So what does the AI distance slider actually effect? Anyone know specifically?

It effects how far away baddies detect you. Right is dectect sooner ... left is later

I think it also affects animations. if set too low compared to view distance it used to cause problems.
In short, don't set it lower than view distance.

I always used it set way below the value I use for Draw Distance... Never had any problems, except when using the FPS Optimizer, in which case I had a few instances of failure to load animation groups.

I too have AI distance set below draw distance. The only effect I have noticed is during clear weather when visibility is good, I sometimes notice a cliff racer or other creature way off in the distance who is "frozen" in place but once I get within the AI distance it starts moving normally. It's only really noticeable with cliff racers since they are normally flapping their wings. But that small visual anomaly seems a small price to pay for the FPS benefits a lower AI distance gives you in crowded cities, especially when you have a heavy load order.

Well, if it's only triggered by FPS optimizer increased view distance, good.
I used to have some animation problem reports with water life creatures, and problem was often the AI distance setting too low,
maybe they were using FPS optimizer more often back in the days.

I think Ai distant slider could also affect increased NPC AI flee distance e.g. set by Wakim/BTB or similar mods

Also, very minor but some scripted AI commands may not work as expected (e.g. my distant scenic striders could not turn correctly in the distance as the Face command needs ai to work)