Legislature(2003 - 2004)

04/24/2003 07:10 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 26-CONST. AM: PF APROPOS/INFLATION-PROOFING                                                                               
Number 2110                                                                                                                     
CO-CHAIR  WHITAKER announced  that  the final  order of  business                                                               
would be 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.                                                                  
Number 2118                                                                                                                     
ARLISS  STURGULEWSKI, Trustee,  University of  Alaska Foundation,                                                               
congratulated  the legislature  on having  established the  House                                                               
Special Committee on  Ways and Means.  She told  the members that                                                               
she is very supportive of  the constitutional amendment [HJR 26].                                                               
There are  a number  of reasons she  believes this  is important,                                                               
she said, but  the most important is that it  offers stability in                                                               
year-to-year  amounts  that  are available  [for  appropriation].                                                               
This  constitutional amendment  would provide  some stability  in                                                               
planning, she said.                                                                                                             
MS. STURGULEWSKI  explained that she  serves as a trustee  on the                                                               
University of  Alaska Foundation  which was formed  primarily for                                                               
scholarships for  students.  She  explained that  [the University                                                               
of Alaska  Foundation] uses methods  similar to that  proposed by                                                               
this constitutional  amendment as do large  endowment foundations                                                               
across the country; this method is a very standard approach.                                                                    
MS.  STURGULEWSKI told  the  members  that when  she  was in  the                                                               
legislature  she carried  the bill  which  inflation proofed  the                                                               
[Permanent] Fund principal, not the  earnings reserves.  She said                                                               
that  this constitutional  amendment  would  pull together  both.                                                               
Over time the markets  do go up and down and  this would assure a                                                               
steady, real  rate of return for  the fund and that  will protect                                                               
it.  Ms. Sturgulewski summarized  her comments by saying that she                                                               
believes this is an excellent  method of protecting the fund, and                                                               
she  will  personally commit  herself  to  working to  pass  this                                                               
constitutional amendment.                                                                                                       
Number 2411                                                                                                                     
MARY   GRISWOLD,   testified   in   support   of   the   proposed                                                               
constitutional  amendment  [HJR  26].   She  read  the  following                                                               
testimony into the record:                                                                                                      
     I  am an  enthusiastic  supporter of  a  5 POMV  payout                                                                    
     because   it   constitutionally  inflation-proofs   the                                                                    
     entire permanent  fund.  Right now,  only the principal                                                                    
     is inflation-proofed, and that  is done by statute, not                                                                    
     through the  constitution, and only after  the dividend                                                                    
     program is funded.                                                                                                         
     The second  reason I support 5  POMV is that it  sets a                                                                    
     spending  limit.     Under  the   current  distribution                                                                    
     methodology,  the   legislature  may   appropriate  the                                                                    
     entire earnings  reserve account.  Five  POMV forces us                                                                    
     to resist the temptation  to appropriate too much money                                                                    
     when  the  fund  is   flush,  yet  makes  distributions                                                                    
     available in lean years.                                                                                                   
     Number 2550                                                                                                                
     Third,  an  annual  payout based  on  market  value  is                                                                    
     compatible with  the fund's diversified  portfolio that                                                                    
     is managed,  in conformance to industry  standards, for                                                                    
     long-term  value over  short-term  gain.   The  current                                                                    
     distribution method,  based on income,  was appropriate                                                                    
     20 years  ago when the  fund was invested  primarily in                                                                    
     bonds.  A  5 percent payout is  generally recognized by                                                                    
     large fund managers as  the highest sustainable payout,                                                                    
     beyond which the real value  of the fund would diminish                                                                    
     over time.  This  straightforward approach protects the                                                                    
     value of the fund  and provides a limited, predictable,                                                                    
     and sustainable revenue stream.                                                                                            
     The  permanent   fund  trustees  combined   the  fund's                                                                    
     principal  and income  in one  pot of  money to  make 5                                                                    
     POMV  work  effectively.    Segregating  the  principal                                                                    
     interferes  with  value-management  goals  by  exerting                                                                    
     pressure to produce short-term  income for dividends or                                                                    
     other    distributions   during    periods   of    poor                                                                    
     performance.   Segregating  the  principal also  tempts                                                                    
     the  legislature  to  provide  for  a  greater  than  5                                                                    
     percent  payout when  the earnings  reserve account  is                                                                    
     flush,  as  in HJR  1.    This  is  just what  POMV  is                                                                    
     designed to avoid.                                                                                                         
     How the legislature chooses to  divide the payout is an                                                                    
     important question.   The  APFC [Alaska  Permanent Fund                                                                    
     Corporation]  takes  no  position  on the  use  of  the                                                                    
     payout.    Five  POMV  is  a  management  tool,  not  a                                                                    
     distribution plan.  However,  the two are intrinsically                                                                    
     linked.   The use of  the payout  should not be  set in                                                                    
     the  constitution  because  this  is  an  appropriation                                                                    
     issue   better  left   to   the  legislative   process.                                                                    
     However,  the  statutes   relating  to  permanent  fund                                                                    
     income  and  income  distribution must  be  amended  to                                                                    
     conform to 5 POMV.  I  urge you to preserve the current                                                                    
     dividend formula when you change  these statutes.  Five                                                                    
     POMV  is too  valuable to  the permanent  fund to  risk                                                                    
     voter rejection by threatening their dividend checks.                                                                      
     Number 2670                                                                                                                
     For  modeling purposes,  we assume  an 8  percent total                                                                    
     return,  3  percent  inflation,   and  5  percent  real                                                                    
     return.   Under  existing statutes,  50 percent  of the                                                                    
     income available  for distribution, or 4  percent, goes                                                                    
     to  the  dividend  program.   Inflation  proofing  then                                                                    
     takes  3  percent,  leaving 1  percent  for  the  other                                                                    
     legislative   appropriation,  which   has  never   been                                                                    
     touched.  For this distribution  to work under POMV, 80                                                                    
     percent of  the 5 percent  payout must be  allocated to                                                                    
     the  dividend program  to provide  the same  4 percent.                                                                    
     Inflation-proofing  of  3   percent  has  already  been                                                                    
     accounted  for  by  establishing  a  5  percent  payout                                                                    
     limit,  leaving  20 percent  of  the  payout for  other                                                                    
     legislative appropriation,  which is the same  as the 1                                                                    
     percent  under  the   existing  distribution  statutes.                                                                    
     Fifty percent  of the money available  for distribution                                                                    
     after  inflation  proofing   cannot  provide  the  same                                                                    
     amount  for  dividends  as  50  percent  of  the  money                                                                    
     available for distribution before inflation-proofing.                                                                      
     It is  time to  move forward  on a  fiscal plan.   This                                                                    
     constitutional amendment combined with  a change to the                                                                    
     statutes securing  80 percent of the  annual payout for                                                                    
     dividends  is critical  first step.   Please  promote a                                                                    
     comprehensive package the voters will  accept.  It is a                                                                    
     three-way  win.    The permanent  fund  gets  a  better                                                                    
     management   framework,   the    legislature   gets   a                                                                    
     predictable revenue  stream, and the people  keep their                                                                    
     dividend formula.  [original punctuation provided]                                                                         
Number 2747                                                                                                                     
REPRESENTATIVE GRUENBERG asked Ms.  Griswold whom she represents,                                                               
and if she  would provide the members with a  written copy of her                                                               
MS. GRISWOLD  stated that  she is representing  only herself.   A                                                               
copy  of  her   written  testimony  has  been   provided  to  the                                                               
Number 2819                                                                                                                     
EDWARD MARTIN, SR.,  testified in opposition to HJR 26.   He told                                                               
the members  that he believes  [HJR 26] is  a poor way  to manage                                                               
the  fund.   The state  legislature  has a  very large  financial                                                               
management  problem and  so does  the Permanent  Fund Corporation                                                               
Board of  Trustees, he said.   They  have to use  the "so-called"                                                               
prudent man  rule.   They have  invested 99  percent of  the fund                                                               
outside of  our borders  which has  produced about  [$6 billion].                                                               
The  sad  part  [of  this  policy] is  that  the  [trustees]  are                                                               
continuing the  same policy [of  investing outside  Alaska] while                                                               
recommending this  legislation which  takes more from  the people                                                               
of Alaska and  lets government have more to waste.   He asked the                                                               
members  to  remember that  the  money  has  no value  to  Alaska                                                               
citizens without  its use.  He  told the members that  there will                                                               
be a heavy political price paid  when the citizen rule is applied                                                               
at  the  ballot box.    This  legislation  does not  benefit  the                                                               
citizens of  Alaska, only special  interests, and the  people are                                                               
not buying it, he warned.                                                                                                       
Number 3112                                                                                                                     
JAMES PRICE,  testified in  opposition to  HJR 26.   He  told the                                                               
members he  believes that  this resolution  brings the  state one                                                               
step  closer  to using  the  dividend  earnings and  perhaps  the                                                               
principal to fund  the operation of state government.   Mr. Price                                                               
said that  he thinks  the legislature should  find a  solution to                                                               
the  deficient  problem before  changing  any  provisions of  the                                                               
Permanent  Fund.   He  said he  would like  to  see the  dividend                                                               
program   off    the   table   with   respect    to   legislative                                                               
appropriations.   He said  he does  not believe  this legislation                                                               
will  solve the  problem,  but  will perpetuate  it.   Mr.  Price                                                               
summarized  his comments  by saying  he  opposes HJR  26 and  the                                                               
appropriation of  any of  the earnings for  the funding  of state                                                               
Number 3309                                                                                                                     
LAURIE CHURCHILL, testified  in opposition HJR 26.   She told the                                                               
members that  she does not  believe there  should be a  change in                                                               
the  [Alaska] Constitution  without a  vote of  the people.   She                                                               
said  she believes  there is  a serious  spending problem  with a                                                               
bloated  budget  and  it  needs  to  be  cut  drastically.    Ms.                                                               
Churchill  noted that  many of  the legislators  who are  serving                                                               
made  campaign promises  to their  constituents  that they  would                                                               
leave   the  PFD   [Permanent  Fund   dividend]   alone.     This                                                               
[resolution] is a violation of the constituents' trust.                                                                         
Number 3429                                                                                                                     
CO-CHAIR WHITAKER  clarified that  what is  being discussed  is a                                                               
proposed constitutional  amendment [HJR  26] which, if  passed by                                                               
the legislature, would require a vote of the people in 2004.                                                                    
Number 3450                                                                                                                     
PETRIA FALKENBERG, testified  in opposition to HJR 26.   She told                                                               
the members  that she is  opposed to the resolution  because most                                                               
candidates elected  in 2002 promised  not to touch  the Permanent                                                               
Fund.  She asked if the  members were listening to the 83 percent                                                               
of Alaskan  voters.   Ms. Falkenberg said  she believes  that the                                                               
major  problem lies  with overspending.   She  said she  does not                                                               
believe the Permanent  Fund should be a source of  funding to run                                                               
the government.   She said  she opposes the  legislature's coming                                                               
through the back door to rob the PFD with bills of this nature.                                                                 
Number 3633                                                                                                                     
REPRESENTATIVE   WILSON  explained   to  those   individuals  who                                                               
testified and those who are  listening that the members have been                                                               
advised  that it  is possible  that  the PFD  could disappear  at                                                               
various times; however, with this resolution in place it would                                                                  
be a more stable and more assured dividend for the people of the                                                                
CO-CHAIR WHITAKER announced that there will be public testimony                                                                 
taken tomorrow, Tuesday, and Wednesday on HJR 9 and HJR 26.                                                                     
[HJR 9 and HJR 26 were held over.]                                                                                              

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