Legislature(2003 - 2004)

04/15/2004 09:08 AM RLS

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND                                                                                
CHAIR ROKEBERG announced  that the final order  of business would                                                               
be HOUSE  BILL NO. 298, "An  Act relating to the  distribution of                                                               
appropriations  from the  Alaska  permanent fund  under art.  IX,                                                               
sec.  15(b), Constitution  of  the State  of  Alaska, and  making                                                               
conforming amendments; and providing for an effective date."                                                                    
CHAIR ROKEBERG  related his  belief that  there is  some question                                                               
about  the  cash  flow  incidence  with regard  to  HB  298,  and                                                               
therefore  requested that  Mr. Storer  speak on  the matter.   He                                                               
announced that no further action would be taken on HB 298 today.                                                                
Number 512                                                                                                                      
ROBERT   STORER,  Executive   Director,  Alaska   Permanent  Fund                                                               
Corporation (APFC),  Department of Revenue, explained  that as HB
298 now  stands, it  would draw  down money  for payment  for the                                                               
dividend and  for government all on  one day.  The  payment would                                                               
be  withdrawn 14  days after  the end  of the  fiscal year.   Mr.                                                               
Storer  acknowledged   that  as  it  applies   to  the  dividend,                                                               
historically  there has  been  a single  draw  down, which  makes                                                               
sense  because the  funds are  transferred to  the Department  of                                                               
Revenue and then  the payments go out quickly  afterwards.  While                                                               
[APFC] can  live with and  manage drawing  down the money  on one                                                               
day,  it believes  there are  more effective  ways to  manage the                                                               
assets of the permanent fund.   Therefore, Mr. Storer recommended                                                               
that the  draw downs  for government occur  on 12  equal payments                                                               
throughout the year.  He explained  that when large sums of money                                                               
are liquidated,  material adjustments to the  asset allocation of                                                               
the fund  occur.  Furthermore, there  are significant transaction                                                               
costs.   He  pointed out  that the  act of  selling the  security                                                               
comes with  a transaction cost.   "To the degree one  can make it                                                               
over  some  systematic  payout,   the  permanent  fund  can  more                                                               
effectively manage  the asset  allocation and  the assets  of the                                                               
fund,"  he  suggested.    Mr. Storer  clarified  that  under  the                                                               
suggestion  of  government draw  downs  occurring  over 12  equal                                                               
payments,   there  [APFC]   wouldn't   have   to  make   material                                                               
adjustments to  asset allocation,  but rather  draw down  on cash                                                               
flow every month.   Therefore, rather than reinvest  cash flow in                                                               
the  equity   market,  it  would   be  distributed  out   to  the                                                               
MR. STORER  informed the committee that  if the draw all  goes to                                                               
the  general  fund at  the  beginning  of  the fiscal  year,  the                                                               
general fund  would earn  interest on that  larger sum  of money.                                                               
However, if the funds are retained  with the permanent fund for a                                                               
longer  period of  time, [APFC]  invests for  a longer  period of                                                               
time and thus  the permanent fund [monies] earn a  higher rate of                                                               
return than  the general fund.   "On  some time basis,  one would                                                               
earn more money in the aggregate  at the permanent fund.  So, you                                                               
would not only  be mitigating against transaction  costs, but you                                                               
would earn  some higher rate  of return  if the money  resided at                                                               
the permanent fund," he explained.                                                                                              
Number 538                                                                                                                      
CHAIR  ROKEBERG related  his understanding  that  because of  the                                                               
cash  flow requirements  of the  general fund,  there are  timing                                                               
issues.   He  further  related his  understanding that  currently                                                               
[the  legislature]  draws  down from  the  constitutional  budget                                                               
reserve  fund   (CBRF)  as   part  of  a   cash  cushion.     The                                                               
aforementioned  draw down  is  as  much as  $400  million of  the                                                               
moving average throughout the year,  depending upon the timing of                                                               
other revenue receipts.                                                                                                         
MR. STORER agreed.  He recalled  that there is a larger draw down                                                               
of  the CBRF  in  the first  quarter of  the  fiscal year,  which                                                               
diminishes as  it goes along.   Therefore, maybe there  are other                                                               
alternatives  that could  be worked  out with  the Department  of                                                               
CHAIR  ROKEBERG inquired  as to  how the  primary liquidation  of                                                               
assets or  realized gains  necessary to  fund the  permanent fund                                                               
dividend are performed.  He  mentioned his belief that it depends                                                               
on market  conditions.  "I  recall ... '01  or '02 where  ... you                                                               
caught it on the rise to  be able to ... provide the availability                                                               
of cash flow that most people don't recall now," he asked.                                                                      
MR.  STORER said  that's correct.   Mr.  Storer pointed  out that                                                               
over time  it has varied.   However,  he noted that  [APFC] knows                                                               
fairly well what the obligation,  plus or minus $50-$100 million,                                                               
will  be   to  the  Department   of  Revenue  well   in  advance.                                                               
Therefore, to  some degree  the asset  allocation and  the market                                                               
environment determine the  payout and funding.   He recalled that                                                               
it  used to  be that  [APFC] would  structure the  bond portfolio                                                               
such  that   some  [investments]   matured  around   the  payout.                                                               
However, the  aforementioned is no  longer done because  the fund                                                               
is mature and  fully invested in the equity  markets.  Currently,                                                               
[APFC] makes  a recommendation  to the Board  of Trustees  of the                                                               
Permanent Fund  at the  June board  meeting.   The recommendation                                                               
relates how [APFC] proposes to  liquidate the assets, while being                                                               
mindful of market conditions and  asset allocation.  Furthermore,                                                               
staff is driven to reduce transaction costs as much as possible.                                                                
CHAIR  ROKEBERG  inquired   as  to  the  period   of  time  those                                                               
transactions are made.                                                                                                          
MR.  STORER  answered  that  depending  upon  the  markets,  [the                                                               
transactions] could  occur within  a month to  three months.   He                                                               
specified that it would be over  a month because of the timing of                                                               
the  payment to  the department.   "That's  not to  say we  don't                                                               
build up some cash in  the bond portfolio to mitigate transaction                                                               
costs," he  explained.  The [APFC]  reports to the board  what it                                                               
does in terms of liquidation.                                                                                                   
CHAIR  ROKEBERG surmised,  "I think  the  issue does  need to  be                                                               
identified  and  worked  with.   You're  asking  for  a  12-month                                                               
window, basically,  for a  portion of  the draw  down, but  ... I                                                               
think you  need to have some  type of window in  which to operate                                                               
that's not  a single day  as required in the  bill, fundamentally                                                               
now.  Is that correct," he asked.                                                                                               
MR.  STORER  replied  yes,  pointing  out  that  the  legislation                                                               
provides 14 days to liquidate  the securities.  The longer [APFC]                                                               
has to liquidate the portfolio,  the more efficient [APFC] can be                                                               
in reducing the transaction costs.                                                                                              
Number 579                                                                                                                      
CHAIR ROKEBERG  announced, "Rather than the  committee taking any                                                               
action on this today, I'd like  the various bill sponsors and the                                                               
corporation to massage  this ... rather than get  too involved in                                                               
the minutia  of this  stage of its  incubation."   Chair Rokeberg                                                               
announced that HB 298 would be  held over and that he anticipated                                                               
it being before the full House next week.                                                                                       

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