SJR 5-CONST. AM.:PERMANENT FUND & DIVIDEND  2:27:22 PM CHAIR HUGHES reconvened the meeting. She announced that the final order of business would be SENATE JOINT RESOLUTION NO. 5, Proposing amendments to the Constitution of the State of Alaska relating to the Alaska permanent fund and the permanent fund dividend. [Before the committee was the CSSJR 5(STA), Version U.] 2:30:23 PM BRUCE TANGEMAN, Commissioner Designee, Department of Revenue, Anchorage, stated that SJR 5 would change the Constitution of the State of Alaska to include the permanent fund dividend. He explained that for over three decades the permanent fund dividend calculation and the amount paid to Alaskans was never questioned. As recently as 2012 and 2013, the amount of the dividend was $900. The Alaska Permanent Fund and the permanent fund dividend were not broken and did not need to be fixed. During the previous administration the legislature appropriated the full permanent fund dividend amount. However, the governor vetoed half of it. The following two years, the legislature and the governor agreed on a dividend that was less than the calculated amount. He said that SJR 5 will guarantee the permanent fund dividend (PFD). It would not be subject to appropriation. The funds would automatically be transferred for payment to Alaskans. He said this process would protect the permanent fund dividend (PFDs), which would not be subject to the governor's veto. The PFD would follow the calculation amount. Any changes to the statutory permanent fund dividend formula would require a vote of the people. He said this resolution is part of the fiscal plan that the governor introduced this legislative session, which also includes a constitutional spending limit and a constitutional amendment for any changes to taxes or new taxes proposed in Alaska. 2:32:58 PM WILLIAM MILKS, Assistant Attorney General, Civil Division, Labor & State Affairs, Department of Law, Juneau, presented a sectional analysis during the hearing of SJR 5. He reviewed Section 1. Section 1: This would provide a conforming amendment to the existing language in order to authorize a portion of permanent fund income to be used for dividends as set forth in Section 2. MR. MILKS said that except as provided under subsection (b), all income from the permanent fund shall be deposited to the general fund unless otherwise provided by law. 2:33:51 PM MR. MILKS reviewed Section 2. Section 2: This section would create two new subsections in the permanent fund amendment. MR. MILKS explained that a portion of the income from the permanent fund shall be transferred solely for a program of dividend payments to state residents. 2:34:04 PM MR. MILKS read subsections (b) and (c). Subsection (b) would require that a portion of the permanent fund income be used, without an appropriation, solely for the purpose of paying permanent fund dividends to state residents. Those payments would occur according to the dividend program and formula currently set forth in statute. Subsection (b) would also allow the legislature to change the dividend program, including amount and eligibility, subject to the approval of the voters in subsection (c). Subsection (c) would require that any law passed by the legislature to amend the permanent fund dividend program, including the amount and the eligibility requirements, would not take effect unless the voters approved the proposed law at the next statewide election. If approved by the voters, it would take effect 90 days after certification of the election or on a special effective date concurred in by two-thirds of the members of each house upon passage, whichever date is later. MR. MILKS read Section 3. Section 3: This transition provision specifies that the dividend program in place on January 1, 2019 would remain in place until the legislature and the voters approved a change to the program. 2:35:10 PM MR. MILKS read Section 4. Section 4: This section would require that the constitutional amendment be placed on the general election ballot in 2020. 2:35:21 PM MR. MILKS said that as Commissioner Tangeman explained, SJR 5 would do several important things. It would provide that a portion of permanent fund income would be used for a dividend program. It also would provide for an automatic transfer of the income for the permanent fund dividend program without any appropriation. It would place into the Constitution of the State of Alaska a permanent fund dividend program that could be changed by the legislature and the voters working together. This resolution follows up on the Alaska Supreme Court decision in Wielechowski v. State that the permanent fund dividend program set forth in statute is subject to legislative appropriation and the governor's veto. He characterized that as the sum and substance of SJR 5. 2:36:29 PM CHAIR HUGHES asked how many years the permanent fund dividend has gone through the budget appropriation process. She related her understanding that initially it was a direct transfer to the program and payment. MR. TANGEMAN said he was unsure. MR. MILKS remarked that certainly through the 80s it has been through the budget appropriation process. He added that the court ultimately said it is subject to the appropriation process. CHAIR HUGHES said that one argument she has heard against putting the permanent fund dividend in the Constitution of the State of Alaska is that it does not reach the level of a fundamental right. She highlighted areas that are important to Alaskans. For example, education and health care are very important to society. The U.S. has a K-12 system and the federal government provides Medicaid and Medicare. The U.S. Constitution does not set out public education or health care as a fundamental right. She asked whether other functions are not included in the Constitution of the State of Alaska or in other states' constitutions. MR. MILKS directed attention to Article VIII of the Constitution of the State of Alaska to the Natural Resources Section. He identified this as an uncommon provision that embodies a policy statement in terms of the utilization of the state's natural resources for the collective benefit of the Alaskans in the constitution. 2:39:04 PM CHAIR HUGHES said she would be interested to know if other states also have unusual constitutional provisions. MR. MILKS said he would need to contemplate it and report back to the committee. 2:39:16 PM CHAIR HUGHES turned to the mathematical provision in statute to the Percent of Market Value (POMV), which is set at 5.25 percent but will drop to 5 percent. She recalled that a Legislative Legal Services opinion indicated that the legislature could decide to draw out additional funds. She asked whether it would ever be necessary to draw out more than the POMV. COMMISSIONER DESIGNEE TANGEMAN answered yes. He said that the calculation for the POMV is 5.25 percent, stepping down to 5 percent. He pointed out that the statute is silent on how those funds are spent. Obviously, this discussion is related to government and dividends. However, the historical rate of growth has been 4 percent. Under that scenario, the entire POMV would be consumed by government. He estimated that this could happen within the next 10-15 years. Since the rate of growth for spending is not connected to the POMV calculation, it still could be consumed by government spending. 2:40:54 PM CHAIR HUGHES clarified her interest was whether [the POMV] could ever be consumed by the PFD by following the historical formula. COMMISSIONER DESIGNEE TANGEMAN said he thought that was also possible. If the state enjoys continued healthy returns the dividend would continue to grow. He stated that the state saw returns of 15-20 percent in at least two of the last five years. He predicted that without market corrections factored in the permanent fund dividend would continue to grow. He estimated that this year's permanent fund dividend would be approximately $3,000. However, the POMV could also be consumed by the full dividend, he said. 2:41:41 PM CHAIR HUGHES pointed out that with continued healthy growth, especially if the constitutional amendment for a spending limit were to pass, the state could have very large permanent fund dividends in the future. She expressed concern that people outside Alaska might want to come to Alaska specifically to receive this permanent fund dividend benefit. She said that SJR 5 also would require any changes to eligibility to be approved by a public vote. She asked whether the administration would be open to a change in the eligibility, perhaps requiring a two-year residency prior to eligibility. She asked whether eligibility could reduce the allowable absence from 180 days to 90 or 100 days, and if other restrictions could be made to the number of years for an allowable absence from the state for medical reasons or military personnel. She preferred that the eligibility changes would be made in statute rather than in the Constitution of the State of Alaska. COMMISSIONER DESIGNEE TANGEMAN offered his belief that the governor would consider any proposals the legislature would recommend. He characterized the permanent fund dividend as a very important issue. The dividend has been on "cruise control" for several decades. However, in the last few years the public has been more engaged because the statutory calculation has not been followed. CHAIR HUGHES asked him to follow up with information on the two- year eligibility, lessening the allowable absences, and some type of limitation for people who leave the state for qualifying reasons but who no longer reside in Alaska and have not lived in Alaska for a number of years. 2:45:10 PM SENATOR KIEHL referred to Chair Hughes's questions about the Senate Bill 26 limit and the permanent fund dividend payment. He asked whether the statutory limit in the rapid growth scenario is effective. He asked whether it is a part of the system provided by law. COMMISSIONER DESIGNEE TANGEMAN responded that the Senate Bill 26 debate focused on the amount that could be taken from the earnings reserve account (ERA) without harming it. He pointed out that the Alaska Permanent Fund Corporation does not weigh in on how the earnings are spent. The entire legislative debate surrounds what would constitute a sustainable draw from the ERA. Step two after adopting Senate Bill 26 would have been to determine the split [between government services and the permanent fund dividend]. The legislature has not been able to come to a consensus on that issue, so the debate has shifted to how to spend it in a responsible manner. He highlighted that this administration believes the constitutional amendment to the existing spending limit is a critical part of the equation since it would cap government spending. That would address the concern that government would absorb the bulk of Senate Bill 26 and the POMV draw. When the spending limit is put into place, the focus on government spending is critical because the POMV draw would be a limited amount, he said. 2:47:25 PM SENATOR KIEHL recapped that the state has had a five-year period with 11-12 percent growth. He estimated that half of the earnings over that period would be more than the 5 percent cap. He said that SJR 5 would calculate the dividend payments as required by law. "So is [Senate Bill 26] a provision by law protected by this constitutional amendment? Do we reduce the dividend?" he asked. MR. MILKS responded that under SJR 5, the permanent fund dividend is provided by law as the statutory dividend framework per the Alaska Supreme Court decision under Wielechowski v. State. The Alaska Supreme Court identified that the statutory calculation determines the amount available for distribution, and another calculation requires 50 percent of that income shall be transferred from the earnings reserve account for distribution of the permanent fund dividend. Finally, that case also addressed the eligibility requirements. SJR 5 would set out in law the existing three-piece statutory framework, he said. He said that Commissioner Tangeman described the Senate Bill 26 law that set up the statutory Percent of Market Value (POMV) framework for a sustainable draw. Thus, these components are related. However, SJR 5 would establish the existing statutory program for dividends. 2:49:21 PM SENATOR KIEHL apologized for not stating his question clearly. He offered to submit his question in writing. 2:49:34 PM CHAIR HUGHES referred to [page 1, line 31 to page 2, line 1] of SJR 5, which states, "provided by law read on January 1, 2019." She said the POMV is involved. However, Mr. Milks referred to the historical statutory formula. She offered her belief that ambiguity exists since the historical statutory formula and the statutory POMV are both laws. 2:50:11 PM SENATOR SHOWER remarked that a lot of confusion surrounds the statutory provisions for the permanent fund dividend. He said that it is straightforward. He pointed out that last year the legislature passed Senate Bill 26, which establishes the formula for the draw. The historical statutory formula, which has been in place for 40 years, is still law, he said. If SJR 5 were to pass, the legislature would draw an amount using the POMV formula [established in Senate Bill 26], but it would be calculated and distributed using the historical statutory formula. He suggested that the confusion about the amount arose because the legislature did not make any change to the 50:50 split, which means a weird statute is in place. CHAIR HUGHES pointed out a conflict exists. She said that Commissioner Tangeman explained the conflict since mathematically the historical statutory formula could exceed the POMV draw. 2:51:49 PM SENATOR REINBOLD asked what the difference is between the way the [Alaska Permanent Fund Corporation] invests the earnings reserve as opposed to the permanent fund principal. COMMISSIONER DESIGNEE TANGEMAN answered that there is not any difference, other than the liquidity aspect. For investment purposes, the Alaska Permanent Fund does not treat the ERA and the corpus of the fund differently. SENATOR REINBOLD related a scenario in which the ERA balance is $15 billion, with a $3 billion draw, and another $2 billion draw to pay for paybacks. That would reduce the balance to $10 billion and thus affect investments. She expressed an interest in learning the rate of return on the ERA versus the principal. COMMISSIONER DESIGNEE TANGEMAN explained that when some people calculate the funds drawn from the permanent fund, they do not consider the incoming revenues. He said their calculation is typically based on a 6.55 percent expected rate of return so for FY 2020, an estimated $4 billion would be deposited to the fund, and $3 billion would be drawn based on the POMV. Instead, the investment portfolio of $65 billion should be the focus, not the ERA which is only a repository for realized gains. The issue is more about the return on $65 billion, and that any realized gains are deposited to the ERA, which is the current $18 billion balance. To illustrate this, he related a scenario in which the earnings were $4 billion, $3 billion was drawn based on the POMV, and another $600 million was drawn for the backpay. This would result in a net $400 million increase, he said. 2:54:55 PM SENATOR REINBOLD offered her belief that the POMV draw, the full $3,000 dividend, and $2 billion in unallocated for back pay of the dividends is important because it could affect future dividends. She said that understanding the whole scope and trigger points was important. Although she supports the PFD statutory formula as a means to compensate Alaskans for their subsurface rights, she was unsure how the mineral rights of Native Regional Corporations might affect the fund. The Constitution of the State of Alaska provides rights, so if people are stripped of permanent fund dividend and mineral rights, it raises constitutional issues, she said. She wondered if the legislature was giving people false hope. She recalled the ramifications of the massive dip in the permanent fund during 2008. She feared there could be a negative dividend at some point. That is the reason she wants to better understand the impact that the POMV, the statutory formula and allocation draw have on future permanent fund dividends. 2:57:13 PM SENATOR KIEHL asked why the administration chose 120 days in SJR 5, since it would leave the choice of using either the primary or the general election ballot. MR. MILKS answered that the language of 120 days was derived from the initiative language in Article II, Section 4. He said that the administration sought consistency in time periods in the Constitution of the State of Alaska. 2:58:11 PM SENATOR KIEHL asked for further clarification on which ballot would be used for proposed changes. He turned to the technical language in the bill and asked for the impact on the funds transferred under Article IX, Section 17(b). MR. MILKS said that SJR 5 would provide an exception and the funds would be moved without an appropriation. He suggested that might be an issue for him to review since it relates to the constitutional budget reserve account (CBR) issue. 2:59:24 PM SENATOR KIEHL asked for further clarification of the statutory POMV structure. He asked why the proposal does not provide any inflation-proofing protection or a POMV cap in the Constitution of the State of Alaska. He said that knowing the interaction between the two would be valuable. COMMISSIONER DESIGNEE TANGEMAN answered that the administration has proposed a series of amendments to the Constitution of the State of Alaska. He offered his belief that inflation proofing would be handled under the resolution for a constitutional spending cap. He acknowledged that inflation-proofing is not covered in SJR 5. 3:00:51 PM SENATOR KIEHL questioned whether the administration had any charts or for projections to show how that would work. COMMISSIONER DESIGNEE TANGEMAN offered to work with his staff to provide the information. SENATOR KIEHL observed that the state attempts to use a statutory POMV cap, but still maintains the constitutional distinction between the permanent fund principal and the earnings reserve account. He expressed concern that over time the value of the principal would diminish, and the value of the ERA would take over. He suggested that without some limitation "with teeth," unstructured draws could create more risk to the value of the permanent fund. If the legislature is going to consider a constitutional amendment on the permanent fund, it should consider protections to the permanent fund that would be effective for generations rather than for only a few years, he said. 3:02:13 PM SENATOR SHOWER raised a counterpoint on the three-year payback. He pointed out that if $2 billion had been taken out over the three years, the fund value would be less today. He offered his belief that the fund value would have changed over time. He related a scenario in which someone has $20,000 in his/her bank account, then deposits $4,000, but also withdraws $4,000. It would net to $20,000, he said. He explained that the money not paid out for dividends over the three-year-period is still in the fund, such that the balance is essentially the same. SENATOR SHOWERS expressed concern that enshrining the eligibility requirements in the Constitution of the State of Alaska may lead to some unintended consequences. He asked Mr. Milks to discuss any potential downfalls. MR. MILKS answered that SJR 5 includes a requirement of voter approval on eligibility and computation of the permanent fund dividend. Alaska statutes contain eligibility statutes and exceptions that permit absences from Alaska for the permanent fund dividend program. He said he thought it would be covered under SJR 5 if adopted in this form. He recalled that Senator Reinbold raised come ancillary concerns in prior committee hearings, such as garnishment. However, he did not think that changes of that nature would be subject to voter approval. He characterized garnishments as being more of a consequence of receiving a dividend rather than an eligibility issue. 3:06:45 PM SENATOR SHOWER said that one concern is whether the permanent fund dividend should be an individual right and if the legislature should retain eligibility requirements in statute. He said he would like to protect the permanent fund dividend program. He said the struggle is related to the legislature's ability to change the amount. He said that he favors less government spending. He wondered if the legislature would be stuck with a 50:50 split. He maintained that eligibility might be better left in the legislature's purview since it may need to change eligibility requirements for absences for college or the military. CHAIR HUGHES said that she does not support adding eligibility in the Constitution of the State of Alaska either. She asked the rationale for constitutionalizing eligibility requirements. COMMISSIONER DESIGNEE TANGEMAN said the administration would be willing to entertain discussions on eligibility. That has been a topic of internal discussion, he said. 3:08:47 PM CHAIR HUGHES raised an issue that she acknowledged was more of an issue for the finance committee to consider. She asked for a rough estimate on the number of people who would be affected if eligibility requirements were changed to a two-year minimum residency, a 90-day maximum absence, and an eligibility cutoff after a three-year legitimate absence for those who do not physically reside in Alaska. Further, she would like more information on the "fundamental right" issue. She said her primary interest was to identify any other programs that do not fall under fundamental rights. She expressed concern that protections were not in place for the earnings reserve account. She said that the Legislative Legal Services provided a memo after Senate Bill 26 passed that indicated the legislature has a right to draw outside of the POMV. She asked whether this was something that the administration would also entertain. COMMISSIONER DESIGNEE TANGEMAN answered yes. He offered his belief that the administration's view is that the ERA would be protected through the constitutional spending limit in SJR 4. 3:10:48 PM CHAIR HUGHES said she understood that the permanent fund dividend would be issued based on a direct transfer to the program. She asked whether this transfer would come before the legislative finance committees. COMMISSIONER DESIGNEE TANGEMAN answered that it would not. He said that the calculation would occur, and the funds would transfer directly into the permanent fund dividend program. It would not part of the appropriation process, he said. 3:11:28 PM SENATOR MICCICHE said that he agreed with the discussion on the eligibility requirements. He offered his belief that the public would not be interested in voting on changes to eligibility, such as the length and cause of absences. He said the permanent fund dividend program is about protecting residents. Eligibility would be something else since it would pertain to someone that may not be regarded as being qualified yet. It is not about taking away any rights from established residents, he said. He referred to subsection (c) on page 2, line 6. He said he found it interesting that it refers to the amount of the dividend instead of the dividend calculation. He said that SJR 5 supports what was in statute on January 1, 2019. He said that he thought the dividend calculation would be a more appropriate choice of language. MR. MILKS said he understood the point and agreed the language could be clearer. 3:13:51 PM SENATOR MICCICHE related his understanding that this would preserve the dividend calculation, but the amount of the dividend is not part of the resolution. It is not possible to know the earnings or what would be available in the future for distribution, he said. Instead, the statutory calculation would be enshrined in the Constitution of the State of Alaska. MR. MILKS agreed that the statutory formula is what would be enshrined since the amount of the permanent fund dividend has historically varied. 3:14:58 PM SENATOR MICCICHE asked whether a quarterly payment could occur under SJR 5 since it would be limited to a distribution method. MR. MILKS offered his belief that would likely work since it would not be part of the dividend calculation nor was it an eligibility issue. He said he thought it would be permissible and not subject to voter ratification. 3:16:42 PM CHAIR HUGHES returned to an earlier discussion related to the historical formula and the POMV laws in effect on January 1, 2019. She asked which statute would trump the other, the historical statutory formula or the POMV formula in statute. She wondered if the permanent fund would get to the point where paying the permanent fund dividend according to the historical formula would exceed the POMV draw. She asked whether it would stop with the POMV amount and be divided by the population or if the historical formula would trump the POMV statute. MR. MILKS offered his belief that this would be an amendment to the Constitution of the State of Alaska. The language in the constitution would supersede a statute that described a statutory draw. SJR 5 would state that a portion of income from the permanent fund would be used for a permanent fund dividend program. CHAIR HUGHES asked for further clarification that the historical formula would trump the POMV law. She said that both statutes were in law as of January 1, 2019. She asked whether he was saying that the courts would interpret it in that way. "Even if mathematically the historical formula to pay it out to the residents would be more than the five, let's say we are at the five percent point, that the constitution would say you can exceed the law on the books that says five percent," she said. MR. MILKS, referring to the hypothetical question, said that the provision in the Constitution of the State of Alaska would govern. The court would look at the constitutional provision that established a portion of income would be used for a dividend program. He said that the administration has tracked the Wielechowski case, which has been described as the permanent fund dividend program, which is based on the historical statutory formula being the amount of income to be transferred to pay the permanent fund dividends. He explained that the statute enacted by Senate Bill 26 addressed the sustainable Percent of Market Value (POMV) draw. Although these two statutes are related, one pertains directly to the dividends, which is the historical statutory framework. He offered his belief that the provisions in SJR 5 would govern. 3:19:52 PM CHAIR HUGHES asked whether SJR 5 would require the draw be taken out of the POMV or if it could be taken outside of it and the POMV could be used to fund government services. MR. MILKS answered that the POMV was established by Senate Bill 26 and is a statute. SJR 5 would address income out of the permanent fund, which is not identified in the Constitution of the State of Alaska as the POMV. CHAIR HUGHES asked whether the POMV could be used for the state budget and the draw could be on top of that. 3:21:15 PM SENATOR KIEHL argued that Senate Bill 26 would prevent it. He also argued against what Mr. Milks said earlier, that this transfer in the Constitution of the State of Alaska somehow trumps the POMV statute established by Senate Bill 26. He said that the statute established under Senate Bill 26 referred directly to the transfer for dividends and an appropriation that could be used to fund state government services. Further, Senate Bill 26 is also a law that existed on January 1, 2019. Thus, SJR 5 would set the Senate Bill 26 limit in stone, he said. He said he did not share the concern that the dividends would regularly go over 5 percent, but the possibility of limiting the permanent fund dividend is a concern. 3:22:27 PM CHAIR HUGHES asked whether the language in Senate Bill 26 mentioned permanent fund dividends or if it referred to an appropriation. COMMISSIONER DESIGNEE TANGEMAN said he did not think it mentioned dividends because the legislature could not come to a resolution on the split. He said the legislature settled on the amount available for a sustainable draw. CHAIR HUGHES related her understanding that SJR 5 would have the historical formula outside the appropriation process. She offered her belief that the 5.25 or 5.0 percent appropriation draw could be used for government spending and the historical formula transfer could be separate. She asked if that was the administration's intention. COMMISSIONER DESIGNEE TANGEMAN said he acknowledges her concern is that there would be two separate paths. He recapped her concern, that the permanent fund dividend would be drawn using the historical formula under SJR 5 but the POMV would be drawn from the earnings reserve account. He offered to study the question and respond to the committee in writing. 3:23:57 PM SENATOR MICCICHE argued that for the POMV to be consumed by a statutory permanent fund dividend would require 20 percent earnings net of fees. He said would be unprecedented but he thought it was a good point. He said if SJR 5 were to pass it would be important to revise the statutes affected by Senate Bill 26 to reflect that automatic transfer. The POMV would need to be net of that transfer in order to stay within the investment disbursement rules that were assumed when the step down to 5 percent was established. Otherwise, it would create a situation that would very quickly erode the earnings reserve account, which would be problematic. 3:25:11 PM SENATOR SHOWER said that the constitutional spending limit is critical to curtail state government. If SJR 5 were to pass without a spending limit in place, it would be a setup for failure, he said. 3:25:46 PM CHAIR HUGHES said that she concurred. However, she said that it still makes her nervous to have the spending limit and permanent fund dividend constitutional changes in separate resolutions. [SJR 5 was held in committee.]