SENATE BILL NO. 78 "An Act creating the education endowment fund and the dividend lottery fund; authorizing contributions from the permanent fund dividend to the dividend lottery fund; relating to transfers from the dividend lottery fund and the education endowment fund; relating to the definition of 'gambling'; and providing for an effective date." 10:16:52 AM Vice-Chair Bishop introduced SB 78. He offered a brief overview of the legislation. He spoke of a past mentor that had highlighted the Education Head Tax taken out of his first paycheck at 16 years old. He stated that SB 78 would set up an education lottery as a fun way to raise money for education. He believed that the bill would provide stable funding for education while supporting economic diversification in the state. 10:20:01 AM PETE FELLMAN, STAFF, SENATOR CLICK BISHOP, relayed that the bill proposed a voluntary program that allowed for the option of donating to education via the permanent fund dividend application. He added that the option would be limited to applicants over 18 years old. He continued that 95 percent of the donated funds would be immediately used for education or would be held for education in the future. He relayed that half of all the donations would go directly to the Public Education Fund for the respective year. Additionally, 25 percent of the funds would go to establish the Public Education Endowment, where it would grow through investment. The remaining 25 percent would go into the Education Lottery Fund, which would pay out a percentage for prizes. Of the 25 percent of total donations, 20 percent would be used to pay lottery prizes through a drawing, every year. He specified that 80 percent of the lottery fund would remain and grow. He related that the fund would grow and feed itself overtime. 10:24:13 AM Mr. Fellman discussed the Sectional Summary for SB 78 (copy on file): Section 1: Amends the definition of "gambling" in AS 11.66.280(3) to exclude the permanent fund dividend drawing in AS 43.23.064. Section 2: Adds new sections to AS 43.23: Sec. 43.23.063: Creates an education endowment fund in the general fund. The fund consists of contributions to the fund from permanent fund dividends (dividends) under AS 43.23.064(b), transfers to the fund under AS 43.23.064(c), interest, and any other money appropriated to the fund. Makes the commissioner of revenue the fiduciary of the fund. Sets the requirements for the commissioner to manage the fund. When the average market value of the fund exceeds $1,000,000,000, 4.5 percent of the average fiscal-year-end market value of the balance of the fund for the last five fiscal years is transferred to the public education fund, subject to appropriation. Sec. 43.23.064: Creates the dividend lottery fund as an account in the general fund. Requires the commissioner of revenue to manage the fund. The fund consists of appropriations from dividends, interest and income earnings shall also be appropriated to the fund. This section allows the commissioner to use the fund without further appropriation to pay for prizes and to pay the cost of administering the fund. When the balance of the dividend lottery fund exceeds $500,000,000 at the end of the fiscal year, the commissioner transfers the amount above $500,000,000 to the education endowment fund. Allows a person to contribute all or a portion of the person's dividend in increments of $100 or more. 25 percent of the contributions may be appropriated to the education endowment fund, 25 percent of the contributions may be appropriated to the dividend lottery fund, and 50 percent of the contributions may be appropriated to the public education fund. Entitles each $100 contribution to one entry into the drawing. The prizes are based on a percentage of the balance of the lottery fund. Section 3: Provides an effective date of January 1, 2018. 10:25:34 AM Senator Micciche extrapolated that if 50,000 residents participated in the first year then $5 million would be generated. He continued that $2.5 million would go directly into the Public Education Fund, with 25 percent going into the endowment and 25 percent would go into the lottery fund. The lottery find would pay out at 20, 15, 10, and 5 percent. He understood that once the lottery fund reached $1 billion, the POMV would be deposited into the education fund. Mr. Fellman answered in the affirmative. He furthered that once the lottery fund reached the $500 million mark, everything above that mark would be deposited into the education fund. 10:27:19 AM Co-Chair MacKinnon wondered about the determination of adult status for 18-year-old residents. Mr. Fellman replied that he did not know the answer. Co-Chair MacKinnon expressed concern that parents could use a child's dividend inappropriately on the raffle. She wondered how many adult applications were received each year. 10:28:41 AM JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION, DEPARTMENT OF REVENUE, stated that the Permanent Fund Dividend Annual Report would break down the number of application between children and adults. He said that in 2016 there were approximately 493,000 adult applications. He clarified that any resident over the age of 18 would fill out an adult application. He stressed that applications for children could not be used for a person who was over 18 years of age. Co-Chair MacKinnon wondered whether any transitional language was necessary for an individual who would reach the age of 18 by the time of distribution but not 18 at the time of the application. Mr. Burnett replied that he had not fully reviewed the bill language but believed that the bill specified an adult application should be used. He thought it was possible for adjustments in the language to accommodate for retroactive entrance into the lottery if a resident turned 18 after the application date but before the distribution date. 10:30:57 AM Senator Dunleavy asked whether the lottery would be limited to Alaskans that qualified for the permanent fund dividend. Mr. Fellman affirmed that the bill proposed a limited lottery. Senator Dunleavy referred to a document "SB 78 - Education Lottery,"(copy on file) which indicated prize levels. He questioned the prize value 10 years out. Mr. Fellman replied that by year 10 the grand prize would be $15 million. 10:32:18 AM Senator Dunleavy appreciated the magnitude of the prizes. He thought that the prize levels could be cause for the lottery to be opened to non-residents. Co-Chair MacKinnon agreed with Senator Dunleavy's concerns. She thought that smaller prizes, spread to more people, could be more beneficial to Alaskans. Senator Dunleavy countered that he appreciated the current prize structure. 10:34:06 AM AT EASE 10:35:34 AM RECONVENED Co-Chair MacKinnon noted that under the legislation if the lottery fund were to grow to $500 million there would be one winner at $50 million when the maximum number was hit. She added that it would take a very long time for the fund to grow to that size, even with high participation. She asked how the public would be informed of participation in the lottery. Vice-Chair Bishop deferred to Mr. Fellman. 10:37:32 AM Mr. Fellman hoped that Department of Revenue would contribute funds for advertising in the initial years and thought that in subsequent years the program would advertise itself. He noted that 2 percent of the fund would be used for advertising. He believed that the odds were very good, there would be four winners each year. He said that if the cap were reached there would be winners at $50 million, $25 million, $12.5 million, and so on. He stressed that 95 percent of the donations would go directly into education in one form or another. Co-Chair MacKinnon thought that the likelihood of winner would be greater if there were more winners overall. Mr. Fellman agreed. 10:39:22 AM Co-Chair MacKinnon noted that the current Pick.Click.Give option was offered when finalizing the permanent fund application. She wondered whether there would be cost to modifying the application process to incorporate the lottery. Mr. Burnett stated that there was an $8,000 fiscal note from the permanent fund division that estimated the one- time cost of making the change to the application process. He said that the department would add the extra lottery information to the advertising efforts already established. He stated that additional advertising could be added but the exact costs would be hard to determine at this point. He assured the committee that getting the information out to the public would be of minimal cost. 10:41:45 AM Co-Chair MacKinnon related that the current program required a 501, a tax deductible, charitable donation. She probed the how the relationship with donations and gambling would work in the legal sense. Mr. Burnett replied that 25 percent of the donation would not be tax deductible because that would be the percentage entrance into the lottery. He related that donations to the state would be tax deductible, or the remaining 75 percent of the donation, voluntary payments to government would be deductible. Co-Chair MacKinnon asked whether the consumer would be informed that only $.75 on each dollar would be tax deductible. Mr. Burnett thought that it would be easy to inform the public; the 1099 form would show the donated amount and the breakdown of that donation. Co-Chair MacKinnon thought that the administrative fee could come out of the other fund. Mr. Burnett agreed. 10:44:27 AM Senator von Imhof queried the maximum limit a person could participate in the lottery per year. Mr. Fellman indicated that it was possible to give your entire permanent fund dividend in $100 increments. Senator von Imhof wondered whether how the state would make more than it paid into the lottery from year to year. Mr. Fellman clarified that of the 25 percent donated to the lottery fund, only 20 percent was used to pay for the prizes. He explained that 80 percent would sit in the fund. He furthered that 25 percent of all the donations received in the following year would be added to the 80 percent; there would always be 80 percent from the previous year to build on in subsequent years. Senator von Imhof asked how the annual payout would be calculated. She wondered whether the payout was based on the money invested per year and not the value of the fund at $500 million. Mr. Fellman replied in the affirmative. He stated that if no bets were placed, there would be no payout. She questioned what would happen if there were no participants in a given year. Mr. Fellman replied that if no one participated, there would be no payout. 10:48:08 AM Co-Chair MacKinnon opined that the issue remained unclear. She relayed that a 10 percent winner would not qualify for $50 million; if only 20 percent of the $500 million fund was available for distribution, the maximum payout would be approximately $10 million and not $50 million. Mr. Fellman replied that if there was $500 million in the fund, the state would pay out 20 percent of the $500 million in prizes. Co-Chair MacKinnon clarified that $50 million was the total payout, but not to one individual. Co-Chair MacKinnon OPENED public testimony. 10:49:44 AM PAUL KENDALL, SELF, ANCHORAGE (via teleconference), testified in opposition to the bill. He lamented that the legislative process was difficult for the public to navigate. He felt that the legislature was dysfunctional. He felt that the "education sector" of Alaska was hording the state's money. He was in opposition to the cost of education. Co-Chair MacKinnon CLOSED public testimony. 10:55:23 AM Vice-Chair Bishop expressed appreciation for the committee hearing the bill. He emphasized that the bill proposed a donation to the future of Alaska's children. SB 78 was HEARD and HELD in committee for further consideration.