Legislature(2003 - 2004)

05/16/2003 01:49 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE JOINT RESOLUTION NO. 26                                                                                                 
     Proposing  amendments to the  Constitution of  the State                                                                   
     of Alaska  relating to and limiting  appropriations from                                                                   
     and  inflation proofing  the  Alaska  permanent fund  by                                                                   
     establishing a percent of market value spending limit.                                                                     
Co-Chair Williams  assigned HJR 26 to a Subcommittee  to work                                                                   
on during the interim.  Members  of the subcommittee will be:                                                                   
Representative    Meyer,   Chair,    Representative    Joule,                                                                   
Representative    Croft,    Representative    Whitaker    and                                                                   
Representative Chenault.                                                                                                        
ROBERT D. STORER,  EXECUTIVE DIRECTOR, ALASKA  PERMANENT FUND                                                                   
CORPORATION, DEPARTMENT OF REVENUE,  expressed that the Board                                                                   
of Trustees believes that it is  important to inflation proof                                                                   
the fund.                                                                                                                       
TAPE HFC 03 - 98, Side A                                                                                                      
Mr. Storer noted  that currently that it is in  statute.  The                                                                   
Legislature  has always  inflation  proofed  to maintain  the                                                                   
purchasing  power of the  fund.   This could inflation  proof                                                                   
the  entire fund  and not  just  the principle  of the  fund,                                                                   
which    could be achieved  by a spending limit,  which would                                                                   
suggest that  limit be no more  than 5% of the  5-year moving                                                                   
average of the fund.  Less could be appropriated.                                                                               
Mr. Storer  explained that  could be  achieved by a  spending                                                                   
limit.  The Board suggests that  the limit be no more than 5%                                                                   
of the  five-year moving  average of the  fund and  that less                                                                   
could  be  appropriated.    Currently,  the  entire  earnings                                                                   
reserve could  be appropriated  so the magnitude  varies from                                                                   
year  to year.   There  have been  "big swings  based on  the                                                                   
market  conditions".     Using  a  moving   average  improves                                                                   
stability each year versus the status quo.                                                                                      
The 5%  number was determined  by looking at  historical data                                                                   
and  prospectively  at  the  capital   markets,  the  current                                                                   
diversified portfolio will be  able to achieve 5% real income                                                                   
over  inflation.   The  old statute  was  developed about  26                                                                   
years ago  at a time  when people  only thought about  bonds.                                                                   
Now  that  more  is invested  in  the  equity  market,  amore                                                                   
volatile high-expected  return, half of the  fund is invested                                                                   
in  that market.   There  will  be more  volatility and  less                                                                   
income unless the managers take  profits over time.  He added                                                                   
this is more  predictable than the current methodology.   The                                                                   
computation  would be  from the five  previous fiscal  years.                                                                   
That  would provide  the legislators  information in  January                                                                   
each year to know the exact amount of available funds.                                                                          
Mr. Storer  noted that at present  time, there is  a positive                                                                   
earnings reserve at  about $2 billion dollars.   The fund has                                                                   
incurred much  volatility to  date.   What is being  proposed                                                                   
would substantially increase the  predictability of the fund.                                                                   
Co-Chair  Williams   requested  further  definition   of  the                                                                   
language of the resolution.                                                                                                     
BOB BARTHOLOMEW,  CHIEF OPERATING  OFFICER, ALASKA  PERMANENT                                                                   
FUND  CORPORATION, DEPARTMENT  OF REVENUE,  pointed out  that                                                                   
the  version   before  the  Committee  was  from   the  House                                                                   
Judiciary  Committee.     Basically,   that  is   a  two-page                                                                   
amendment making  changes to the constitution.   The title is                                                                   
a policy statement  regarding why the trustees  are proposing                                                                   
the change to protect the Permanent Fund from inflation.                                                                        
Mr. Bartholomew noted that the  first change was indicated on                                                                   
Page 1,  Line 10, referring to  a new second paragraph  to be                                                                   
added  to the  constitution.   Page 1,  Line 11  is the  most                                                                   
significant change,  which would delete "principal"  and that                                                                   
the Permanent Fund  would be protected with  a spending limit                                                                   
of up to 5% per year, which could  be taken.  That would be a                                                                   
policy  call to  balance.    Incorporating the  new  language                                                                   
would  provide   that  there   would  always  be   an  annual                                                                   
distribution from  the fund limited to 5%.   The action would                                                                   
balance the  benefit of providing  a distribution  every year                                                                   
against the  short-term risk of  spending down the fund.   He                                                                   
acknowledged that would be a significant policy decision.                                                                       
Mr. Bartholomew continued, Page  1, Lines 13-14, would delete                                                                   
the language  "all income  from the  Permanent Fund  shall be                                                                   
deposited in  the General Fund  unless otherwise  provided by                                                                   
law".   The intent  would be  that all  income earned  by the                                                                   
Permanent Fund  remain in the fund.   The two pools  of funds                                                                   
would   be  combined   which  would  not   need  a   separate                                                                   
itemization of where the income was placed.                                                                                     
Page 2, Line  2, begins the new paragraph,  which establishes                                                                   
a not to exceed  spending limit of 5% of the  year-end market                                                                   
value.    That amount  is averaged  over a five-year  period.                                                                   
Page 2,  Line 4,  clarifies that  it would  be for the  first                                                                   
five  of the  six fiscal  years,  immediately preceding  that                                                                   
fiscal year.   Under current  rules, the available  amount is                                                                   
not known  because the five-year  average used,  includes the                                                                   
June  30  of  the  present year.    Looking  back six  years,                                                                   
making  the last June  30  the  end point  for the  following                                                                   
year,  provides   information  indicating  exactly   what  is                                                                   
available for Legislative appropriation.                                                                                        
Mr. Bartholomew stated that Section  #3 provides the language                                                                   
proposed by  Legislative Legal, transitional  language, which                                                                   
clarifies  that  any  money in  the  earnings  reserve  would                                                                   
remain a part of the Permanent  Fund and states that it would                                                                   
stay with the Permanent Fund.                                                                                                   
Mr.  Bartholomew noted  that Section  #4  stipulates that  to                                                                   
make it  effective to  change the  constitution, it  would go                                                                   
before the  voters of  Alaska at  the next general  election,                                                                   
November 2004.                                                                                                                  
Co-Chair  Williams   appointed  a  subcommittee   to  address                                                                   
concerns  of the  legislation.   Representative  Meyer  would                                                                   
chair  the Subcommittee  with  members Representative  Croft,                                                                   
Representative   Chenault,   Representative   Whitaker,   and                                                                   
Representative   Joule.      Co-Chair   Williams   encouraged                                                                   
statewide participation.                                                                                                        
HJR 126 was HELD in Committee for further consideration.                                                                        

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