SENATE BILL NO. 26 "An Act relating to the Alaska Permanent Fund Corporation, the earnings of the Alaska permanent fund, and the earnings reserve account; relating to the mental health trust fund; relating to deposits into the dividend fund; relating to the calculation of permanent fund dividends; relating to unrestricted state revenue available for appropriation; and providing for an effective date." 9:02:47 AM RANDALL HOFFBECK, COMMISSIONER, DEPARTMENT OF REVENUE, wanted to walk through SB 26, and noted that many of the slides were very similar to what was discussed the previous week when the committee considered SB 70. He informed that he would highlight the differences between the two presentations in slides 1 through 25. Co-Chair MacKinnon asked if Commissioner Hoffbeck could review the document for the benefit of the public. Commissioner Hoffbeck discussed the presentation "Permanent Fund Protection Act," (copy on file). He turned to slide 2, "BASIC ELEMENTS OF SB 26": The Permanent Fund Protection Act proposes: 1. A framework for sustainable withdrawals from the earnings reserve account (ERA) and 2. A sustainable dividend formula. Commissioner Hoffbeck noted that there were several companion documents [a 5 critical tests document, a one- page overview of the Alaska Permanent Fund Protection Act, a 12-page narrative white paper, and a sectional analysis]. He considered that the two points on the slide were critical for the durability of any plan. Commissioner Hoffbeck looked at slide 3, "PRESENTATION OVERVIEW": Part I: The Permanent Fund's Role in a Solution Part II: Structure for Using the Permanent Fund Part III: Modeling Background Part IV: Draw Durability Part V: Dividend Durability Part VI: Fund Durability & Inflation Proofing Part VII: Fiscal Plan Impact Commissioner Hoffbeck informed that there was seven parts to the presentation. 9:04:59 AM Commissioner Hoffbeck read slide 4, "Part I - THE PERMANENT FUND'S ROLE IN A SOLUTION." Commissioner Hoffbeck spoke to slide 5, "USE OF PERMANENT FUND EARNINGS": "This proposal, if approved, would amend the Constitution of the State of Alaska by … establish[ing] a constitutional permanent fund into which at least 25 percent of all [mineral royalties] received by the State would be paid. The principal of the fund would be used only for income-producing investments permitted by law and the income from the fund would be deposited in the general fund of the State and be available to be appropriated for expenditure by the State unless otherwise provided by law." Ballot Proposition No. 2 Permanent Fund from Non-Renewable Resource Revenue Constitutional Amendment Commissioner Hoffbeck highlighted the last line of the slide. He thought there had always been intent within the structuring of the Permanent Fund that it would eventually be used for state expenditures. Commissioner Hoffbeck discussed slide 6, "WHY USE PERMANENT FUND EARNINGS,": FY18 Budget $4.3 billion FY18 Budget Gap $2.8 billion Potential Tools to Close the Gap Motor Fuels Tax Increase $0.1 Broad Based Tax $0.6 Oil Tax Credit Reform $0.1 Max. Cuts Proposed (over 3 years) $0.75 SB26 (net dividend) $2.0 Commissioner Hoffbeck expanded that SB 70 had generated about $1.9 billion; the difference between it and SB 26 was how royalties were treated between the dividend and the income. He stated that the governor had expressed a preference for a revenue solution, but was open to a broad discussion on revenues versus expenditure reductions. The governor had expressed in an op-ed piece that he would accept whatever the legislature agreed upon within terms of a revenue solution. 9:06:52 AM Commissioner Hoffbeck turned to slide 8, "STRUCTURE FOR USING THE PERMANENT FUND": 1. Rule-Based Framework (Saving, Spending, Dividend) 2. Stabilize the Budget 3. Protect the Dividend 4. Protect the Permanent Fund 5. Maximize the use of the Earnings Reserve Commissioner Hoffbeck relayed that the slide listed the five tests the administration used for reviewing any plans being presented that involved changing the Permanent Fund. The various plans had a robust hearing history. He thought SB 26 was very similar to SB 128 [legislation from 2016 dealing with the Alaska Permanent Fund Corporation], and he would discuss the differences in a later slide. There had been many hearings, community meetings, and a review of global best practices as to how a sovereign wealth fund should be used. Commissioner Hoffbeck looked at slide 9, "STRUCTURE FOR USING THE PERMANENT FUND": A plan to use the fund should be … 1. Rule-Based (Saving, Spending, Dividend) · Greatest threat to long term fund durability is unplanned withdrawals · Withdrawals need to occur under a set of statutory rules o Designed to protect the fund and guard against unsustainable uses o Ensure the ERA holds enough to bridge years of low earnings ("ERA durability") Commissioner Hoffbeck stated that it was critical to know how much could be spent in order to still maintain a sufficient balance in the Permanent Fund and the Earnings Reserve Account (ERA). He stated that a great deal of time had been spent modelling various bills to ensure that plans were durable and would last over time. Commissioner Hoffbeck reviewed slide 10, "STRUCTURE FOR USING THE PERMANENT FUND": A plan to use the fund should be … 2.Stabilizing: · Over the long term, economies that experience repeated ups and downs grow slower than stable economies. · Because commodity prices are volatile, economies dominated by a single commodity industry, like the petroleum industry, experience more (and more pronounced) cycles. · Permanent Fund Earnings can play a central role in reducing four decades of boom and bust budgeting cycles. Commissioner Hoffbeck noted that stability was associated with economic growth. He mentioned the "resource curse," which described a funding source that was primarily based on a volatile and singular revenue stream, which tended to slow economic growth over time. He thought it was critical to stabilize the government component of the economy to the extent it was possible. He thought it was possible to structure income from investments and oil together in such a way to reduce volatility out of the budgeting process for state expenditures. 9:09:33 AM Commissioner Hoffbeck looked at slide 11, "STRUCTURE FOR USING THE PERMANENT FUND": A plan to use the fund should… 3. Protect the Dividend · Reflects the current and future economic realities of shrinking oil and gas tax revenue. · Recognizes that too large a dividend limits available options for full fiscal solutions. · Provides for a sustainable dividend for all generations of Alaskans. Commissioner Hoffbeck discussed the one-page document "Permanent Fund Protection Act," dated February 6, 2017 (copy on file). Commissioner Hoffbeck noted that protecting the Permanent Fund Dividend (PFD) became a critical issue after speaking around the state and talking with constituents. He had found relative consensus regarding use of the Permanent Fund, but people considered that the dividend was part and parcel of the economics of the state and should be preserved at some level. Commissioner Hoffbeck reviewed slide 12, "STRUCTURE FOR USING THE PERMANENT FUND": A plan to use the fund should… 4. Protect the Permanent Fund · Meant to provide for funding state expenditures for all generations of Alaskans. · Maintain or grow the real (inflation-adjusted) value of the permanent fund. · Withdrawing too much is unsustainable and risks damaging the fund. Commissioner Hoffbeck discussed slide 13, "STRUCTURE FOR USING THE PERMANENT FUND": A plan to use the fund should … 5. Maximize the use of the Permanent Fund Earnings: · As North Slope production declines, the fund's earnings will be increasingly important in eliminating the fiscal imbalance in order to sustain public services. o Similar to petroleum revenue, investment earnings can be highly variable. o Unlike petroleum, our financial reserves are a renewable resource. · Withdrawing too little limits future options for full fiscal solutions. · Other proposed new revenues and cuts could reduce the deficit by millions, the fund can sustainably contribute billions. Commissioner Hoffbeck stated that in order to maintain the durability of the Permanent Fund, there needed to be situation where there was less chance of an unplanned unstructured draw. In order to do so, it was necessary to put as money as possible in the structured portion of the fund in order to close the fiscal gap to the greatest extent possible. Commissioner Hoffbeck looked at slide 15, "MODEL SOPHISTICATION and VETTING": · Key aspects of the model •Probabilistic treatment of oil prices, oil production, investment returns •Focus on detail of how money flows between permanent fund, general fund, and dividends •Assumptions from objective sources •Monte Carlo simulations · Vetted by McKinsey last year •Found no major mechanical errors, reasonable assumptions •Approved of Monte Carlo probabilistic method •Suggested improvements, some of which the Department of Revenue (DOR) has incorporated (for example, probabilistic oil production, autocorrelation) Commissioner Hoffman relayed that there had been robust probabilistic modelling of production and price. 9:13:02 AM Commissioner Hoffbeck reviewed slide 16, "METHOD, INPUTS, ANDASSUMPTIONS": · Permanent Fund Starting Value: $54.9 billion •Realized portion of corpus: $37.9 billion •Realized portion of earnings reserve account (ERA): $9.7 billion •Unrealized earnings held by the fund: $6.3 billion •Starting value based on •APFC forecast for end of fiscal year 2017 (FY17), without inflation proofing transfer for FY17 •Because APFC accounts for October 2017 dividends in FY17, scenarios starting with $1,000 per person dividends begin with a higher realized ERA balance of $10.6 billion and a total fund balance of $55.8 billion. · Investment Return: Callan Associates' 10-year forecast •Total return: 6.95% geometric, 12.32% standard deviation •Statutory return: 6.24% mean, 2.24% standard deviation •Inflation rate: 2.25% Commissioner Hoffman stated that the base assumptions discussed in the slide were consistent with all the Permanent Fund bills that the department considered. The assumptions were based on the Permanent Fund's forecast for the end of the year FY 17. He stated that the numbers on the slide were lower than what actually resided in the fund, due to an unexpectedly higher year of returns; which resulted in another level of conservatism in the projections. The department had used Callan and Associates' ten-year forecast for total returns, statutory returns, and an inflation rate. Commissioner Hoffbeck discussed slide 17, "METHOD, INPUTS, and ASSUMPTIONS": · Petroleum Revenues: o Oil price: Probabilistic analysis of ANS oil prices using a PERT distribution from the fall 2016 price forecasting session. o Production: Probabilistic analysis of ANS oil prices using a PERT distribution from the DNR forecast in Fall 2016 RSB · CBR: $4.4 billion beginning of year 2018 balance & a 2.25% rate of return. Commissioner Hoffman noted that the probabilistically modelled oil price and production and were noted in the Fall Revenue Forecast. Commissioner Hoffbeck displayed slide 18, "BUDGET ASSUMPTIONS," which showed a graph depicting the baseline for UGF revenues for all revenues except unrestricted royalties and production taxes, which were modelled separately. The blue line was the ten-year Office of Management and Budget (OMB) forecast, which was extended with inflation after ten years. Senator Micciche asked to go back to slide 18, and inquired if the assumption for inflation was 2.25 percent. Commissioner Hoffbeck answered in the affirmative. Senator Micciche asked if the first four years were flat because of assumed reductions. Commissioner Hoffbeck needed to look at the details as to why the years were flat, and conveyed that the first three years assumed some budgetary restraint. Senator Micciche asked if the commissioner would agree that the most challenging part of the model was assuming what the future would be, and which plan covered the largest portion of the gap. He thought the OMB ten-year plan did not account for revenues, and was just a comparison based on what was known of the past for growth. Commissioner Hoffbeck stated that there was a challenge both in forecasting and the reality of some of the formula programs that were currently in statute, and that tended to grow over time. He recounted that there had been $240 million to $260 million in the current budget between one- time expenditures and formula growth that needed to be stripped from the budget to get to a zero budget. He thought there were a lot of issues to consider when holding the line on expenditures, and even more issues when reductions were considered. He also thought there were many issues to consider when pondering new revenues. 9:17:00 AM Commissioner Hoffbeck looked at slide 19, "LAST SESSION'S WORK": Last year, the 29th Legislature held 39 hearings on the Permanent Fund Protection Act (SB128, HB245, and SB5001): · SSTA: 10 hearings, including 2 days of public testimony · SFIN: 10 hearings, including 1 days of public testimony · HFIN: 19 hearings, including 4 days of public testimony Other bills addressing the use of permanent fund earnings were also considered: · SB114: 7 hearings in SSTA, 9 hearings in SFIN · HB303: 4 hearings in HFIN · HB224: 4 hearings in HFIN SB26 is a slimmed down version of the Permanent Fund Protection Act passed by the Senate last year. It is the same as the CS for SB128, but without provisions re.: · CBR management · APFC procurement · Spending cap Commissioner Hoffbeck noted that the slide talked about the genesis for SB 26, which was largely based on SB 128. He discussed the provision for moving Constitutional Budget Reserve (CBR) management to the Alaska Permanent Fund Corporation (APFC), which had been left out of SB 26. He recounted that APFC Executive Director Angela Rodell had testified that she would have similar struggles in terms of investment returns on the CBR until there was a structure around the timing of draws. Commissioner Hoffbeck showed slide 20, "PFPA: SCENARIO": · Corpus Deposits: o 25% of royalties o Any ERA balance over 4 times the full POMV calculation (after the current year draw) is transferred to the corpus (inflation proofing mechanism or "4 times" rule). · Draw Calculation: o Maximum POMV: 5.25% of the average fund value in the first 5 of the last 6 years. o Draw Limit: The maximum POMV amount is reduced by $1 for every $1 that UGF royalties and production taxes exceed $1.2 billion. · Dividend Calculation: o 20% of the maximum POMV payout before reductions, plus 20% of UGF royalties o Overwriting the above calculation, the October 2018 dividend is $1,000 per person (the 2017 dividend is reflected in the starting fund value) Commissioner Hoffbeck informed that the treatment of the corpus deposits was the same as under SB 70 as was the draw calculation for the first 4 or 5 years. The dividend calculation under SB 70 was 25 percent of POMV, while under SB 26 the dividend calculation was tied to investment returns and oil and gas development and success. Commissioner Hoffbeck displayed slide 21, "Part IV - DRAW DURABILITY." Commissioner Hoffbeck turned to slide 22, "POMV DRAW,": · 5.25% of the average fund value in the first 5 of the last 6 years · Example: draw calculation for fiscal year 2018 •Average fund value in the first 5 of the last 6 years = $48.1 billion •5.25% of $48.1 = $2.5 billion •Effective POMV: = 4.7% of 2017 value · Aggressive, but sustainable … if the draw limit is applied Commissioner Hoffbeck stated that the slide was a review of the POMV draw at 5.25 percent, and was the same as shown under SB 70. The slide showed the net effect of a 5.25 percent draw when using five of the prior six years. The draw was effectively a 4.7 percent draw. Commissioner Hoffbeck showed slide 23, "THE EFFECTIVE POMV": Based on historic fund values, these "snapshot" POMV calculations demonstrate that, 5.25 percent of the fund's average market value in the first 5 of the preceding 6 years is generally less than 5.25 percent of the fund's current value. Commissioner Hoffbeck stated that the bar graph on slide 23 showed the effective Percent of Market Value (POMV) draw in five-year increments back through 1995. The draw was generally in the 4 percent to 4.5 percent range; with the exception of 2006-2010, which was at 5.32 percent. There would be variation in the POMV, but it appeared as though it would be within the range of 4.5 to 5 percent, which was modelled as durable. 9:21:40 AM Commissioner Hoffbeck discussed slide 24, "DRAWLIMIT · Reduces the POMV draw by $1 for every $1 that UGF production taxes and royalties exceed $1.2 billion. · Does not apply to the portion of the POMV going to dividends. Commissioner Hoffbeck looked at slide 25, "POMV & DRAW LIMIT," which graphically showed the ERA draw started to reduce over time. He recalled that Senator Micciche had posed some questions about the location of trigger points. The oil production tax reached $1.2 billion somewhere between $65/bbl and $70/bbl. A reduction in the draw could be seen at about $72/bbl, and at around $100/bbl there was no draw on the ERA. Commissioner Hoffbeck displayed slide 26, which showed a graph entitled "Median UGF Revenue and Budget." He recalled a question by Senator Micciche about the unfunded portion of government expenditures under the plan, which the green bars on the graph were trying to forecast. The dark blue represented status quo revenue, the yellow was the planned Permanent Fund withdrawals, and the green were other fiscal measures necessary to balance the budget over the life of the plan. He observed that there was a short-term window of opportunity to close the fiscal gap, but a long-term issue to address as well. Co-Chair MacKinnon asked for a footnote to illustrate that the green bars representing "Other Fiscal Measures" could include any combination of budget cuts. Commissioner Hoffbeck agreed with Co-Chair MacKinnon, and indicated that the wordage had signified it could be either cuts or new revenues. Commissioner Hoffbeck turned to slide 27, "STATUS QUO UNRESTRICTED GENERAL FUND REVENUE," which showed a chart depicting the impact of additional production and additional price on the amount of revenue available for government expenditures. The slide reflected total UGF revenue, and included all of the revenues including oil and gas taxes and royalties. He noted that income taxes adjusted with oil price and production changes. He thought it was possible to see where the fiscal gap could be closed with increased production and oil price. Commissioner Hoffbeck turned to slide 29, "DIVIDEND FORMULA": · $1,000 per person for the first 2 years, then · 20% of UGF royalties (15% of all royalties), plus 20% of the 5.25% POMV draw (about 1% POMV)(expected to be about $1,000 per person into the future) Commissioner Hoffbeck stated that the dividend formula was slightly different than what was under SB 70. 9:25:42 AM Commissioner Hoffbeck looked at slide 30, "PFPA, FULL FISCAL PLAN," which showed a graph illustrating the dividend per person under the Permanent Fund Protection Act (PFPA). He stated that the median was the intersection of the yellow and blue bars, which was the most likely occurrence of the dividend amount. The graph showed the 2041 median value of the dividend to be $1,468 in nominal dollars. The dividend's real buying power would be reduced over time. He compared the value with the dividend projection under SB 70, which had a nominal dollar value of $1,603. The dividend grew faster under SB 70 than under SB 26. Commissioner Hoffbeck turned to slide 31, "20/20 DIVIDEND (OCT. 2017)," which was a new slide to show the relative impacts at higher oil production and higher price. Commissioner Hoffbeck discussed slide 33, "INFLATION PROOFING TRANSFERS": · AS 37.13.145(c) currently provides for annual inflation proofing transfers from the ERA to corpus. · The ERA needs a sufficient balance to be able to meet the draw each year ("ERA durability" concern). · To address this concern, the bill provides that the ERA balance over 4 times the maximum draw (after current year draw) is transferred to corpus instead. · This "4 times" rule is designed to grow the corpus in pace with inflation over time. Commissioner Hoffbeck looked at slide 34, "PFPA, FULL FISCAL PLAN," which showed a graph that demonstrated how much the Permanent Fund itself would grow under the full fiscal plan, with no unplanned draws against the fund. He pointed out that the graph started out at approximately $54.9 billion as an assumed fund balance, which would grow to $61 billion during the 24 years of the modelling. He pointed out that the ERA fail rate over 24 years was approximately 1.52 percent. He recalled that under SB 70, the real value of the fund grew to about $66 million. The fund grew slightly higher under SB 70 than under SB 26, and the failure rate under SB 70 was less than 1 percent. Both rates of failure were within the errors of the modelling and indicated that there was little chance of either of two plans having a failure during the life of the modelling. Commissioner Hoffbeck presented slide 36, "FUND SIZE COMPARISON," which showed a line graph that compared the relative fund value over time for SB 26, SB 70, SB 21, and the status quo. He observed that the fund value grew in a very similar fashion over time for all the plans. He commented that all were substantially greater than the growth from the status quo. 9:30:33 AM Commissioner Hoffbeck showed slide 37, "UGF REVENUE COMPARISON," which showed a line graph depicting the amount of monies available for government expenditures under the three plans. He observed that the PFPA yielded just slightly more than SB 70. He considered that there was an issue with SB 21 in that it provided substantially less money available for government expenditures, and in doing so created a greater risk of unplanned draws from the Permanent Fund. Commissioner Hoffbeck showed slide 39, "Conclusion," which was a narrative comparison of plans shown on a table. He stated that it was similar to the chart used for SB 70, but with a few changes reflecting some of the comments by members at the committee hearing. He pointed out that all of the plans had substantial risk if the fiscal problem was not fully dealt with. He reiterated the risk of unplanned draws. If there weren't a sufficient amount of expenditure reductions or sufficient additional revenue, the only other source of income after the CBR was depleted was the ERA. Commissioner Hoffbeck summarized that the three bills being considered in the meeting were all rules-based, and all had a five-year averaging of the POMV and had some investment income stabilization. He continued that SB 21 had no defined plan as to how to deal with the total revenue issues, while the PFPA had a partial stabilization of total revenues with the four-times draw and the turning off of the ERA flows from oil price increases. The bill did not deal with volatility of other revenues within the system. Commissioner Hoffbeck continued to discuss slide 39, and pointed out that SB 70 had a spending cap, and had more of an ability to deal with other revenues. All three plans protected the dividend. Both SB 26 and SB 70 protected the corpus of the Permanent Fund. Under SB 21, the fund would grow and keep it's buying power over time, but there was no process for moving monies back into the corpus. Without such a process the corpus would remain flat and all of the growth would reside in the ERA. He did not feel SB 21 used enough money to close the fiscal gap by maximizing use of the ERA. The PFPA maintained a 5.25 draw, which he considered the maximum draw; while SB 70 maintained a 5 percent draw over time. 9:34:20 AM Commissioner Hoffbeck looked at slide 40, "Conclusion," which showed another table that examined the amount of money actually available for government expenditures and providing government services. He acknowledged that the state was in the position of needing to use Permanent Fund earnings for government services, and must examine how much could be taken under each of the plans. He reviewed the potential dividends under the various plans. He reviewed the assumed budget under each plan, and highlighted Unrestricted General Fund (UGF) revenues under the plans. The revenues were a bit higher under SB 70, as there was no draw on the royalties. He addressed the ERA draws; and observed that while there was no planned draw under the status quo, there was various draws under the under plans. Commissioner Hoffbeck continued discussing the table on slide 40. He addressed the bottom row, 'Additional Measures Required for a Full Fiscal Plan,' noting that under status quo, $2.8 billion was needed. Under SB 21 $1.5 billion was needed, and under both SB 26 and SB 70 there was an approximately 700 million gap to close. He found it was significant that to close the $1.5 deficit under SB 21 it would require all of the cuts proposed by the Senate as well as all of the revenues proposed by the House. By paying the larger dividend and having a lower draw, there would be a need for substantially more pieces to achieve a solution. Commissioner Hoffbeck looked at slide 41, "PFPA (SB 26)": · Provides a rule-based framework for use of the fund earnings · Stabilizes UGF revenues · Protects the dividend · Protects the permanent fund · Maximizes the use of the earnings reserve Co-Chair MacKinnon noted that there had been a similar presentation the previous week, which was available for review by the public. There had been substantial questions from the committee at the previous presentation. Senator Dunleavy asked if the governor was able to veto a dividend under SB 26. Commissioner Hoffbeck answered in the affirmative. Senator Olson asked if there were any bills being considered that would preclude the governor's ability to veto the PFD. Commissioner Hoffbeck understood that the governor would have veto authority under all the bills being considered. 9:38:31 AM EMMA POKON, ATTORNEY, DEPARTMENT OF LAW, discussed the sectional analysis for SB 26 (copy on file): Section 1 - Legislative Intent Section 1 expresses legislative intent to reevaluate the use of permanent fund earnings in three years. Section 2 - Dedicated Mineral Royalties Section 2 amends AS 37.13.010(a) to reduce the percentage of mineral royalties directed to the principal (or corpus) of the permanent fund from about 30% of all mineral royalties received by the state (25% from pre-1980 leases and 50% from later leases) to 25% of the total. Section 3 - Conforming Amendment Section 3 deletes the definition of "income available for distribution" in AS 37.13.140. An amended definition of this term will appear in a new subsection, AS 37.13.140(b), created by section 4 of this bill. Section 4 - Draw formula (the amount to appropriate from the ERA to the general fund) Replacing the language removed in section 3, section 4 adds new subsections (b) and (c) to AS 37.13.140. These new subsections contain the new formula for determining "the amount available for distribution each year" from the earnings reserve account (ERA). This "draw formula" has two parts: (1) a percent of market value (POMV) calculation and (2) a "draw limit." Contained in new subsection (b), the POMV calculation is 5.25% of the average value of the fund for the first 5 of the last 6 years. The 5.25% POMV is the maximum amount that would be taken from the ERA under the plan. This amount may be reduced by the draw limit contained in new subsection (c). New subsection (c) provides that after calculating the 5.25% POMV, the draw limit reduces that amount by one dollar for every dollar by which unrestricted (i.e., non-dedicated) production taxes and mineral royalties exceed $1.2 billion. Basically, when oil revenues go up the draw from the permanent fund goes down. Together, the POMV calculation and the draw limit create a draw formula that: (1) stabilizes general fund revenues; (2) avoids using permanent fund earnings when oil revenues are high; (3) allows larger withdrawals (larger than what would be sustainable under a simple POMV) when oil revenues are low; and (4) creates more opportunities for the permanent fund to grow, resulting in larger dividends and more funding available for the general fund when it is most needed. Section 5 - Conforming Amendment This conforming amendment updates a cross-reference to the calculation of the "amount available for distribution" or the "draw formula." The cross- reference is in AS 37.13.145(d) which exempts income from the Amerada Hess portion of the fund from the calculation of the amount available for distribution, directing it to the Alaska capital income fund instead. Section 6 - Appropriations out of the ERA Defining two types of appropriations out of the ERA, one to the general fund and one to the principal, section 6 adds new subsections (e) and (f) to AS 37.13.145. To the general fund: New subsection (e) contemplates an appropriation from the ERA to the general fund of the amount determined by the draw formula in section 4. This provision specifies that the appropriation is "up to" the amount determined by the draw formula. To the principal: New subsection (f) amends the timing and amount of transfers from the ERA to the corpus (the inflation proofing mechanism) currently in AS 37.13.145(c). The current inflation proofing mechanism in AS 37.13.145(c) contemplates an annual appropriation from the ERA to the principal of the amount necessary to offset the effect of inflation in the prior year. AS 37.13.145(c) would be repealed by section 13 of this bill. To replace AS 37.13.145(c), new subsection (f) instead contemplates appropriating any balance of the ERA that exceeds four times the maximum 5.25% POMV draw (after the transfer to the general fund contemplated in new subsection (e)). In other words, when the ERA reaches 21% of the total value of the fund (5.25% multiplied by four) any money in the account over that amount goes to the principal. Over time, these transfers will inflation proof the principal (grow the principal in pace with inflation). This new formula also means that the timing of inflation proofing transfers changes from a fixed annual event to a more flexible "as we can" schedule. of protecting the permanent fund. However, depleting the ERA would create pressure to realize earnings based on general fund needs rather than on good investment policy. Thus, to ensure investment decisions remain independent of political considerations, the ERA should hold a balance sufficient to bridge several years of low or negative investment returns (and low oil revenues). This more flexible inflation proofing mechanism helps bolster the ERA balance to prepare for that possibility while keeping a mechanism for transfers to the corpus in place. Section 7 - Appropriations from the General Fund to the Dividend Fund Adding a new section (AS 37.13.146), section 7 effectively amends AS 37.13.145(b) (which is repealed in section 13) to change the dividend calculation. The new formula has two parts. It contemplates an appropriation from the general fund to the dividend fund of an amount equal to: (1) 20% of non-dedicated royalties (which is about 15% of all royalties), plus (2) 20% of the POMV calculation (or about 1% of the total value of the fund). This only relates to the total amount appropriated for dividends. The rest of the formula for per person dividend check is in the dividend fund statute. Section 8 - Conforming Amendment Like the conforming amendment in section 5, this provision updates a cross-reference to the "amount available for distribution" or the "draw formula." The update is in AS 37.13.300(c), which exempts income from the mental health trust fund from the calculation of the amount available for distribution. Section 9 - Conforming Amendment This conforming amendment updates a cross-reference to the formula for the amount to appropriate to the dividend fund. Section 10 - 2018 and 2019 Dividends Section 10 specifies that, notwithstanding the new dividend formula, dividend checks in 2018 and 2019 will be $1,000 per person. Section 11 - Conforming Amendment Section 11 updates AS 43.23.045(a), specifying that the dividend fund consists of money appropriated to it under the new section AS 37.13.146 (section 7 above). Section 12 - Conforming Amendment Amends AS 43.23.055 to clarify that, once funds are appropriated to the dividend fund under AS 37.13.146 (section 7 above) to pay dividends the Department of Revenue may pay dividends without another appropriation. Section 13 - Repeals Section 13 repeals three provisions in current statute: 1. AS 37.10.430(c), which creates a CBR subaccount and requires that the main account be invested short-term if the Department of Revenue anticipates a need for those funds within 5 years; 2. AS 37.13.145(b), which contains the current formula for appropriations to the dividend fund that would be replaced by the formula in section 7 of this bill; 3. AS 37.13.145(c), which contains the current inflation proofing formula that would be replaced by the new mechanism in section 6 of this bill. Section 14 - Repeal Section 14 repeals AS 42.23.025(c) on June 30, 2020. Created by section 10 (above), this provision applies to dividends in 2018 and 2019 and will be superfluous after the October 2019 dividend distribution. Section 15 - Immediate effective date Co-Chair MacKinnon asked if there was a reason that there was not a severability clause in the bill. Ms. Pokon had not previously discussed the issue. Co-Chair MacKinnon thought that dividends were very close and personal to Alaskans and expected that someone could take the state to court after any changes of any kind were made to the dividend. She referenced past litigation. SB 26 was HEARD and HELD in committee for further consideration. 9:42:58 AM AT EASE 9:46:13 AM RECONVENED