HB 260-PFD: 50/50 POMV SPLIT  11:38:39 AM CHAIR SPOHNHOLZ announced that the first order of business would be HOUSE BILL NO. 260, "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." 11:39:06 AM REPRESENTATIVE LIZ SNYDER, Alaska State Legislature, prime sponsor, introduced HB 260. She said the bill should look familiar because the committee first heard the bill as HB 4008 during a special session. She stated that HB 260 addresses the permanent fund dividend (PFD) formula. 11:40:03 AM ALLIANA SALANGUIT, Staff, Representative Liz Snyder, Alaska State Legislature, on behalf of Representative Snyder, prime sponsor, presented a sectional analysis of HB 260 [included in the committee packet and titled "SECTIONAL ANALYSIS HB 260: PFD: 50/50 POMV SPLIT"]. She explained Section 1 would amend AS 37.13.140-Income by removing the original statutory formula so there is no longer any conflicting language. She said no changes would be made to the percent of market value (POMV) rate, but language would be added stating that the amount available for appropriation cannot exceed the balance in the earnings reserve account. MS. SALANGUIT explained Section 2 would amend AS 37.13.145(b) Disposition of Income by providing the new appropriation guidelines for the permanent fund dividend (PFD) and POMV draw. She explained that if state revenue outside of the POMV and 50 percent of the POMV can flat fund the calculated baseline budget, then the other 50 percent of the POMV draw would go towards the PFD. The baseline budget would be calculated using a five-year trailing average that is cumulatively adjusted for inflation and population changes, she said. For example, the fiscal year 2023 (FY 23) budget baseline calculation would incorporate the budgets for FY 17 and FY 21; conversely, if changes occur in FY 24, then those changes wouldn't show up until FY 26. She stated that the average annual appropriation that would be used in this calculation is defined as the operating, capital, and mental health budget minus appropriations for the PFD, the appropriations for inflation proofing of the permanent fund, and other state revenues such as taxes, grants, leases, loans, and federal funds. MS. SALANGUIT explained Sections 3, 4, and 5 would add conforming language. She said Section 6 would direct the Alaska Permanent Fund Corporation (APFC) to annually compute the net income of the fund [on the last day of] each fiscal year. She related that Section 7 would add conforming language to the amount of the dividend [AS 43.23.025(a)]. She advised that Section 8 would add repealers for AS 37.13.145-Disposition of Income because those provisions would now be in Section 1. She stated that Section 9 would add an effective date of 7/1/22. 11:42:09 AM REPRESENTATIVE SNYDER provided a PowerPoint presentation titled "HB 260" [hard copy included in the committee packet]. She said HB 260 is the result of several months of speaking to various legislators, members of the legislature's Fiscal [Policy] Working Group, and her own constituents, so she received very diverse viewpoints and priorities to consider while drafting the bill. She spoke to the second slide, "Considerations Incorporated into HB 260," which read as follows [original punctuation provided]: •50/50 split •Sustainable, reliable, and high-quality government services •Constitutional obligations •Need to remedy conflicting statutory language •Need for fiscal plan •Need for flexibility in challenging budgetary climates •Household and economic benefits of direct payments •Fiscal [Policy] Working Group recommendations timestamp REPRESENTATIVE SNYDER drew attention to the four-page report distributed to members during the committee meeting titled nd "FISCAL POLICY WORKING GROUP FINAL REPORT 32 ALASKA LEGISLATURE." She said many of the considerations on the second slide were identified in the report as necessary parts of a comprehensive fiscal solution [bullet points on page 3]. She said HB 260 would be conducive to achieving the following bullet points listed on page 3: • Constitutional, single-account Permanent Fund structure with draws limited by POMV • Constitutional certainty for the Permanent Fund Dividend (PFD) • Healthy capital budget • New revenues • Budget reductions • Spending cap reform • Constitutional Budget Reserve reform • Process: a comprehensive solution must be negotiated and agreed to as whole, not be taken up one part at a time REPRESENTATIVE SNYDER, regarding the bullet point, "Spending cap reform," added that the bill would inch toward a spending cap by use of its five-year rolling average calculation of the baseline budget, which is the starting point for a baseline budget and can be viewed as guidance similar to what a spending cap could achieve. REPRESENTATIVE SNYDER stated that HB 260 would deliver on the following bullet points listed on page 3: • New POMV-based PFD formula • Several-year 'transition period' with one-time fiscal measures REPRESENTATIVE SNYDER stated that the bullet point, "Resilience to fiscal stress," is a key driver of HB 260 and would allow a thoughtful response in times of fiscal stress. REPRESENTATIVE SNYDER, regarding the bullet point, "Process: at all times, keep in mind what can realistically pass the legislature," maintained that of the suite of options before the legislature, HB 260 may be the most likely to draw support across the aisle. 11:48:54 AM REPRESENTATIVE SNYDER continued to the third slide, "Components of HB [260]." She said the bill would maintain the current language regarding the 5 percent POMV draw, eliminating the conflicting language; provide guidance on the distribution of the POMV draw between the general fund and the dividend fund; and provide conforming language. 11:49:41 AM REPRESENTATIVE SNYDER turned to the diagram on the fourth slide illustrating the mechanics of HB 260. She explained that the legislature directs earnings from the permanent fund to PFDs and a portion of state services, and that revenues support the remaining portion of state services. She said the bill would pull a 5 percent POMV, that 5 percent POMV draw would be added to revenues, and this would be the start of calculating how that money will be spent and how it will be distributed between government services and the PFD calculation. She specified that under HB 260, if 50 percent of the POMV draw plus revenue flat funds the previous year's budget, which is calculated as a five- year average, then 50 percent would go to the PFD and 50 percent would be directed towards government services. However, she continued, if 50 percent of the POMV [plus revenue] does not flat fund the previous year's budget, then under HB 260 the legislature would be directed to pull whatever percentage is necessary from the other 50 percent that could go to PFDs to flat fund the budget; in other words, the POMV split is adjusted to fill the gap. Representative Snyder pointed out that in both cases, the bill is designed so that the door is left open to new cuts in the budget as well as new revenue added to the budget. She said the rationale for why this plan could be a good way forward is that it would eliminate conflicting language in statute, protect against unsustainable growth, protect against damaging year to year budget fluctuations, increase pressure to pass reasonable revenue measures and locate efficiencies, and provide a win on both sides of the aisle. 11:52:58 AM MS. SALANGUIT addressed the fifth slide, "HB 260 Modeling Assumptions," regarding different revenue scenarios. She explained that Scenario 1 is for flat funding and no revenue if HB 260 is adopted; Scenario 2 is for a minus $100 million decrease in appropriations and no revenue; Scenario 3 is for an additional $100 million and no revenue; and Scenario 4 is for an additional $100 million in appropriations and an additional $200 million in revenue. She explained that for these modeling assumptions the sponsor worked closely with Conor Bell of the Legislative Finance Division (LFD); the appropriations in the scenarios incorporate numbers from "HCS 1," which is about a $600 million add from subcommittees and includes the $1,300 energy rebate; the revenue estimates were provided by LFD; and the POMV estimates are all the same and are outlined on this slide and 50 percent of the POMV is also depicted on this slide [for fiscal years 2023-2031]. 11:54:08 AM MS. SALANGUIT turned to the sixth slide, "Scenario 1: Flat fund, no new revenue." She noted that Scenario 1 flat funds the budget from FY 23 and uses those adjustments throughout FY 31 and has no new revenue. She explained that the bars on the graph depicting Scenario 1 represent the entire POMV, the blue is the amount that is left for the [PFD] once the baseline budget is funded, the pink-orange line represents 50 percent of the POMV draw, and the dark orange line shows the dividend payout in normal US dollars as opposed to in millions for the amount left for the PFD and the budget baseline. REPRESENTATIVE SNYDER added that these next few slides look similar under these different scenarios. However, she said, the last line in the table on each of the slides gives insight into how the percent of the POMV directed toward the PFD from year- to-year changes over time, and over time it is slowly creeping towards that 50 percent while maintaining some consistency in service funding. 11:55:56 AM REPRESENTATIVE EASTMAN asked whether the expectations of permanent fund growth are based on assumptions that were made before or after Russia invaded Ukraine. REPRESENTATIVE SNYDER deferred to Mr. Bell to provide an answer. 11:56:16 AM CONOR BELL, Fiscal Analyst, Legislative Finance Division (LFD), Alaska State Legislature, responded that the division hasn't updated the permanent fund for returns since the Department of Revenue's fall forecast, so the oil price and permanent fund return assumptions used in this model are from that fall forecast. He advised that there probably is some loss to the permanent fund returns at this point, but that the higher oil prices aren't incorporated in this modeling. He stated that the Department of Revenue will be releasing its spring forecast soon, at which time his division will incorporate the updates [into the modeling]. CHAIR SPOHNHOLZ noted that the updated forecast is expected on 3/15/22. 11:57:15 AM REPRESENTATIVE WOOL inquired whether "appropriations less revenue" is the budget. MS. SALANGUIT replied that "appropriations less revenue" is the operating, capital, and mental health budget, and then it takes away other state revenue such as taxes, grants, loans, and federal funds. Then, she continued, there is an exclusion for appropriations for the dividend and inflating proofing of the permanent fund. 11:58:02 AM REPRESENTATIVE WOOL surmised that the baseline budget of $2.5 billion in Scenario 1, flat fund, no new revenue, is a low budget. He further surmised that oil revenue is not being taken into account. MS. SALANGUIT answered that she believes it is. She said the baseline budget shown [on the sixth slide] is cumulatively adjusted for population change and inflation. CHAIR SPOHNHOLZ clarified that "appropriations less revenue" is the total operating capital plus mental health budgets less traditional revenue, non-POMV related revenue. So, she said, it is sort of a net number excluding projected oil revenue and other items. It is a very different nomenclature than what is typically used when referencing the budget, she added. REPRESENTATIVE WOOL noted that oil revenue is the number one non-POMV revenue and it is growing. "It is less all revenue," he continued, "so you are stripping it out the revenue and basic elements of the budget with POMV alone." MS. SALANGUIT confirmed that that is correct. CHAIR SPOHNHOLZ offered her belief that the spring revenue forecast will change this substantially. She noted that there is also the understanding that what goes up will come down again, so [legislators] must think about fiscal policy decisions that are made in all possible operating context. She allowed that sometimes [the legislature] has fallen short of its fiduciary responsibility for the state by making long term fiscal policy decisions based on a moment in time and it is known that oil is a highly volatile commodity. 12:00:26 PM REPRESENTATIVE WOOL, regarding [Scenario 1] which flat funds the budget, asked why the budget goes down for FY 23 to FY 24 and then goes up again. REPRESENTATIVE SNYDER replied that it is because the flat budget is not simply from the year before, it is the rolling five-year average; the oldest year is dropped, and a more recent year is picked up. Therefore, she continued, it will bounce around a bit because the five-year bucket from which the average is being calculated bounces around a bit and gives a slightly different number when moving forward year to year. REPRESENTATIVE WOOL sought to confirm that the baseline budget has nothing to do with revenue because if oil revenue were to fluctuate the line above that would fluctuate since a different amount is being subtracted and oil is not just a straight graph upwards. REPRESENTATIVE SNYDER responded yes. She stated that the talk about "appropriations less revenue" is because the focus is on what percent of the POMV is needed to ensure flat funding the budget once the amount from other sources is calculated. To the point about fluctuating oil prices, she argued that HB 260 gives more flexibility to respond appropriately and ensure that continuity in services is maintained. She said HB 260 does not prescribe a hard and fast distribution on how to divvy up the POMV. The 50/50 is conditional, she explained, the 50 percent is directed only if there is the ability to flat fund, and if that cannot be done, "then we get to backfill." Whereas, she continued, if it is hard and fast and the market tanks and the percentage doesn't cover the baseline, then alternatives would have to be figured out that aren't necessarily in line with statute. 12:03:07 PM REPRESENTATIVE JOSEPHSON asked why he should be fixated on a five-year average when he thinks there has been tremendous underserving of need. REPRESENTATIVE SNYDER answered she has her own part of the answer but would like for Mr. Bell to answer the question because she worked with him to select that calculation. MR. BELL responded that he can't speak to the legislative intent behind taking a five-year average budget, but the idea is that it's adjusting of the budget for inflation. He said if there is fluctuation in a given year, such as emergency funding that is unanticipated, it balances out some of those swings in the budget. He stated that if the budget grows in real terms over time, "yes it would not track that." He added that this would be more catered towards mostly unanticipated large spikes in government spending due to any number of factors. 12:05:06 PM REPRESENTATIVE STORY inquired whether inflating proofing the budget under HB 260 includes inflation proofing the base student allocation (BSA) for grades K-12. REPRESENTATIVE SNYDER turned to Mr. Bell to answer the question. MR. BELL replied that it isn't directly addressed, it is adjusting for inflation and population, and would be assumed to be a component of that inflationary growth. There is not a separate assumption for the growth rate for education or anything else, he stated. The Legislative Finance Division, he explained, has a baseline agency operations assumption and LFD's top-level modeling doesn't always break out the education specifically. 12:06:31 PM REPRESENTATIVE STORY remarked that when fully funding education [the legislature] never accounts for inflation proofing that number of $1.2 billion, it is kept the same. She said she therefore wouldn't expect for it to be in here, but that it is something which needs to be thought about. CHAIR SPOHNHOLZ said she thinks the bill's language says adjusting for inflation and not necessarily inflation proofing. The bill is designed to take an average of the operating capital and mental health budgets, with a lagging five-year average, and then adjust it for population and inflation to level out volatility in the dividend and in the budget. She said the committee needs to understand the impacts of the sticky issues that it is identifying. She asked Ms. Nauman whether HB 260 would constrain the legislature's ability to appropriate outside the formula for the operating, capital, and mental health budgets if the legislature wanted to do that. 12:08:00 PM EMILY NAUMAN, Legislative Legal Counsel, Legislative Legal Services, Alaska State Legislature, answered, "No, the legislature is free to appropriate any amount of available revenue and balances of accounts in any year." So, she said, even if this bill passed, just as the dividend statutes currently read, the legislature would still be free to appropriate any amount for the dividend or any other budget. CHAIR SPOHNHOLZ stated that that is a constitutional requirement that the legislature has the ability to appropriate. MS. NAUMAN responded, "Yes." REPRESENTATIVE SNYDER noted that constitutionally and through the courts it has been reaffirmed that the legislature can appropriate funds as it sees fit. She pointed out that HB 260 would also allow for adding to the budget and reducing the PFD or the proportion of the POMV sent to the PFD in any year. It would simply be a conversation that would have to be had and agreed upon within the legislature with the necessary votes to increase the budget and as a result decrease the PFD, she added. 12:09:37 PM REPRESENTATIVE EASTMAN noted that HB 260 would not amend the constitution and the limits in the bill would not necessarily constrain the legislature's activity. He requested the sponsor to speak to what she was referring to when she used the word constitutional in her opening presentation. REPRESENTATIVE SNYDER replied it was simply to say that nothing in HB 260 would violate what is currently permitted or required in the constitution. She said the bill is also conducive to any future additional activities as discussed and recommended by the Fiscal Policy Working Group. 12:10:19 PM REPRESENTATIVE EASTMAN asked about how the population adjustment would be made and whether a certain threshold of population change must happen before adjustment occurs. He further asked about how recent the population data is that triggers the adjustment. He also asked whether people leaving the state would trigger the same kind of adjustment or whether it is anticipated that the state population will continue to grow. MS. SALANGUIT offered her belief that the population adjustments are done annually using data from the Department of Labor and Workforce Development. 12:11:24 PM REPRESENTATIVE SNYDER displayed the seventh slide, "Scenario 2: -$100 budget, no new revenue," and resumed her presentation. She directed attention to the bottom row of the table and related that if the budget was cut by $100 million with no new revenue, the percent of POMV for the PFD would bounce a bit because there is variation in the calculation of the baseline budget and other assumptions, but that the percent would slowly increase. REPRESENTATIVE SNYDER continued to the eighth slide, "Scenario 3: +$100 budget, no new revenue." She related that if the budget was increased by $100 million with no new revenue, and all other assumptions remained the same, there would again be a slight variation [and the percent of POMV for the PFD would increase]. She offered her belief that the Fiscal Policy Working Group's recommendation for revenue generation was $500 million to $700-plus million and said that it would more quickly move toward the 50/50 split. She argued that a take-away with HB 260 is that it could, for some, increase pressure or increase motivation for identifying new revenue sources. 12:13:31 PM REPRESENTATIVE WOOL asked whether the $100 million would be a one-time addition or an addition every year. MS. SALANGUIT responded it would be an addition of $100 million every year beginning in FY 24 and that will be the same assumption for future models; any changes in appropriations or revenue will begin in FY 24 and go through FY 31. CHAIR SPOHNHOLZ stated that the annual addition is an important data point for committee members. REPRESENTATIVE SNYDER addressed what would happen under HB 260 if new revenue was generated. She explained that if the state's various sources of revenue - including taxes, federal funds, plus 50 percent of the POMV - would flat fund the budget, then the other 50 percent of the POMV would go to the PFD. Any new revenue, she explained, would first go toward ensuring that the baseline budget is flat funded. Once the baseline budget was flat funded, she stated, the legislature would be free to use any remainder to increase the budget and not direct it toward a 50 percent PFD. But, she continued, if the legislature decided not to increase the budget, the first next step would be bringing up the PFD to 50 percent. Representative Snyder further explained that if the budget was kept flat and a 50 percent PFD was achieved with the new revenue, the legislature would be able to direct any remainder of that new revenue. However, she specified, that remainder could not go to the PFD because the bill says the cap is 50 percent, so it could go to savings, expanding the budget, or whatever made sense. 12:16:52 PM REPRESENTATIVE SNYDER turned to the nineth slide, "Scenario 4: +100 Budget, +200 Revenue." She noted she has other scenarios available to share as well as scenarios utilizing the governor's amended budget. She said Scenario 4 is still the HCS 1 and models an addition of $100 million to the budget with $200 million in new revenue. She drew attention to the progression in the last row of the table [from 23 percent of POMV for PFD in FY 23 to 38 percent in FY 31]. 12:17:28 PM REPRESENTATIVE EASTMAN asked how the next year's dividend would be impacted if money went towards savings instead of the PFD. REPRESENTATIVE SNYDER answered that money directed towards savings would not be calculated into the new baseline budget. REPRESENTATIVE EASTMAN asked how that would impact the value of the next year's dividend. REPRESENTATIVE SNYDER replied that it would be the same as in any other scenario it would take the five-year rolling average not including funds that were directed towards savings. REPRESENTATIVE EASTMAN posed a scenario in which $10 billion is added to savings. He asked whether that would impact the amount of the next year's dividend or whether that would be a separate calculation. REPRESENTATIVE SNYDER offered her understanding that it wouldn't impact it. She deferred to [Mr. Bell] to answer further. MR. BELL confirmed Representative Snyder's answers are correct. If the revenue was higher than the appropriations in the budget, he explained, that surplus money would automatically lapse into the constitutional budget reserve (CBR). If there was a year in which a significant amount of money was lapsed into the CBR, he continued, the adjusted appropriations would be much lower than the revenue. That would lead to raise the calculated PFD amount, he said, but it wouldn't be counted as an appropriation. 12:19:38 PM REPRESENTATIVE WOOL commented that when lots of revenue comes in there is temptation historically to spend more. He posed a scenario in which the PFD is at 40 percent instead of 50/50 and said there would be pressure to get it up to 50 percent. He posited that many people would demand that the 50/50 happens first before any extra spending on the budget. REPRESENTATIVE SNYDER responded that that pressure is being experienced now and has been for several years. She said a benefit of HB 260 is that the legislature would then be following the law, which is heard a lot from constituents and reasonably so. The way HB 260 is written, she asserted, would add positive pressure in both directions. Pressure would be added for new revenue, she continued, because then in theory more could be directed to the PFD. The bill would also allow the legislature to increase the budget, but because it would come at the cost of a larger PFD it would rightfully put pressure on legislators to ensure the budget is being grown in a smart way and that it can be justified. 12:22:37 PM REPRESENTATIVE WOOL asked whether pressure to raise new revenue to pay a PFD up to the 50/50 level could be a problem. REPRESENTATIVE SNYDER answered that there are different ways to answer the question and she can only answer from her interpretation. She said revenue is raised in a different way under different formulas and impacts different Alaskans at different levels. The PFD is the same amount to every Alaskan, she continued, so a dollar out of the PFD impacts Alaskans differently than, say, a dollar collected through something like an income tax. CHAIR SPOHNHOLZ stated that from her perspective the answer to the question is that the first place the revenue goes is to the budget, not to the dividend. If there is additional revenue, she said, that revenue doesn't flow directly to dividends, it flows to the budget as the first point in time, and the dividend formula is based on the balance at that point in time. 12:25:14 PM REPRESENTATIVE EASTMAN requested a real-world example of how last year's dividend would have been impacted had HB 260 been law at that time. CHAIR SPOHNHOLZ asked whether there is retrospective modeling. MS. SALANGUIT replied yes, but [the modeling] wasn't included in the presentation because then it would have been too crowded. She said the sponsor will share those numbers after the hearing. 12:26:02 PM REPRESENTATIVE SNYDER thanked the committee for hearing HB 260. [HB 260 was held over.]