Legislature(2015 - 2016)FAHRENKAMP 203
03/15/2016 09:00 AM Senate STATE AFFAIRS
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SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS 9:05:08 AM CHAIR STOLTZE announced the consideration of SB 114. 9:05:14 AM At ease. 9:06:26 AM CHAIR STOLTZE called the committee back to order and noted that there was a proposed committee substitute (CS). SENATOR MCGUIRE moved that the CS for sponsor substitute (SS) SB 114, version U, be brought before the committee. CHAIR STOLTZE objected for discussion purposes. He explained that the CS was developed by Senator McGuire with one revision from his office, pertaining to revenue limitation. 9:07:28 AM BRANDON BREFCZYNSKI, Staff, Senator Stoltze, Alaska State Legislature, Juneau, Alaska, stated that the committee made only one change aside from the sponsor's changes. He explained the committee's change as follows: Page 2, line 28 through page 3, line 2. We are establishing a revenue limit based on production tax and royalties that exceed $1 billion. For every dollar of production tax and royalties that exceeds $1 billion, the annual Percentage of Market Value (POMV) draw will be reduced on a dollar-for-dollar basis. SENATOR WIELECHOWSKI asked that an explanation be provided on the impact if $2 billion in increased production occurred. MR. BREFCZYNSKI specified as follows: If the state would have received $2 billion in production tax and royalties, you reduce your POMV draw by $1 billion. Anything over $1 billion the annual POMV draw is reduced on a dollar-for-dollar basis. CHAIR STOLTZE added as follows: Spending limits themselves is really tough to implement and we've seen from other action you can do previous year appropriations and there's a lot of ways to alter the effectiveness of a spending limit. If all of the prognostications are wrong and oil rebounds, we don't want to put in a mechanism that would cause the ability to spend. Government has an intrinsic tendency to spend available money. 9:10:27 AM JESSE LOGAN, Staff, Senator McGuire, Alaska State Legislature, Juneau, Alaska, addressed what the CS for SSSB 114 does as follows: 1. Establishes a revenue limit: Section 3. 2. Changes the POMV draw from 5 percent to 4.5 percent: Section 3. The change allows for a larger rate of growth for the Permanent Fund and greater payouts over time. Legislative Finance agreed with the approach. 3. Adds an inflation-proofing mechanism: Section 5, page 3, lines 20-23. Similar approach to the governor's bill in that if the POMV draw from the previous year is multiplied by 4, the difference in the Earnings Reserve Account (ERA) could be returned to the corpus for inflation proofing. 4. Establishes a review period: Section 7, page 4, lines 23- 31. Allows the commissioner for the Department of Revenue to recommend adjustments in addition to providing a report in consultation with the Permanent Fund Corporation to the Legislature for evaluating asset sufficiency within the ERA. MR. LOGAN added that several other small changes were made that entailed housekeeping measures regarding cash flow and timing. He noted that changes were done in consultation with the Permanent Fund Corporation. 9:13:17 AM SENATOR MCGUIRE added that the amendments were the result of consultation with members of the House and Senate who actively spoke with their neighbors in addition to public testimony offered in the State Affairs Committee. She pointed out that Chair Stoltze's amendment to limit spending addressed a concern people had where the Permanent Fund Dividend (PFD) would be restructured, but the Legislature could go on a spending spree at some later point. She asserted that changing the POMV draw from 5 to 4.5 percent would provide for more sustainability. She opined that the POMV model would inflation-proof itself in addition to retaining the constitutional requirement for 25 percent of the royalties to go into the Permanent Fund itself. She noted that an additional provision was included for added inflation proofing to reflect times of growth. She said the review period was something that lawmakers had asked for in order to comeback and revisit the provisions in SB 114. She pointed out that SB 114 guaranteed a $1000 PFD and noted that the intent was to provide a dividend that was sustainable. She added that Permanent Fund Corporation and its trustees were consulted to make sure all of the amendments were fully vetted. CHAIR STOLTZE announced that Senator Coghill had an amendment to offer. 9:15:49 AM SENATOR COGHILL moved Amendment 29-LS0883\U.2 ("U.2"), Gardner, 3/15/16. AMENDMENT U.2 Page 2, lines 9 - 15: Delete all material and insert: "*Sec. 2. AS 37.13 is amended by adding a new section to read: Sec. 37.13.015. Appropriations to the dividend fund. (a) Following the calculation under AS 37.13.140(b), the legislature may appropriate to the dividend fund established in AS 43.23.045 the following amounts from the following funds: (1) from the earnings reserve account established in AS 37.13.145, (A) 15 percent of 21 percent of the sum of the net income of the fund determined under AS 37.13.140(a) for each of the last five fiscal years including the fiscal year just ended; and (B) two percent of the market value of the constitutional budget reserve fund (art. IX, sec. 17, Constitution of the State of Alaska) calculated on the last day of the fiscal year just ended; and (2) from the general fund, 15 percent of the money deposited in the general fund during the fiscal year just ended from all mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS 38.05.180(f) and (g), federal mineral revenue sharing payments, and bonuses received by the state from mineral leases. (b) Nothing in this section creates a dedicated fund." Page 2, line 29: Delete "the portion" Insert "an amount equal to 85 percent" 9:16:01 AM CHAIR STOLTZE objected for discussion purposes. SENATOR COGHILL explained that the intent of the amendment was to exclude the dividend payment from the $1 billion cap. He said the concept was essentially a hybrid plan for the PFD to be paid for by blending earnings from the Permanent Fund and royalties in addition to a small valuation from the Constitutional Budget Reserve (CBR). He explained that the current plan calls for the PFD to be paid primarily from the earnings of royalties, rents, and leases. He detailed that the concept's formulation would blend the following: · 15 percent of the 21 percent sum of the net income from the ERA. · 15 percent of the royalties, sales, and proceeds net shares of the oil and gas leases. · 2 percent of the market value of the CBR. SENATOR COGHILL said instead of guaranteeing a particular number, the PFD would be based on the health of the state. He detailed that people would feel the ebb and flow of the long term as well as the state's short term economic health. He revealed that he had David Teal, [Legislative Fiscal Analyst], review his concept and a $200 million funding gap was projected, a number similar to the bill's original concept. 9:19:20 AM CHAIR STOLTZE stated that he would continue his analysis, but remained unsure. He noted that the Senate Finance Committee would consider the bill as well. SENATOR MCGUIRE offered her name as a co-sponsor to the amendment. She concurred that the amendment would also address concerns for creating a PFD that was based on future rents and royalties. 9:22:54 AM RYNNIEVA MOSS, Staff, Senator John Coghill, Alaska State Legislature, Juneau, Alaska, explained that because 15 percent of royalties were already in the computation, the amendment removes the 15 percent of the royalties from the $1 billion cap. MR. LOGAN specified that the amendment restructured the payout for the PFD as follows: 1. Market's long term health: 15 percent value of the statutory net income of the earnings reserve ties to the long term health of the market. The last 34 dividends have been tied entirely to the value of the market and the amendment would have the PFD start to share some of the market value with the state's long and short term fiscal health. 2. Alaska's short-term fiscal health: 15 percent of royalties in the calculation would reflect the short-term fiscal health of the state. 3. Alaska's long-term fiscal health: the 2 percent of the CBR value would be the long-term fiscal health of the state. MR. LOGAN summarized that the amendment was a three-dimensional concept that shared risk and benefit between the state and Alaska's residents. 9:24:29 AM SENATOR WIELECHOWSKI asked that Mr. Logan review the payout numbers from the proposed dividend formula for 2016. He noted that the state paid out approximately $1.4 billion in total dividends in 2015. 9:26:24 AM MR. LOGAN answered that the PFD payout from the proposed formula would be $700 million, resulting in an $1100 dividend. He noted that the bill retained the $1000 dividend floor. SENATOR COGHILL explained that the amendment was put together prior to the $1000 floor. He noted that the formula's projections show the dividend dipping under $1000 by 2020. He detailed that downward pressure would occur when the Unrestricted General Fund (UGF) was above $5 billion. He added that the CBR would be extended out at a steadier rate and the Permanent Fund balance would continue to rise. He stated that he would defer to Senate Finance for a decision on whether to retain the $1000 floor. MR. LOGAN pointed out that the modeling for the bill shows a rise in the FY17 budget because the dividend would be considered part of the overall budget. 9:29:06 AM MS. MOSS addressed Senator Wielechowski's question and detailed that an $1127 dividend would be paid out in 2016 from the proposed formula as follows: · 15 percent earnings = $618. · 15 percent royalties = $211. · 2 percent CBR = $298. · Total = $1127. SENATOR WIELECHOWSKI asked how much the dividend would be under the bill as currently written versus the amended version. MR. LOGAN answered that the bill would transition to a new formula in 2017 and the 2016 dividend exceeding $2000 would not change. He explained that transitioning to the new formula in 2016 would result in an $1100 or $1200 dividend. SENATOR WIELECHOWSKI noted that dividend projections dipped slightly below $1000 in future years. He asked what dividends where projected to be into 2025. MR. LOGAN answered that the dividends would be approximately the same, which was the reason the $1000 floor was retained. SENATOR MCGUIRE added that dividends could have gone as high as $3000 or $4000 under the current bill due to the formula's higher percentage of royalties; however, Alaskans expressed concern in the plan's volatility. She conceded that the proposed amendment would guarantee Alaskans with a more stable share of wealth. SENATOR COGHILL reiterated that the modeling for the amendment did not contemplate a floor. CHAIR STOLTZE announced that the Amendment U.2 would be set aside until later today. 9:33:08 AM CHAIR STOLTZE moved Amendment 29-LS0833\U.1 ("U.1"), Gardner 3/14/16. He specified that the amendment deals with a sunset provision. AMENDMENT U.1 Page 2, following line 8: Insert a new bill section to read: "* Sec. 2. AS 37.13.010(a), as amended by sec. 1 of this Act, is amended to read: (a) Under art. IX, sec. 15, of the state constitution, there is established as a separate fund the Alaska permanent fund. The Alaska permanent fund consists of (1) 25 percent of all mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS 38.05.180(f) and (g), and federal mineral revenue sharing payments received by the state from mineral leases issued on or before December 1, 1979, and 25 percent of all bonuses received by the state from mineral leases issued on or before February 15, 1980; (2) 50 percent of all mineral lease rentals, royalties, royalty sale proceeds, net profit shares under AS 38.05.180(f) and (g), and federal mineral revenue sharing payments received by the state from mineral leases issued after December 1, 1979, and 50 percent of all bonuses received by the state from mineral leases issued after February 15, 1980; and (3) [(2)] any other money appropriated to or otherwise allocated by law or former law to the Alaska permanent fund." Renumber the following bill sections accordingly. Page 3, following line 5: Insert a new bill section to read: "* Sec. 5. AS 37.13.140, as amended by sec. 4 of this Act, is amended to read: Sec. 37.13.140. Income. [(a)] Net income of the fund includes income of the earnings reserve account established under AS 37.13.145. Net [THE CORPORATION SHALL DETERMINE THE NET] income of the fund shall be computed annually as of the last day of the fiscal year in accordance with generally accepted accounting principles, excluding any unrealized gains or losses. Income [, EXCLUDING UNREALIZED GAINS OR LOSSES. (b) THE CORPORATION SHALL DETERMINE THE AMOUNT AVAILABLE FOR DISTRIBUTION UNDER THIS SECTION, COMPUTED ANNUALLY FOR EACH FISCAL YEAR, FOLLOWING THE CONCLUSION OF THE FISCAL YEAR. THE AMOUNT] available for distribution [MAY NOT BE LESS THAN ZERO AND] equals 21 [FOUR AND ONE HALF] percent of the net income [AVERAGE MARKET VALUE] of the fund [, INCLUDING THE EARNINGS RESERVE ACCOUNT ESTABLISHED IN AS 37.13.145,] for the last five fiscal years, including [IMMEDIATELY PRECEDING] the fiscal year just ended, but may not exceed net income of the fund for the fiscal year just ended plus the balance in the earnings reserve account described in AS 37.13.145 [REDUCED BY THE PORTION OF PRODUTION TAXES AND MINERAL LEASE RENTALS, ROYALTIES, ROYALTY SALE PROCEEDS, NET PROFIT SHARES UNDER AS 38.05.180(f) AND (g), FEDERAL MINERAL REVENUE SHARING PAYMENTS, AND BONUSES RECEIVED BY THE STATE FROM MINERAL LEASES AND DEPOSITED INTO THE GENERAL FUND IN THE FISCAL YEAR JUST ENDED THAT EXCEEDS $1,000,000,000]" Renumber the following bill sections accordingly. Page 3, following line 11: Insert a new bill section to read: "* Sec. 7. AS 37.13.145(a), as amended by sec. 6 of this Act, is amended to read: (a) The earnings reserve account is established as a separate account in the fund. Income [EXCEPT FOR INCOME DEPOSITED INTO THE GENERAL FUND UNDER (e) OF THIS SECTION, INCOME] from the fund shall be deposited by the corporation into the account as soon as it is received. Money in the account shall be invested n investments authorized under AS 37.13.120." Renumber the following bill sections accordingly. Page 4, following line 2: Insert a new bill section to read: "Sec. 9. AS 37.13.145(c), as amended by sec. 8 of this Act, is amended to read: (c) after the transfer under (b) of this section, the [THE] corporation shall [MAY] transfer from the earnings reserve account to the principal of the fund an amount sufficient to offset the effect of inflation on principal of the fund during that fiscal year. However, none of the amount transferred shall be applied to increase the value of that portion of the principal attributed to the settlement of State v. Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First Judicial District) on July 1, 2004. The [ON JULY 1, THE] corporation shall calculate the amount to transfer to the principal under this subsection by (1) computing the average of the monthly United States Consumer Price Index for all urban consumers for each of the two previous calendar years; (2) computing the percentage change between the first and second calendar year average; and (3) applying that rate to the value of the principal of the fund on the last day of the fiscal year just ended, including that portion of the principal attributed to the settlement of State v. Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First Judicial District) [MULTIPLYING THE AMOUNT AVAILABLE FOR DISTRIBUTION FOR THE PREVIOUS FISCAL YEAR UNDER AS 37.13.140(b) BY FOUR AND SUBTRACTING THE PRODUCT OF THAT CALCULATION FROM THE BALANCE OF THE EARNINGS RESERVE ACCOUNT ON JUNE 30 OF THE PREVIOUS FISCAL YEAR]." Page 4, following line 12: Insert a new bill section to read: "* Sec. 11. AS 37.13.145(d), as amended by sec. 10 of this Act, is amended to read: (d) Notwithstanding (b) [(e)] of this section, income earned on money awarded in or received as a result of State v. Amerada Hess, et al., 1JU-77-847 Civ. (Superior Court, First Judicial District), including settlement, summary judgment, or adjustment to a royalty-in-kind contract that is tied to the outcome of this case, or interest earned on the money, or on the earnings of the money shall be treated in the same manner as other income of the Alaska permanent fund, except that it is not available for distribution to the dividend fund or for transfers to the principal [GENERAL FUND] under (c) [(e)] of this section, and shall be annually deposited into the Alaska capital income fund (AS 37.05.5650." Renumber the following bill sections accordingly. Page 4, following line 31: Insert a new subsection to read: "(h) At the end of each fiscal year, the corporation shall transfer from the earnings reserve account to the dividend fund established under AS 43.23.045, 50 percent of the income available for distribution under AS 37.13.140." Page5, following line 4: Insert a new bill section to read: "* Sec. 14. AS 37.13.300(c), as amended by sec. 13 of this Act, is amended to read: (c) Net income from the mental health trust fund may not be included in the computation of net income [THE AMOUNT] available for distribution under AS 37.13.140 [AS 37.13.140(b)]." Renumber the following bill sections accordingly. Page 5, foll0wing line 11: Insert a new bill section to read: "* Sec. 16. AS 37.14.031(c), as amended by sec. 15 of this Act, is amended to read: (c) The net income of the fund shall be determined [COMPUTED ANNUALLY] by the Alaska Permanent Fund Corporation in the same manner the corporation determines the net income of the Alaska Permanent Fund under AS 37.13.140 [AS OF THE LAST DAY OF THE FISCAL YEAR IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, EXCLUDING ANY UNREALIZED GAINS OR LOSSES]." Renumber the following bill sections accordingly. Page 6, following line 6: Insert a new bill section to read: "* Sec. 18. AS 43.23.025(a), as amended by sec. 17 of this Act, is amended to read: (a) By October 1 of each year, the commissioner shall determine the value of each permanent fund dividend for that year by (1) determining the total amount available for dividend payments, which equals (A) the amount of income of the Alaska Permanent Fund transferred [APPROPRIATED] to the dividend fund under AS 37.13.145(h) [AS 37.13.015] during the current year; (B) plus the unexpended and unobligated balances of prior fiscal year appropriations that lapse into the dividend fund under AS 43.23.045(d); (C) less the amount necessary to pay prior year dividends from the dividend fund in the current year under AS 43.23.005(h), 43.23.021, and 43.23.055(3) and (7); (D) less the amount necessary to pay dividends from the dividend fund due to eligible applicants who, as determined by the department, filed for a previous year's dividend by the filing deadline but who were not included in a previous year's dividend computation; (E) less appropriations from the dividend fund during the current year, including amounts to pay costs of administering the dividend program and the held harmless provisions of AS 43.23.075; (2) determining the number of individuals eligible to receive a dividend payment for the current year and the number of estates and successors eligible to receive a dividend payment for the current year under AS 43.23.005(h); and (3) dividing the amount determined under (1) of this subsection by the amount determined under (2) of this subsection." Renumber the following bill sections accordingly. Page 6, following line 18: Insert a new bill section to read: "* Sec. 21. AS 43.23.045(d), as amended by sec. 20 of this Act, is amended to read: (d) Unless specified otherwise in an appropriation act, the unexpended and unobligated balance of an appropriation to implement this chapter lapses into the dividend fund on June 30 of the fiscal year for which the appropriation was made and shall [MAY] be used in determining the amount of and paying the subsequent year's dividend as provided in AS 43.23.025(a)(1)(B)." Renumber the following bill sections accordingly. Page 6, following line 19: Insert a new bill section to read: "* Sec. 23. AS 37.13.015, 37.13.145(e), 37.13.145(f), 37.13.145(g); and AS 43.23.025(c) are repealed July 1, 2018." Renumber the following bill sections accordingly. Page 6, line 22: Delete "sec. 10" Insert "sec. 17" Page 6, line 23: Delete "sec. 11" Insert "sec. 19" Page 6, lines 23-24: Delete "sec. 12" Insert "sec. 20" Page 6, line 26: Delete "sec. 10 - 12" Insert "secs. 17, 19, and 20" Page 6, following line 30: Insert a new bill section to read: "* Sec. 25. The uncodified law of the State of Alaska is amended by adding a new section to read: TRANSITION. (a) Notwithstanding AS 43.23.025(a), as amended by sec. 18 of this Act, and AS 43.23.045(c), as amended by sec. 21 of this Act, the commissioner of revenue shall determine the value of the permanent fund dividend distributed in 2018 under AS 37.13.015, AS 43.23.025(a), 43.23.025(c), and 43.23.045(d), as those sections read on the day before the effective date of secs. 18 and 21 of this Act. (b) The commissioner of revenue and the Alaska Permanent Fund Corporation may adopt regulations, policies, and procedures necessary to implement AS 43.23.025(a), as amended by sec. 18 of this Act, and AS 43.23.045(d), as amended by sec. 21 of this Act. The regulations, policies, or procedures may not take effect before the effective date of the law implemented by the regulation, policy, or procedure." Page 7, lines 2 - 3: Delete "secs. 1 - 14 of this Act take effect after July 1, 2016, secs. 1014" Insert "secs. 1, 3, 4, 6, 8, 10, 12(e) - (g), 13, 15, 17, 19, 20, and 24 take effect after July 1, 2016, secs. 8, 10, 12(e) - (g), 13, 15, 17, 19, 20, and 24" Page 7, following line 3: Insert a new bill section to read: "* Sec. 27. Sections 2, 5, 7, 9, 11, 12(h), 14, 16, 18, 21, and 23 of this Act take effect July 1, 2018." Renumber the following bill sections accordingly. Page 7, line 4: Delete "Sections 14 and 15" Insert "Sections 24 and 26" Page 7, line 5: Delete "sec 16" Insert "secs. 27 and 28" 9:33:36 AM SENATOR HUGGINS objected for discussion purposes. CHAIR STOLTZE explained that Amendment U.1 would add a 2-year sunset provision to SB 114 and the legislation would be brought back for discussion. He noted that his preferred route was a public vote for the provision to be added to the constitution. 9:35:02 AM CHAIR STOLTZE announced that SB 114 would be set aside and reconsidered when the committee reconvenes in the afternoon. [Amendments U.1 and U.2 were pending.] SB 114-PERM FUND: EARNINGS, DEPOSITS, ACCOUNTS 2:33:46 PM CHAIR STOLTZE announced the continued consideration of SB 114. He restated the motion to adopt Amendment 29-LS0833\U.1 ("U.1"). SENATOR HUGGINS restated his objection. CHAIR STOLTZE moved to amend Amendment U.1. He explained that in consultation with the sponsor, Senator McGuire asked that the provision's sunset be extended one additional year. He explained that the amendment was conceptual because drafting would have taken too long due to the sunset provision's complex language. CHAIR STOLTZE moved a conceptual amendment to Amendment U.1. CONCEPTUAL AMENDMENT TO AMENDMENT U.1 The provisions inserted through Amendment [U.1] which sunset the act within two years, shall be altered to reflect a 3 year sunset extending the repeal-sunset provisions for one additional year. 2:34:45 PM CHAIR STOLTZE found no objection to the conceptual amendment to Amendment U.1 and it was adopted. SENATOR HUGGINS removed his objection. 2:35:03 PM CHAIR STOLTZE found no objection to Amendment U.1, as amended, and it was adopted. SENATOR COGHILL said Amendment U. 2 has a technical drafting error and he would like to amend his motion to adopt it to reflect the proper citation of 29-LS0883\U.3 ("U.3"). SENATOR HUGGINS objected for discussion purposes. SENATOR COGHILL explained that it is the same amendment but the citation was typed incorrectly. It should be 29-LS0883\U.3. SENATOR HUGGINS removed his objection. 2:36:06 PM CHAIR STOLTZE announced that hearing no objection, Amendment U.3 is adopted. 2:36:11 PM SENATOR MCGUIRE moved to report the [committee substitute] for sponsor substitute for SB 114, as amended, from committee with individual recommendations and attached fiscal notes. 2:36:39 PM CHAIR STOLTZE announced that without objection, CSSSSB 114(STA) moved from committee.