Legislature(2003 - 2004)
05/16/2003 01:49 PM House FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 th June 30 of the present year. Looking back six years, th 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.