HB 72-PERMANENT FUND DIVIDEND; 75/25 POMV SPLIT  7:01:31 PM CHAIR CARPENTER announced that the final order of business would be HOUSE BILL NO. 72, "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." 7:01:48 PM REPRESENTATIVE DANIEL ORTIZ, Alaska State Legislature, as prime sponsor, presented HB 72. He read the sponsor statement, [included in the committee packet] which read as follows [original punctuation provided]: The purpose of this bill is to settle the age-old debate over which statutes to follow when it comes to determining the size of a Permanent Fund Dividend (PFD). If adopted, it will reconcile the current two competing statutes regarding the dividend amount. House Bill 72, the Protecting Future Dividends Act (PFD Act), will put into statute the percent of money from the POMV dedicated to a PFD. It establishes a 75/25 split in which 75 percent of the Percent of Market Value (POMV) draw goes into the general fund and 25 percent of the POMV draw goes to the dividend fund. It's simple, and most importantly it's sustainable. The POMV draw is the largest single source of Unrestricted General Funds these days. Revenue that the state receives from natural resource development no longer consistently makes up the majority of our revenue. Instead, we rely on the POMV draw. As long as we continue to rely on the POMV draw, this bill will continue to provide a PFD into the future. Based on current projections, this bill allows us to balance our budget without needing to come up with new revenue sources. Over the next ten years, if we pass and follow HB 72, and if resource revenue remains stable and our state budget grows as anticipated, we won't have a budget deficit and we will have a PFD. This bill does not make stipulations on how the money will be spent after the POMV draw is sifted 75/25 into the general fund and dividend fund. It simply provides structure as to where the POMV is appropriated. 7:06:25 PM LIZ HARPOLD, Staff, Representative Dan Ortiz, Alaska State Legislature, on behalf of Representative Ortiz, prime sponsor, gave the sectional analysis [included in the committee packet], which read as follows [original punctuation provided]: Sec. 1 Establishes a short title: The Act may be known as the Protecting Future Dividends Act. Sec. 2 Amends AS 37.13.140(a) to delete language that describes a formula to determine the amount of income of the fund that is available for distribution. Amends AS 37.13.140(b) to clarify that the amount available appropriation from the earnings reserve account may not exceed the balance in the earnings reserve account. Sec. 3 Amends AS 37.13.145(b) to provide that of the appropriation each year from the earnings reserve account under AS 37.13.140(b) will go to the general fund, and then 25% of that total amount will go to the dividend fund. Sec. 4 Amends AS 37.13.145(c) to authorize an appropriation, after the appropriations to the general fund and dividend fund in AS 37.13.145(b), to the principal of the permanent fund for inflation proofing. Sec. 5 Amends AS 37.13.145(d) to clarify that the permanent fund income earned as a result of the State v. Amerada Hess case is not available for appropriation to the dividend fund or general fund or the principal and that it shall be deposited into the Alaska capital income fund. Sec. 6 Amends AS 37.13.300(c) to clarify that the net income of the mental health trust fund is not included in the computation of the amount available for appropriation from the permanent fund earnings reserve account under AS 37.13.140(b). Sec. 7 Amends AS 43.23.025(a) to clarify that the legislature appropriates money to the dividend fund consistent with section 3. Sec. 8 Repeals AS 37.13.145 (e) and (f) which related to total appropriations from the earnings reserve. Sec. 9 Establishes an immediate effective date. MS. HARPOLD told committee members she had spoke with Legislative Legal Services about a possible committee substitute (CS) which would change "distribution" to "appropriation" on page 2, line 20, to conform to a previous section of the bill, and "add a reference to subsection (b), on page 2, line 21." 7:08:38 PM The committee took an at-ease from 7:08 p.m. to 7:10 p.m. 7:10:04 PM CONOR BELL, Fiscal Analyst, Legislative Finance Division, Legislative Agencies and Offices, showed a slide, entitled "Legislative Finance Division Fiscal Model," [hard copy included in the committee packet]. He said the model assumes a 25 percent of market value (POMV) permanent fund dividend (PFD), and the governor's fiscal year 2024 (FY 24) amended budget with 2.5 percent annual agency operations. He pointed to a chart in the top-right showing savings balances, with the constitutional budget reserve/statutory budget reserve (CBR/SBR) ending balance and the realized earnings reserve account (ERA) balance. He said, "Since there is no draws from the ERA or other savings accounts, that's unaffected." He continued as follows: The budget summary is showing our baseline budget, and the reason there's that negative scenario change in our budget summary of $449 million negative in FY 24, that's because the Legislative Finance [Division] baseline is currently using ... last year's capital budget, growing with inflation, which would be $750 million, and so that's the biggest change there is that the scenario's using the governor's budget versus assuming there would be a $750 million capital budget growing with inflation each year. And otherwise, it's ... inline with what the governor's budget is proposing. So, based on those assumptions, there are surpluses throughout the period. ... The surplus before the PFD is $2 billion, and then the PFD appropriation in FY 24 is $881.5 million, which is $1,300 per person; and the pre-transfer surplus is $1.1 billion in FY 24. That is basically the surplus before there's transfers between accounts, such as the revenue replacement from the American Rescue Plan Act. By the end of the period, the PFD has grown to $1.1 billion, which would be approximately ... $1,700 per person, and the ... surplus at the end of the period would be $226 million, estimated. And I should add that this is based on the ... fall revenue forecast, which has declining revenues throughout the period; that's why the surpluses are getting so much smaller is because they're ... based on the oil futures markets, which have slowly declining prices. You're seeing those lower revenues throughout the period in our baseline forecast. 7:13:35 PM REPRESENTATIVE MCCABE asked whether the division's budget baseline includes money for the base student allocation or defined benefit plan, for example. MR. BELL answered that the division does not include any policy changes in its analysis that could lead to higher or lower expenditures. 7:14:14 PM MR. BELL confirmed a clarification from Chair Carpenter that the budget assumption in this fiscal model is what the governor has presented as his budget, "plus the amendments to his original budget." He added that the division is adding the 2.5 percent annual growth for inflation. 7:14:36 PM REPRESENTATIVE MCCABE surmised that if policy changes were made, then "the PFD would go down significantly." CHAIR CARPENTER responded that the intent of the committee would be to answer that question later with another model. 7:15:38 PM REPRESENTATIVE GRAY pointed to the pre-transfer surplus deficit line, and observed that after FY 24 there would be a $1.17 billion surplus, so theoretically a base student allocation increase could be paid with that surplus. MR. BELL answered that's correct. 7:16:34 PM REPRESENTATIVE MCKAY asked whether this model includes production from the Willow [Project] and the Pikka [oil field]. MR. BELL explained that the division uses the Department of Revenue's revenue forecast, which uses the Department of Natural Resources' production forecast. He mentioned the percentage used in calculation and said presumably there is some proportion of Willow and Pikka included in the forecast. 7:17:50 PM REPRESENTATIVE GROH asked the bill sponsor to address who, under HB 72, would pay for "the structural deficit." REPRESENTATIVE ORTIZ answered that everyone who receives a PFD of a potential larger amount pays for that potential deficit by "giving up some of the PFD now." He said the committee could choose to amend HB 72 to scale the split down to 50/50 when revenue is greater. However, another option if there are surpluses created under the 75/25 split, could be to invest in long-deferred infrastructure projects. 7:22:11 PM REPRESENTATIVE MCCABE directed attention to bill language on page 2, lines 15 and 24, and asked the bill sponsor why he used "may" instead of "shall". REPRESENTATIVE ORTIZ deferred to his staff to answer. 7:22:50 PM MS. HARPOLD suggested Emily Nauman, from Legislative Legal Services, was available to give feedback about the bill language. 7:23:11 PM EMILY NAUMAN, Director, Legislative Legal Services, Legislative Agencies and Offices, stated that HB 72 uses "may" rather than "shall" because the Constitution of the State of Alaska requires that the movement of money out of the ERA into the permanent fund requires appropriation by the legislature under the dedicated fund clause, and that was reaffirmed in State v. Wielechowski. In response to a follow-up question as to whether amending the constitution would be effective, she first explained that whether the statute says "may" or "shall", the legislature retains the authority to appropriate whatever amount for dividends or out of the ERA in any given year; therefore, using "may" is more accurate to how the laws are applied and interpreted. Regarding the idea of a constitutional amendment, she indicated it would depend on how it was worded. 7:25:53 PM REPRESENTATIVE ALLARD asked Ms. Nauman for the legal difference between "shall" and "may". MS. NAUMAN answered that "shall" in this case, "and if it were constitutional" means the legislature would be required to appropriate a certain amount for a dividend; the word "may" is permissive and means the legislature may or may not "do that action." 7:27:02 PM MS. HARPOLD, in response to a question from Representative McKay, clarified that HB 72 would amend the original statute that pertains to the income of the permanent fund. She said it would leave the definition of income as is but "it's not what will be used as a basis for ... an appropriation." She stated that AS 37.13.140(b) is the POMV portion of statute, and HB 72 would add that the legislature cannot take more than what is available in the ERA. In Section 3, the bill would amend statute to say that the legislature may appropriate to the GF an amount available for appropriation under AS 37.13.140(b); it could take the 5 percent draw and put it into the GF, and then 25 percent of that would go into the permanent fund. She added, "And so we are basically taking those previous statutes away, and it helps simplify what's there; and that's part of the goal of having this piece of legislation is to take ... potentially competing or conflicting statutes out of the way." REPRESENTATIVE MCKAY concluded that the intent was "to simplify the conflict that we've been having for so long." REPRESENTATIVE ORTIZ responded, "Absolutely." 7:30:01 PM MS. HARPOLD, to a previous question, confirmed that HB 72 would not include policy decisions; it would indicate how much of the POMV would go toward the PFD or state services. 7:31:00 PM REPRESENTATIVE MCCABE asked for confirmation that the state could pay the 50/50 now and it would not become a problem until about 2028. 7:31:57 PM REPRESENTATIVE ORTIZ answered yes, but underlined that this assumes the current governor's budget with no increases in the base student allocation for the next eight years and continuation of the capital budget at a flat level for eight years, for example. 7:33:09 PM REPRESENTATIVE GROH suggested that a 50/50 plan put in the constitution may be harder to address in the future than if it were in statute. REPRESENTATIVE ORTIZ concurred. Notwithstanding that, he mentioned that the [Fiscal Policy Working Group] had supported a constitutional amendment that states that "a PFD will be paid, as provided by law". He said the key there is that whatever is put in the constitution needs to be sustainable, and he opined that the 50/50 model is not sustainable in the future. 7:35:59 PM REPRESENTATIVE ALLARD asked the bill sponsor if he is saying he wants to take money from the PFD to pay for the base student allocation. REPRESENTATIVE ORTIZ answered that the bill is "agnostic to that issue." CHAIR CARPENTER assured the committee that there would be opportunity to "plug this bill into a moving diagram" to see the policy choices in relation to HB 72 and other proposed bills. 7:37:31 PM REPRESENTATIVE GRAY asked if the legislature could use the aforementioned surplus to "make a bigger PFD." 7:37:48 PM MS. HARPOLD answered yes; the bill does not state how the 75/25 split must be used. 7:38:14 PM REPRESENTATIVE ORTIZ thanked the committee for hearing HB 72. [HB 72 was held over.]