SENATE BILL NO. 107 "An Act relating to the Alaska permanent fund; relating to income of the Alaska permanent fund; relating to the amount available for appropriation and appropriations from the earnings reserve account; relating to the permanent fund dividend; and providing for an effective date." 10:24:45 AM KEN ALPER, STAFF, SENATOR DONNY OLSON, discussed the presentation, "Senate Bill 107, How We Got Here: Use of Savings to Balance the Budget Permanent Fund, CBRF, and the POMV" (copy on file). 10:25:47 AM Mr. Alper addressed slide 2, "The Permanent Fund, 1977- 2017": • For 40 years, the Permanent Fund mostly grew in the background and was not used for general government in any way • Half of statutory earnings, defined by formula, were distributed as dividends • The "other half" could have been used by the state, but was left in the fund Therefore, the fund now includes the compounded earnings on the state's "half" that was not used 10:26:32 AM Mr. Alper pointed to slide 3, "The Permanent Fund, 1977- 2017": • What would it have been used for? o Additional state spending o Larger PFDs o Lower oil taxes o Invested separately in another savings fund • 2016-2017 Dividend Reduced from formula by veto (2016) or budget action (2017) • 2018 Passage of SB26, with a sustainable "percent of market value" draw tied to a five-year lookback fund value 10:28:13 AM Mr. Alper discussed slide 4, "Constitutional Budget Reserve History": • 1977-1990: Multiple lawsuits between state and oil industry regarding pipeline tariffs, royalty valuation, and petroleum taxes • 1990: As these cases were settling, Art. IX, Sec. 17 passed as a place to hold settlement funds apart from general revenue o Two methods to draw funds: by simple majority or by supermajority • 1994, Hickel v. Halford, Supreme Court greatly limited possibility for simple majority draw, making the "¾ vote" necessary in almost all cases • 1994-2005, annual budget balancing draws totaling $5.5 billion • 2006-2010, budget surpluses were used to pay back full amount • 2011-2013, no CBRF draws; budget surpluses saved elsewhere • 2014-2017, draws totaling about $11 billion 10:30:10 AM Mr. Alper displayed slide 5, "Constitutional Budget Reserve History": • 2018-2021, ongoing concern of balance hitting zero • 2022-2023, small repayments due to: o Failure of "reverse sweep" o FY22 surplus after spring '22 price spike o Veto of SBR deposit passed last session 10:31:55 AM Mr. Alper pointed to slide 6, "POMV, Dividends, and Year End Balances 2018-2028." 10:34:31 AM Mr. Alper addressed slide 7, "What If the Senate Version of SB26 Had Passed?" • (The House version had similar provisions, including a 67/33 POMV split, although all were removed by the conference committee) • 75/25 Split • If certain oil revenue (production tax plus UGF portion of royalty) exceeds $1.2 billion, POMV is reduced dollar for dollar by the amount over that o The reduction comes from the GF portion, not the dividend portion • When the ERA exceeds four times the current year's POMV, the amount in excess of this sweeps to the principal (replaces inflation proofing) o Internal to the fund, so does not impact this analysis • Appropriation cap of $4.1 billion, plus capital budget and PFD, less debt service, plus inflation from 7/1/16 10:36:45 AM Mr. Alper pointed to slide 8, "What If the Senate Version of SB26 Had Passed?" And then: • How would budgets have changed? • Future POMV adjustments due to claw back • Etc. 10:39:16 AM Mr. Alper discussed slide 9, "What CSSB107(FIN)\Y Does": • Establishes the 75/25 Split (25 percent of POMV to dividends) • Sets a "trigger" by which the split increases to 50/50 (50 percent of the POMV to dividends): o If, in any year starting in 2026, the legislature passes at least $900 million in new revenue, the POMV split increases to 50/50 o Must be new, annually recurring revenue, versus what was in statute as the law read on January 1, 2023 o The condition must be agreed to by both the Commissioner of Revenue and the Director of Legislative Finance o If this doesn't happen by 2037, the condition expires and the 75/25 remains 10:40:39 AM Mr. Alper pointed to slide 10, "Potential additional amendments to the POMV": • Modify the "trigger" (for the switch from 75/25 to 50/50) o Different revenue amount than $900 million o Add multiple "steps" of new revenue where the POMV split would change gradually • Add additional "triggers" o Minimum savings amount o Condition to passing some other legislation • Add additional pieces from SB26 o lawback" / volatility piece (POMV reduced when oil revenue is high) o Automatic sweep from ERA to Principal when ERA hits certain size 10:42:06 AM AT EASE 10:43:03 AM RECONVENED 10:43:03 AM PETE ECKLUND, STAFF, SENATOR BERT STEDMAN, looked at the presentation, "Historical Capital Budgets" (copy on file). He looked at slide 1. Mr. Ecklund discussed slide 2. He noted that the slide showed some of the deferred maintenance needs in the state, and school major maintenance needs. 10:45:36 AM Mr. Ecklund pointed to slide 3. He remarked that the slide was from the Office and Management and Budget (OMB), which addressed preventative maintenance. Mr. Ecklund looked at slide 4. He stated that the slide was drafted by Senator Bishop. Senator Bishop stated that the slide showed that the slide would slowly address the issue, because it adjusted for inflation as related to deferred maintenance . Mr. Ecklund pointed to slide 5. He noted that the slide pointed to the modeling assumptions. Mr. Ecklund pointed to slide 6. He remarked that the slide was built into the assumption for education. Mr. Ecklund discussed slide 7. He noted that the slide showed the assumptions, which were similar to other budget items throughout the session. 10:50:32 AM Mr. Ecklund pointed to slide 8. He noted that the slide showed what was needed in revenue to get to a 50/50 dividend. Mr. Ecklund displayed slide 9, which showed the probabilistic modeling. Co-Chair Olson noted the CBR probability. Mr. Ecklund agreed Mr. Ecklund addressed slide 10, which showed that the reduction in the budget would reflect the history of the budgets. 10:56:09 AM Co-Chair Olson looked at slide 6, and wondered whether the supplemental budget was slated at $50 million per year. Mr. Ecklund replied in the affirmative. Co-Chair Olson felt that assumption was low for the supplemental budget. SB 107 was HEARD and HELD in committee for further consideration. Co-Chair Olson discussed the following meeting's agenda.