide 14, which read as follows [original punctuation provided]: PREMISE Equitable formula that gives Alaskans "More Bang for the Bucks!" The McCarty Plan 5% of POMV draw with a 35/65 Percent Split 35% to PFD 65% to State with at least 20% allocated to Capital Budget Projects Capital Projects assurance will result in jobs and projects toward maintenances, improvements, and infrastructure for roads, airports, A.M.H., bridges, buildings, fire support, school structures, etc. 11:36:07 AM REPRESENTATIVE MCCARTY highlighted the perceived advantages and disadvantages of HB 4010 on slide 15, which read as follows [original punctuation provided]: ADVANTAGE Seeks to establish a distribution plan that is dependable & sustainable into the future Equitable for both the people's government and individual Alaskans Alaskans benefit from a dividend as well as jobs and services from Capital Projects Fiscally sustainable that does not require excessive revenue expansion / taxation DISADVANTAGE Not a 50 / 50 Plan Not a 25 / 75 Plan Revenue continues through resource development and free enterprise industry rather taxation REPRESENTATIVE MCCARTY discussed the modeling on slide 16, noting that LFD projected revenue with no liability reduction until 2028 and surpluses in 2030. Additionally, FY 21 to FY 24 showed a deficit with surplus growth after FY 25. 11:38:59 AM REPRESENTATIVE MCCARTY addressed appropriations to capital projects on slide 17, which read as follows [original punctuation provided]: More Money to Support Jobs for Alaskans Boosts the Economy Infrastructure for now and into the future REPRESENTATIVE MCCARTY concluded on slide 18 by reiterating his hope that HB 4010 would provide a more sustainable future for Alaska by implementing a "safety net" and boosting a strong economy. 11:39:32 AM REPRESENTATIVE SCHRAGE commended bill sponsor for putting forward a plan. He asked why this plan would be favorable to a 75/25 split. He acknowledged the deficits that would need to be addressed under this proposal and asked why this would be the appropriate formula for the legislature to move forward with. REPRESENTATIVE MCCARTY believed that a 65/35 plan would be more balanced than a 75/25 split in terms of fairness to both residents and government services. 11:42:04 AM REPRESENTATIVE JOSEPHSON asked whether the proposed legislation would result in substantial cuts to the operating budget. REPRESENTATIVE MCCARTY claimed that there would not be a deficit and argued that the budget would be balanced under HB 4010. REPRESENTATIVE JOSEPHSON asked Mr. Bell whether the operating budget would need to be cut without the addition of new revenue if HB 4010 were to pass. MR. BELL said it was unclear whether the bill sponsor had intended 20 percent of the entire POMV draw would go to the capital budget or if it was 20 percent of 65 percent of the POMV draw. Regardless, it would increase the capital budget either way. CHAIR SPOHNHOLZ clarified that 20 percent of the overall POMV would go to the capital budget under Representative McCarty's plan. She asked what kind of deficit that would create. 11:48:17 AM MR. BELL confirmed that based on DOR's spring forecast, there would be small deficits through FY 30 if the entire amount was appropriated towards the capital budget. CHAIR SPOHNHOLZ asked what the deficit would be in FY 23. MR. BELL estimated a deficit of slightly over $1 billion. 11:49:20 AM REPRESENTATIVE JOSEPHSON pointed out that slide 16, which provided modeling of HB 4010, showed the capital budget from FY 22 to FY 30 using assumptions from the FY 22 enacted budget, as opposed to modeling the proposed 20 percent of 65 percent of the POMV draw. MR. BELL confirmed. He said the fiscal model on slide 16 did not use the 20 percent minimum for the capital budget assumption, which was proposed in HB 4010. Instead, it modeled the capital budget assumptions that grow with inflation based on the enacted budget. CHAIR SPOHNHOLZ said that's an important distinction. REPRESENTATIVE JOSEPHSON sought to confirm that slide 16 did not accurately reflect the bill. MR. BELL said it did not include that aspect of the bill. He offered to follow up with an assumption that increased the capital budget to conform with the language in the bill. 11:51:08 AM CHAIR SPOHNHOLZ shared her understanding that HB 4010 would create a fairly significant fiscal gap. If the bill were to become law, she asked the sponsor how he would recommend balancing the budget. REPRESENTATIVE MCCARTY believed that investments in infrastructure could lead to an increase in revenue. CHAIR SPOHNHOLZ asked how state revenue would increase based on capital spending. REPRESENTATIVE MCCARTY shared an example from the North Slope. CHAIR SPOHNHOLZ sought to confirm that Representative McCarty was suggesting that the legislature increase oil industry subsidies to increase state revenue. REPRESENTATIVE MCCARTY responded, "Well, I suggest looking into all the different things that's increasing the infrastructure within the state." He discussed ports in Alaska and potentially moving more commodities through them. 11:55:07 AM CHAIR SPOHNHOLZ pointed out that economic development would take a long time to produce new revenue; further, she opined that there wasn't a clear relationship between short-term capital spending and short-term revenue. She addressed the billion- dollar deficit beginning in FY 23 under this proposal, adding that there would need to be a billion dollars in net cuts or new revenue sources to balance the budget. She encouraged the sponsor to consider ways to balance the budget. REPRESENTATIVE MCCARTY believed that the dividend formula in HB 4010 would boost the economy. 11:58:18 AM REPRESENTATIVE SCHRAGE appreciated the idea of increasing the capital budget and the argument that government spending could facilitate the economy. Nonetheless, he expressed concern that Alaska's revenue was highly was dependent on oil and gas revenue. Additionally, he pointed out that there was no indication of a correlation between private industry success and an increase in state revenue. CHAIR SPOHNHOLZ appreciated the consensus from the fiscal policy working group that different elements had to come together to create a successful fiscal plan, such as broad-based revenue, a robust dividend, modest cuts to the budget from systemic reforms, and an updated spending cap. [HB 4010 was held over.]