Legislature(2003 - 2004)

04/25/2003 07:13 AM House W&M

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HJR 26-CONST. AM: PF APPROPS/INFLATION-PROOFING                                                                               
Number 0157                                                                                                                     
CO-CHAIR  WHITAKER announced  that  the first  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 0209                                                                                                                     
MARC LANGLAND,  Chair, President, and CEO,  Northrim Bank; former                                                               
trustee, Alaska Permanent Fund  Corporation, testified in support                                                               
of HJR 26  and answered questions from the members.   He told the                                                               
members that because of his  experience with the Alaska Permanent                                                               
Fund Corporation  [Board of Trustees],  he would like  to comment                                                               
on  the endowment  process and  let members  know that  he favors                                                               
moving  in  that  direction.   In  [moving  toward  an  endowment                                                               
process] there  will be a steady  flow of cash and  a predictable                                                               
flow  of revenues  to the  state  versus the  current system,  he                                                               
explained.  He  pointed out that this would take  politics out of                                                               
process of  managing the  fund and remove  the temptation  on the                                                               
part  of  the  legislature   to  use  inflation-proofing  dollars                                                               
instead of  putting the money back  into the fund.   Mr. Langland                                                               
noted that when he was a  trustee there was not the same pressure                                                               
on the fund  as there is now with respect  to producing earnings.                                                               
He  explained that  there  is an  opportunity  under the  current                                                               
system for  decisions to be made  that would create more  or less                                                               
cash  earnings  for the  fund  such  as taking  appreciation  and                                                               
assets as a  profit to create new  cash or take losses.   He said                                                               
sometimes  those decisions  could be  influenced by  politics and                                                               
pressures to influence the flow of  cash.  Although he said he is                                                               
not  sure  that   has  ever  happened,  it  could   occur.    The                                                               
[endowment]  approach  would  allow trustees  to  provide  better                                                               
management of  the assets of  the fund by making  decisions based                                                               
on  long-term proper  asset allocation  and  [base] decisions  on                                                               
whether to  take profits from an  index fund or not,  without the                                                               
influence of  political pressure  to create  cash.   Mr. Langland                                                               
recalled  that during  the last  election  he heard  a number  of                                                               
people  discuss the  notion of  not inflation-proofing  the fund,                                                               
and  using  that cash  to  close  the  budget gap;  thereby,  not                                                               
impacting the dividend.  The  aforementioned is a good example of                                                               
how, in  times of  stress, politics  could influence  the overall                                                               
integrity of the fund by not inflation-proofing it.                                                                             
Number 0636                                                                                                                     
MR.  LANGLAND said  that in  the  future the  pressure to  create                                                               
revenues and use earnings from the  fund to fill the [budget] gap                                                               
will  be great.   He  reiterated  that the  endowment idea  would                                                               
produce a  predictable flow of cash  no matter what happens  in a                                                               
more   volatile   stock   market   and   unpredictable   economic                                                               
situations.   The  endowment would  also provide  the legislature                                                               
with  better  knowledge  on  how to  manage  the  state's  fiscal                                                               
issues,  he said.   He  asked the  members to  consider that  the                                                               
state  is  facing very  unpredictable  revenue  sources from  the                                                               
price  of  oil.   In  managing  a  business  it is  important  to                                                               
mitigate  the volatility  of the  revenue  stream, he  explained.                                                               
Under  the current  system, oil  revenues  are unpredictable  and                                                               
volatile  and  financial  markets   are  also  unpredictable  and                                                               
volatile; however, with an endowment  method at least one-half of                                                               
the revenue  stream for  the state  will be  off of  the volatile                                                               
list  and  make  [the  fund]  more  predictable.    Mr.  Langland                                                               
summarized his  comments by  saying that  from the  standpoint of                                                               
managing government  revenues and being  able to use  those funds                                                               
for government,  it is in  the [best  interest] of the  state and                                                               
its citizens  to understand what  the permanent fund  can produce                                                               
on a regular  basis when the fund is not  influenced by political                                                               
pressure.  Mr. Langland urged members to pass HJR 26.                                                                           
Number 0908                                                                                                                     
REPRESENTATIVE  GRUENBERG  asked Mr.  Langland  if  he read  Mike                                                               
Doogan's column  where he criticized  this approach  [to managing                                                               
the fund].                                                                                                                      
MR.  LANGLAND  replied  that  he does  not  read  [Mr.]  Doogan's                                                               
REPRESENTATIVE GRUENBERG  commented that  Mr. Doogan  raised some                                                               
interesting issues  with respect to this  [method of management].                                                               
One issue  he raised is  the assumption that  there will be  an 8                                                               
percent return.   Mr. Doogan asked  what will happen if  there is                                                               
not that rate of return, since  the fund is not earning 8 percent                                                               
now.  Representative  Gruenberg asked Mr. Langland  to respond to                                                               
Mr. Doogan's question.                                                                                                          
Number 1043                                                                                                                     
MR. LANGLAND replied that in looking  at the permanent fund it is                                                               
important to  look at it as  a long-term asset.   The statistical                                                               
data on a long-term basis [reflects  that] an 8 percent return is                                                               
a  reasonable expectation  through various  economic cycles  with                                                               
the proper asset allocation of the  fund.  Although there will be                                                               
times when real returns are less  than 8 percent, there will also                                                               
be times  that the return will  be more than that.   Mr. Langland                                                               
pointed out that  it is very difficult to predict  the future and                                                               
that  is  why  it  is  very  important  to  think  prospectively.                                                               
Unfortunately,  the political  arena does  not look  at the  long                                                               
term and  [Mr. Doogan's] comment  is a  very good example  of why                                                               
the endowment and payout formula is so important.                                                                               
CO-CHAIR WHITAKER  told the  members that he  does not  want [Mr.                                                               
Doogan's]  column to  be the  subject matter  of the  committee's                                                               
Number 1302                                                                                                                     
CO-CHAIR  HAWKER  commented that  across  [the  state] there  are                                                               
criticisms  [voiced]  with  respect  to making  changes  [to  the                                                               
permanent  fund].   There  is  [a  perception] that  the  current                                                               
structure  of permanent  fund  is absolutely  the  best and  only                                                               
structure  in  which  it  should  be organized.    He  asked  Mr.                                                               
Langland what years he served  on the Alaska Permanent Fund Board                                                               
of Trustees.                                                                                                                    
MR. LANGLAND replied that he served  from 1986 through 1990.  The                                                               
1990's were very big years and  the real rate of return was about                                                               
4 percent.                                                                                                                      
CO-CHAIR HAWKER  asked if the  trustees were looking at  a change                                                               
in the methodology at that time.                                                                                                
MR. LANGLAND  replied that the  biggest issue he recalls  was the                                                               
requirement  that dividend  calculations were  the first  call on                                                               
the earnings  versus inflation-proofing.   The trustees  tried to                                                               
get the  legislature to  look at  switching that  order, although                                                               
they were not  able to achieve it.  Another  important issue that                                                               
was being discussed was the change  from 50 percent to 25 percent                                                               
on new  oil revenues.   Mr. Langland  pointed out that  there has                                                               
been a change  in the definitions in  accounting principles which                                                               
makes the current system more  complicated.  He commented that at                                                               
that  time [1986-1990]  there was  no political  pressure to  use                                                               
earnings from the fund to close the budget gap.                                                                                 
Number 1550                                                                                                                     
CO-CHAIR HAWKER  asked if Mr.  Langland believes  the legislature                                                               
is  being  too  reactive  in   considering  this  as  a  tool  in                                                               
addressing  the  fiscal  gap.    He  asked  if,  as  a  financial                                                               
professional  and economist,  this [change]  would make  sense to                                                               
Mr. Langland if he were still a trustee on the board.                                                                           
MR. LANGLAND replied  that he absolutely would  support [HJR 26].                                                               
He explained  that when he  was on the board  there was a  lot of                                                               
index  fund management  instead  of individual  managers for  the                                                               
stock  portfolio.   The  markets  were  good  then and  the  fund                                                               
accumulated hundreds of millions  of dollars in appreciated stock                                                               
values.  Mr.  Langland told the members that the  [board] had the                                                               
opportunity to directly  influence the size of  the dividend over                                                               
time  by taking  the profits  and  turning them  into cash  which                                                               
would  have  created larger  payouts  of  dividends.   Tremendous                                                               
political pressure  could have resulted in  influenced decisions,                                                               
he  commented.   Mr. Langland  told the  members that  [the fund]                                                               
took profits for  the right reason and it had  nothing to do with                                                               
dividends.  As the appointments  of the trustees are politicized,                                                               
it is a  big concern that they [may] feel  pressure [to increase]                                                               
earnings when  there is the  opportunity to change how  much cash                                                               
flows  into the  state coffers  for dividends  or operations  [of                                                               
state government].   At the time  he was a trustee,  Mr. Langland                                                               
said he did not like it and  believed it would be a major problem                                                               
in  future.    He  reiterated   that  he  does  not  believe  the                                                               
legislature is being over reactive  because this method is a very                                                               
sound,  long-range  plan.    The  prudence  of  this  concept  is                                                               
defensible  and understandable  to  both institutional  investors                                                               
throughout the country  and recipients of cash that  flows out of                                                               
different types of endowments, he said.                                                                                         
Number 1846                                                                                                                     
CO-CHAIR HAWKER  referred to Mr.  Langland's earlier  comments on                                                               
the importance of maintaining a  mechanism to inflation-proof the                                                               
fund.   He  asked if  he would  clarify his  conclusion that  the                                                               
proposed method would  institutionalize inflation-proofing of the                                                               
fund.  Would  it in fact, result in the  preservation of capital,                                                               
or does the  ultimate mechanism result in an  erosion of capital,                                                               
he asked.                                                                                                                       
MR. LANGLAND  replied that  there is no  absolute answer  to that                                                               
question.   It  all depends  on the  time [period  in which]  the                                                               
market is looked  at, and what the payout  formula percentage is.                                                               
He recalled a study that  was done on inflation-proofing while he                                                               
was  on the  board.   The trustees  looked at  every method,  and                                                               
there was no conclusion about  what [would be the] absolute right                                                               
way  to  protect  the  principal  of  the  fund  from  inflation.                                                               
Because there is no absolute  answer, he suggested looking at how                                                               
most  people  address  this  issue.    The  endowment  method  is                                                               
certainly a proven way that  addresses the issues, although it is                                                               
not perfect and does not  totally inflation-proof the fund at any                                                               
given time  because it depends  on the payout percentage  that is                                                               
used.  If taking a  conservative [approach], the payout should be                                                               
less  than  5  [percent].   If  there  is  a  desire to  take  an                                                               
aggressive  approach,  then  the  payout would  be  more  than  5                                                               
[percent], he  said.   The current  system is  totally subjective                                                               
because  no  one  has  any   idea  what  real  inflation  is  and                                                               
inflation-proofing  is  totally  subject  to  the  discretion  of                                                               
legislature,  which creates  more risk  to the  principal in  the                                                               
long  run.     However,  the   endowment  theory,   provided  the                                                               
legislature   does  not   get  carried   away  with   the  payout                                                               
percentage, [would provide stability].   Mr. Langland stated that                                                               
a  5 percent  [payout]  is  about right  or  a  little above  the                                                               
average [of other endowment payouts].                                                                                           
Number 2159                                                                                                                     
CO-CHAIR HAWKER  noted that Mr.  Langland's perspective on  the 5                                                               
percent payout factor as the key  to the success of this model is                                                               
an issue he would like to  discuss further.  It is important that                                                               
capital is  preserved and not  eroded, he said.   Co-Chair Hawker                                                               
asked for Mr.  Langland's opinion on the 5  percent payout factor                                                               
and the  [constitutional] amendment.   For  the record  he stated                                                               
that  [HJR 26]  has language  that  states the  payout would  not                                                               
exceed 5 percent,  rather than a definitive 5  percent.  Co-Chair                                                               
Hawker emphasized that he believes  it is important to ensure the                                                               
long-term value of the fund.                                                                                                    
Number 2310                                                                                                                     
MR.  LANGLAND replied  that  statistical  information is  readily                                                               
available on  the long-term  average of inflation.   Many  of the                                                               
studies  that he  has  seen  say inflation  has  been around  3.1                                                               
percent since about  1926, and real returns are  generally in the                                                               
3 to  4 percent range.   If earnings  are in  the 7 to  8 percent                                                               
range on  an average basis, the  fund would be in  good shape, he                                                               
said.   Mr. Langland explained  that on a long-term  basis stocks                                                               
generally produce about  a 9 percent return,  and bonds [produce]                                                               
about  a 3.5  to 4.5  percent [return].   He  commented that  a 5                                                               
percent  payout  over the  long  term  is  probably a  very  good                                                               
number, but  he emphasized that he  would not be in  favor of any                                                               
number in excess of 5 percent.   On a short-term basis, 5 percent                                                               
will probably  be excessive,  but he  stressed the  importance of                                                               
structuring  this  [endowment]  as  a  long-term  concept.    Mr.                                                               
Langland commented  that no  one can predict  with any  degree of                                                               
certainty, beyond  a couple  of years,  [what earnings  will be].                                                               
For  example, stocks  did  not produce  dividends  in the  1990s;                                                               
however,  currently  there  is pressure  for  stocks  to  produce                                                               
dividends.   On a historical  basis stocks  have returned 4  to 5                                                               
percent over  the long term  in dividends, he  said.  There  is a                                                               
major shift  right now in how  income comes in stocks  versus the                                                               
importance of appreciation in value in the 1990s.                                                                               
MR.  LANGLAND pointed  out that  there are  many issues  that are                                                               
important  in  the management  of  the  fund.   It  is  extremely                                                               
important that a  trustee can focus on the long  term when making                                                               
[investment]  decisions [because  the  impact  of those  choices]                                                               
will allow  for the  proper allocation of  assets to  protect the                                                               
fund.    Mr. Langland  summarized  his  comments by  saying  that                                                               
stability is  very important when  managing funds like this.   He                                                               
stated that  the process currently in  place creates instability,                                                               
which increases risk, both in  asset allocation and ultimately in                                                               
Number 2698                                                                                                                     
CO-CHAIR HAWKER  commented that Mr.  Langland touched  on capital                                                               
erosion; however,  the fund  has had years  when there  have been                                                               
earnings  in  excess of  the  5  percent  level.   He  asked  Mr.                                                               
Langland if he is comfortable  that this mechanism would keep the                                                               
earnings "off the table" in good years.                                                                                         
MR.  LANGLAND   responded  that  he  is   comfortable  with  this                                                               
legislation  because, as  an endowment,  it  provides that  there                                                               
would only be  a 5 percent payout of the  current market value of                                                               
the fund.  Asset allocations are  moved around depending on a lot                                                               
of different factors,  he said, and that is the  key to producing                                                               
revenues  that  are  less  volatile   in  the  long  term.    The                                                               
aforementioned is one of the  most important parts to consider in                                                               
how this piece  of legislation [could benefit  the] management of                                                               
the fund.   Mr. Langland stated that he  could not over-emphasize                                                               
how important that is because the  way volatility is reduced in a                                                               
fund is through  the proper allocation of those assets.   That is                                                               
the most critical and positive  element for the management of the                                                               
fund and preservation  of capital.  He  explained that allocation                                                               
of  assets  refers  to  the  different kinds  of  stocks  in  the                                                               
portfolio,  [how  much  is  invested]  in  bonds,  how  much  [is                                                               
invested] in  international funds, and  how much in  real estate,                                                               
et cetera.                                                                                                                      
Number 2926                                                                                                                     
REPRESENTATIVE   WEYHRAUCH  asked   him  if   his  reference   to                                                               
preservation of capital  actually meant to protect  the fund from                                                               
inflation and  ensure that the  real value of the  permanent fund                                                               
is preserved.                                                                                                                   
MR. LANGLAND replied that is the correct interpretation.                                                                        
Number 3011                                                                                                                     
REPRESENTATIVE WEYHRAUCH asked  if Mr. Langland, as  a banker and                                                               
former  trustee of  the fund,  believes this  amendment [HJR  26]                                                               
would provide certainty of dividend calculations.                                                                               
MR.  LANGLAND prefaced  his  comments  by saying  that  he has  a                                                               
prejudice [concerning dividends].  He  explained that he does not                                                               
look at the fund and the way  it is managed with any [thought] to                                                               
dividends.   He acknowledged  that politically  that does  not go                                                               
over well; however, he said  he does not believe that [dividends]                                                               
should  be the  focus.   The  focus should  be  on a  predictable                                                               
revenue stream that the legislature  can use for whatever purpose                                                               
is deemed necessary.   He opined that [dividends] will  not be an                                                               
issue for very  long because he believes it will  be necessary to                                                               
use the money for state government.   He emphasized that he would                                                               
not look  at this  resolution [based]  on how it  may or  may not                                                               
affect dividends and pointed out  that this resolution would give                                                               
a  more predictable  annual  source  of cash  and  that could  be                                                               
interpreted to help the dividend.                                                                                               
REPRESENTATIVE  WEYHRAUCH highlighted  that the  resolution talks                                                               
about protecting  the fund from  inflation and ensuring  the real                                                               
value of the  permanent fund.  He asked how  Mr. Langland defines                                                               
real value.                                                                                                                     
Number 3211                                                                                                                     
MR.  LANGLAND commented  that it  is a  loose term.   He  said he                                                               
relates  it to  inflation  in the  sense of  real  value and  the                                                               
ability to  properly allocate the  assets of the fund  to protect                                                               
and reduce  the volatility of  the fund over  the long term.   He                                                               
stated that he  does not believe there is any  way anyone can say                                                               
that there is  a formula or process that  will absolutely protect                                                               
the real value  of the fund or  real principal of the  fund.  Mr.                                                               
Langland said  that he believes  this piece of  legislation would                                                               
clear up  a lot of these  definitions and eliminate a  lot of the                                                               
misconceptions  and misinterpretations  of terms.   He  urged the                                                               
members to  focus on what  this legislation  does or does  not do                                                               
for the preservation [of the fund].                                                                                             
Number 3404                                                                                                                     
REPRESENTATIVE   WEYHRAUCH  commented   that  in   public  forums                                                               
questions such  as these  come up.   He  said he  appreciates Mr.                                                               
Langland's  insight,  as  it will  assist  him  in  intelligently                                                               
answering questions  from the  public.   Representative Weyhrauch                                                               
surmised that Mr.  Langland views this resolution  as a provision                                                               
to improve the  administration of the fund and  thus improves the                                                               
flow of  permanent fund earnings to  the state general fund.   He                                                               
asked if that is an accurate summary [of his views].                                                                            
MR. LANGLAND replied that he is exactly right.                                                                                  
REPRESENTATIVE  WEYHRAUCH went  on to  say that  this legislation                                                               
would  help   the  legislature  to  provide   appropriations  for                                                               
permanent fund  dividends, if the  legislature makes  that policy                                                               
choice, and to help close fiscal gap.                                                                                           
MR. LANGLAND responded that is correct.                                                                                         
Number 3516                                                                                                                     
CO-CHAIR WHITAKER noted that as a  banker Mr. Langland has a huge                                                               
stake in  the economy.  He  asked what will happen  in the larger                                                               
economic picture if the legislature  does not take action such as                                                               
that prescribed by HJR 26.                                                                                                      
MR.  LANGLAND explained  that he  has  been active  in trying  to                                                               
persuade the  legislature and  the administration  to face  up to                                                               
the fiscal  crisis and  deal with it  earlier rather  than later.                                                               
He said  the argument that he  puts forth is there  would be less                                                               
impact on  the economy if action  is taken sooner to  ease into a                                                               
transition from no responsibility on  the part of citizens to one                                                               
in  which  citizens  gradually become  responsibile  for  funding                                                               
state  government.   He said  he  is unsure  whether that  action                                                               
would  include  using  part  of the  earnings  and  lowering  the                                                               
dividends [to fund]  state government or some sort  of tax system                                                               
in which individuals would participate.                                                                                         
MR. LANGLAND  expressed concern that  the legislature  might wait                                                               
until [the state] runs out  of money in the Constitutional Budget                                                               
Reserve Fund (CBR) and then  take dividends totally off the table                                                               
and/or  impose very  large taxes.   He  said in  either of  those                                                               
[scenarios]  there will  be  a negative  impact  on the  economy.                                                               
There is  no way that  the state can  get through this  knot hole                                                               
without  having  a  negative  impact   on  the  state's  economy.                                                               
However,  how  serious  that  impact   will  be  depends  on  the                                                               
legislature's approach  to closing  the [fiscal] gap,  which will                                                               
be closed  because constitutionally  the legislature  is required                                                               
to  balance the  budget.   One  argument he  opposes  is to  take                                                               
inflation-proofing dollars  and use those  [funds to  balance the                                                               
budget].   In this  case the  dividend would  still be  paid out.                                                               
The danger  he sees [with  the legislature failing to]  close the                                                               
gap  is that  it  will affect  people coming  into  the state  or                                                               
people already  here who are  trying to expand  their businesses.                                                               
For example,  if a businessperson  coming into Alaska  knows that                                                               
there is  a billion dollar [fiscal]  gap, it would be  clear that                                                               
there will be taxes and it will  have an impact in some way.  Mr.                                                               
Langland cautioned  that this  is a  dangerous situation  that is                                                               
easy to keep putting off because  the legislature has the cash to                                                               
deal  with  the deficit,  but  it  is  a very  dangerous  process                                                               
economically.   Phasing in [a  method of closing the  budget gap]                                                               
would  provide a  smoother  transition with  less  impact on  the                                                               
economy.   He urged the  members to let citizens  make adjustment                                                               
personally.   Mr. Langland summarized  his comments by  saying he                                                               
understands the  political realities that the  members must face,                                                               
but leadership [should not] take polls,  and going to the vote of                                                               
the people  is not  a very  practical way  to close  the [fiscal]                                                               
Number 4046                                                                                                                     
CO-CHAIR  WHITAKER asked  if the  budget is  not balanced,  where                                                               
will that path lead  us.  He surmised that [if  the budget is not                                                               
balanced]  economic growth  will  be stifled  and in  combination                                                               
with the  shock or  reality that  must be faced  when the  CBR is                                                               
gone [will lead the state to an economic crisis].                                                                               
MR. LANGLAND agreed that is the path  [the state] is on.  He said                                                               
he  is  not   very  hopeful  that  the   administration  and  the                                                               
legislature  will  provide  a   transition  [in  addressing  this                                                               
problem].  Politically  it will be necessary to  do a combination                                                               
of major  reductions in the  permanent fund [dividends]  and have                                                               
taxes  to  fill   the  gap.    Mr.  Langland   commented  that  a                                                               
combination of  these two  steps would  be less  of an  impact on                                                               
each citizen, although there will  be some impact to the economy.                                                               
He  emphasized that  he  does not  see these  steps  as having  a                                                               
devastating impact  at all.  In  some cases, he said  he believes                                                               
it will be  positive for the state to have  more participation in                                                               
government [from its  citizens].  Mr. Langland  commented that he                                                               
does not  see this  as a  big negative.   Although there  will be                                                               
issues that will have to be  worked thorough, Alaska has a strong                                                               
enough  economy  to  weather  this   [storm]  without  any  major                                                               
disruptions.  However,  he cautioned that it may  be necessary to                                                               
offer some  help on the  social side to  bridge the gap.   Still,                                                               
Mr. Langland said  he believes this is very manageable  and he is                                                               
Number 4342                                                                                                                     
CO-CHAIR HAWKER said that this  constitutional amendment [HJR 26]                                                               
envisions merging the  earnings reserve and the  principal of the                                                               
Alaska  permanent fund.   Most  politicians  and economists  have                                                               
conditioned people  to be  very protective of  the corpus  of the                                                               
fund.  He asked Mr. Langland  if he believes it is appropriate to                                                               
merge these  two aspects  of the  fund.  In  doing this  will the                                                               
state end  up with  a result that  is consistent  with preserving                                                               
the long-term value of the fund, he asked.                                                                                      
MR.  LANGLAND replied  the he  thinks  it is  [appropriate].   He                                                               
explained that the way  the fund works now there is  a need for a                                                               
depository  for those  times when  there is  more cash  available                                                               
than what the  formula needs.  The reserve account  has been used                                                               
to pull  off cash in those  years when the formula  does not work                                                               
and  it is  short of  cash.   Once  the legislature  goes to  the                                                               
payout formula,  there will be  no need for the  reserve account;                                                               
it goes  away.   He said  he thinks,  from a  prudent standpoint,                                                               
that merging the reserve account  into the principal of the fund,                                                               
rather  than taking  it  off the  table and  using  it for  other                                                               
governmental purposes, would  be viewed in a  more positive light                                                               
politically; philosophically it is the prudent thing to do.                                                                     
Number 4554                                                                                                                     
CO-CHAIR   WHITAKER  asked   if  this   would  facilitate   asset                                                               
management  and  the  implementation of  those  points  addressed                                                               
earlier which would mitigate the volatility of the fund.                                                                        
MR. LANGLAND replied that it would.                                                                                             
TAPE 03-14, SIDE B                                                                                                            
Number 4526                                                                                                                     
CO-CHAIR HAWKER moved to adopt  the proposed committee substitute                                                               
(CS)  for HJR  26,  Version 23-LS1006\H,  Cook,  4/23/03, as  the                                                               
working document.  There being no objection, it was so ordered.                                                                 
CO-CHAIR HAWKER  noted a  [typographical] error on  page 2:   the                                                               
reference to Version A should actually be to Version H.                                                                         
Number 4437                                                                                                                     
RON LORENSEN,  Attorney at  Law, Simpson,  Tillinghast, Sorensen,                                                               
and  Longenbaugh,  speaking  as  outside counsel  to  the  Alaska                                                               
Permanent Fund  Corporation, testified in  support of HJR  26 and                                                               
answered questions from the members.                                                                                            
REPRESENTATIVE  WEYHRAUCH asked  about  the language  on page  2,                                                               
line  2,  Section   2(b),  which  says,  "Money   should  not  be                                                               
appropriated from  the permanent fund."   He asked why  the words                                                               
"should not" were used, instead of "will not."                                                                                  
MR.  LORENSEN  explained  that  the   change  in  the  draft  was                                                               
suggested by Tamara Cook, Director,  Legal and Research Services.                                                               
He  recalled that  Ms. Cook  was  concerned that  as drafted  and                                                               
presented  in the  original  version  of HJR  26,  the first  and                                                               
second   sentences  of   subsection   (b)   setup  separate   and                                                               
independent  standards  for  appropriations  from  the  permanent                                                               
fund.   She was  concerned that might  create some  confusion and                                                               
legal  issues in  the future.   Therefore,  Ms. Cook  drafted the                                                               
first sentence basically  as a predicate statement  to the second                                                               
[sentence], he  said.  Mr. Lorensen  noted that while he  has not                                                               
talked to  Ms. Cook  directly, that is  his understanding  of the                                                               
change  and  it makes  sense  to  him when  he  read  it in  that                                                               
Number 4247                                                                                                                     
REPRESENTATIVE  WEYHRAUCH  agreed  that   it  does  makes  sense,                                                               
especially  since  the  second  sentence  begins  with  the  word                                                               
"therefore."   Representative  Weyhrauch said  that he  had never                                                               
seen  a  sentence  in  the   constitution  start  with  the  word                                                               
"therefore"  which [makes]  it almost  a statement  of policy  or                                                               
MR. LORENSEN  reiterated that  Ms. Cook is,  in this  case, using                                                               
the first sentence as a predicate  or policy statement, as to the                                                               
goal of limitations  of payouts and the word  "therefore" is used                                                               
as the transition into the limitation language.                                                                                 
Number 4136                                                                                                                     
REPRESENTATIVE  WEYHRAUCH   commented  that  changing   the  word                                                               
"should" to the word "will" would  remove the need for the use of                                                               
the word "therefore".                                                                                                           
MR. LORENSEN  asked the members  to compare the  original version                                                               
of  HJR 26.   He  pointed  out that  it  said "money  may not  be                                                               
appropriated" in the  first sentence so the  word "therefore" was                                                               
not in the second sentence.                                                                                                     
REPRESENTATIVE  WEYHRAUCH asked  about  the language  on page  2,                                                               
lines  6-7, where  it  says "the  first five  of  the six  fiscal                                                               
years" and inquired as to  the significance of the 5-year period.                                                               
He asked if Mr. Lorensen would  clarify if this meant any five of                                                               
the preceding six years, or the last  five of six years.  What is                                                               
the purpose of selecting five years, he asked.                                                                                  
MR. LORENSEN  said that what  this calls  for is a  one-year look                                                               
back  provision.    What  this  means is  when  looking  back  to                                                               
determine the 5-year  period the current fiscal  year is omitted.                                                               
In other words if the  legislature is making an appropriation for                                                               
this year, FY 04, it would mean  that FY 03 is not looked at, but                                                               
that the five years that ended with  FY 02 would be included.  He                                                               
explained that  this is  a simpler  way of  saying that  than the                                                               
attorney's language.  For example,  if appropriating funds for FY                                                               
04,  the legislature  would look  at  the six  years before  that                                                               
year, but  only use the  first five of  those years.   This would                                                               
ensure certainty at the time  of making the appropriation because                                                               
the last year used as part of the calculation would be FY 02.                                                                   
Number 4000                                                                                                                     
REPRESENTATIVE  WEYHRAUCH   turned  to  when  the   trustees  are                                                               
determining  if  there  should  be  a payout  on  June  30th  and                                                               
inquired as  to the  timeframe being  used.  Is  it the  close of                                                               
business at 5:00 p.m. [Eastern  Standard Time] or midnight Alaska                                                               
MR.  LORENSEN replied  that  he believes  it is  the  end of  the                                                               
business day for financial purposes  which is 5:00 p.m., New York                                                               
ROBERT  BARTHOLOMEW, Chief  Operating  Officer, Alaska  Permanent                                                               
Fund Corporation,  testified in  support of  HJR 26  and answered                                                               
questions from  the members.   He  told the  members historically                                                               
when the permanent  fund and the custodian bank, the  Bank of New                                                               
York,  determine the  fund  value  of a  day  they  use the  last                                                               
closing  of   the  markets  around   the  world.     When  making                                                               
calculations on  June 30th, the  fund will find the  last closing                                                               
value from all the stock markets  all around the world were.  For                                                               
example,  if in  the middle  of evening  on June  30th the  stock                                                               
market in Tokyo  is opening, the fund does not  use an opening or                                                               
intra-day value in  determining the value of the fund.   It would                                                               
be  the last  closing day  that would  be used  for all  of those                                                               
different markets, he reiterated.                                                                                               
Number 3748                                                                                                                     
REPRESENTATIVE   WEYHRAUCH   asked   if  the   funds   would   be                                                               
appropriated to the general fund under this scheme.                                                                             
MR.  BARTHOLOMEW   responded  that  the  funds   are  subject  to                                                               
legislative  appropriation  so  there  is  no  direction  in  the                                                               
constitution as to where those appropriations would go.                                                                         
MR.  BARTHOLOMEW,   in  response  to   Representative  Weyhrauch,                                                               
clarified that  the current constitutional provision  says income                                                               
from the  permanent fund shall  be deposited in the  general fund                                                               
unless  otherwise  provided by  law.    However, since  1982  the                                                               
statutes have  provided that all  income from the  permanent fund                                                               
shall be  deposited in  the permanent  fund.   So the  funds have                                                               
been  retained  in  the  permanent   fund  since  1982  and  then                                                               
appropriations have  come from the earnings  reserve [account] of                                                               
the permanent fund  and have gone to the dividend  fund, which is                                                               
a  subfund  of  the  general   fund.    In  further  response  to                                                               
Representative  Weyhrauch,  Mr.  Bartholomew confirmed  that  the                                                               
earnings reserve  account and the  earnings reserve fund  are the                                                               
same thing.                                                                                                                     
Number 3624                                                                                                                     
CO-CHAIR  HAWKER  noted  that if  this  constitutional  amendment                                                               
should pass  the legislature,  it would  be necessary  to address                                                               
the  existing  statute  which  would  be  incompatible  with  the                                                               
mechanism  within  the  constitution.     It  would  require  the                                                               
legislature to  look for broader  enabling statutes to  define or                                                               
delineate  what should  be done  with those  distributions should                                                               
they be made, he said.                                                                                                          
MR. BARTHOLOMEW said  the board's policy resolution,  which is in                                                               
the members'  packets, recommends  that the existing  statutes be                                                               
updated  to work  better with  a payout  of market  value method.                                                               
The legislature  could leave the  existing statutes, but  it does                                                               
not  work  very  well.    The existing  statutes  provide  for  a                                                               
calculation  of  what  is available  for  appropriation  using  a                                                               
realized  income approach,  and  [these statutes]  do not  direct                                                               
where the money goes, he explained.   It is the understandiing of                                                               
the board that  there will be statutory  language that implements                                                               
constitutional provisions  as things  work now.   Mr. Bartholomew                                                               
told  the  members that  the  board's  recommendation and  policy                                                               
statement  is that  the  legislature look  at  the statutes  that                                                               
determine what  is available and  write those [statutes]  to work                                                               
better with the payout of market value [method].                                                                                
Number 3559                                                                                                                     
REPRESENTATIVE WEYHRAUCH  said that the language  in [sub]section                                                               
(b) of this amendment indicates  that the government of the State                                                               
of Alaska  has to  ensure that  the real  value of  the permanent                                                               
fund is preserved over time.  He  asked if that is a correct.  In                                                               
response    to    Mr.   Bartholomew's    affirmative    response,                                                               
Representative Weyhrauch  asked if this requires  the legislature                                                               
to ensure  the value  of the permanent  fund reserved  over time.                                                               
The legislature could not appropriate  out funds that would drain                                                               
the  permanent fund  because that  would be  in violation  of the                                                               
constitution.    He asked  if  Mr.  Bartholomew agrees  with  his                                                               
interpretation of the language.                                                                                                 
MR. BARTHOLOMEW  agreed that is  his understanding of  the intent                                                               
language.   The language is to  ensure the focus is  on the long-                                                               
term  period, and  then over  that long-term  period, the  policy                                                               
statement is  to preserve the  real value of the  permanent fund.                                                               
The board of  trustees or legislative members  use whatever tools                                                               
available to them  to make a statement or an  analysis to look to                                                               
the preservation of the value of the fund, he said.                                                                             
Number 3341                                                                                                                     
REPRESENTATIVE WEYHRAUCH  commented that when the  permanent fund                                                               
was established and  the statutory scheme was setup  in 1982, the                                                               
intent  was   to  set  aside   money  for  government   and  keep                                                               
politicians  honest by  investing  the  public through  permanent                                                               
fund dividends.   This ensured  that the public [had  a] invested                                                               
[interest] in  the account  and the  legislature knew  the people                                                               
would be  invested.   There was  also the  intent that  the funds                                                               
would eventually be there for a  rainy day when Alaska ran out of                                                               
oil   revenues,  and   therefore  the   legislature  could   fund                                                               
government when  Alaska did not have  a huge revenue stream.   He                                                               
asked Mr. Bartholomew  if that is his basic  understanding of the                                                               
permanent fund's origin.                                                                                                        
Number 3257                                                                                                                     
MR. BARTHOLOMEW  responded that  he would go  back a  bit further                                                               
and  say that  there  were  three major  steps  that  led to  the                                                               
current situation  with the permanent  fund.  First, there  was a                                                               
constitutional amendment in  1976 that asked the  citizens of the                                                               
State of Alaska  to set aside mineral  wealth, which historically                                                               
has  been  oil wealth.    So  step one  had  no  conception of  a                                                               
dividend or  what would  be done  with the  earnings.   [The 1976                                                               
constitutional  amendment] said  that the  state would  set aside                                                               
earnings that are  not needed or oil wealth that  was not needed.                                                               
The earnings  from that  oil wealth would  be deposited  into the                                                               
general fund.   He  pointed out  that in  1976 the  earnings were                                                               
fairly small, but those earnings  were deposited into the general                                                               
fund.    In  1980,  after  a   couple  of  years  of  debate  and                                                               
discussion, the dividend  program came into existence.   In 1982,                                                               
[the constitution] was  amended and that is  the statutory scheme                                                               
that is  used today.   Mr. Bartholomew turned to  the legislative                                                               
history  of  the  permanent  fund.    Governor  Hammond  was  the                                                               
governor at  the time.  The  statutes in place since  1982 gave a                                                               
better   allocated  50   percent   of  what   is  available   for                                                               
appropriation annually to the dividend  program.  Mr. Bartholomew                                                               
noted  that inflation-proofing  has  been in  the statutes  since                                                               
1982, and [there  is no mention] about what to  do with the funds                                                               
available  after  the dividends  have  been  paid and  inflation-                                                               
proofing has occurred.                                                                                                          
CO-CHAIR  WHITAKER  noted  for  the  record  that  Representative                                                               
Rokeberg had joined the meeting.                                                                                                
Number 3039                                                                                                                     
REPRESENTATIVE  WEYHRAUCH asked  Mr. Bartholomew  if he  believes                                                               
this [HJR  26] is a  dramatic departure from the  original intent                                                               
of  the people,  legislature, and  the administration  that setup                                                               
the permanent fund.                                                                                                             
MR. BARTHOLOMEW  responded that  the board  of trustees  does not                                                               
feel this is  a major change; the permanent fund  has changed and                                                               
matured.  How the money is  invested has evolved over the last 25                                                               
years, he commented.   For example, the funds have  evolved to be                                                               
100 percent invested  in fixed income or bonds  that pay interest                                                               
income  to the  holder  of the  bonds whereas  20  years ago  the                                                               
general  direction  was that  these  bonds  were  to be  held  to                                                               
maturity so there  was not a lot of volatility.   The legislature                                                               
crafted a statutory scheme that works  well in the world of bonds                                                               
and fixed  income.  As  the permanent  fund has matured  and more                                                               
learned about  the investment industry  and capital  markets, the                                                               
legislature has  granted the [Alaska Permanent  Fund Corporation]                                                               
through  statutes  the  permission  to  invest  in  U.S.  stocks,                                                               
international stocks,  international fixed  income or  bonds, and                                                               
real estate.   How income  is derived from those  investments has                                                               
evolved, it  is not just an  interest payment, he explained.   As                                                               
Mr.  Langland  testified  earlier,  the permanent  fund  now  has                                                               
capital appreciation in real estate  and stocks which were not an                                                               
issue with bonds,  he said.  The [board]  characterizes this more                                                               
as [addressing]  the fund's asset  investment strategy  which has                                                               
matured;  [however,]  the rules  that  guide  the permanent  fund                                                               
regarding how  to make use  of the value  have not evolved.   The                                                               
board  has been  working  for the  last eight  or  nine years  to                                                               
educate everyone  so that a  decision will  be made to  bring the                                                               
rules up to speed and in  a manner matching the fund's investment                                                               
strategy.   Originally, the  intent was to  set aside  oil wealth                                                               
for some future period, and the  decision as to whether the state                                                               
is in  that future period or  not is separate from  how to manage                                                               
the fund.   Mr. Bartholomew told the members that  this is purely                                                               
the board's  recommendation that the  rules that help  manage the                                                               
fund need  to be improved.   He  said he does  not see that  as a                                                               
dramatic change in what was trying to be done in 1982.                                                                          
Number 2731                                                                                                                     
REPRESENTATIVE  GRUENBERG  said that  he  always  thought of  the                                                               
concept  of the  fund as  a permanent  fund, so  that the  corpus                                                               
would be  there permanently,  but income from  the fund  could be                                                               
used.  The  amendment to the constitution  provides a theoretical                                                               
possibility that  the corpus could  itself be consumed,  he said.                                                               
He asked  if that is not  a fundamental change in  the purpose of                                                               
the fund.                                                                                                                       
MR.  BARTHOLOMEW responded  that he  believes it  is a  different                                                               
perspective.    He  asked  the  members to  look  at  the  policy                                                               
statement [the  board submitted].   He said  the board has  had a                                                               
lot  of  discussion  on  the  issue  of  whether  to  remove  the                                                               
distinction between  principal and income  and move to  where the                                                               
permanent  fund  is  one  account  of  money.    He  referred  to                                                               
Representative  Weyhrauch's earlier  question as  to whether  the                                                               
intent  is still  to preserve  the  corpus or  principal [of  the                                                               
fund] over  time.   Mr. Bartholomew stated  that he  believes the                                                               
board  would say  it absolutely  is the  intent and  objective to                                                               
continue  to  maintain the  principal.    He read  the  following                                                               
sentence  [from the  Alaska Permanent  Fund Corporation  Board of                                                               
Trustees Resolution  03-05, page  3, lines 1-3],  which addresses                                                               
the proposal  to eliminate the distinction  between principal and                                                               
income and the overall proposal  of payout of market value, which                                                               
     The  Board  believes  that  this  approach  effectively                                                                    
     balances   the  goal   of  providing   for  an   annual                                                                    
     distribution  from the  Fund  that  is predictable  and                                                                    
     limited with the long-term goal  of protecting the real                                                                    
     value  of   contributions  to  the  Fund.     [original                                                                    
     punctuation provided]                                                                                                      
MR. BARTHOLOMEW pointed out that  the board of trustees is trying                                                               
to  determine the  best way  to protect  the fund  and deal  with                                                               
annual distributions.  Some believe  that if there were a $22-$23                                                               
billion fund it  could not make a distribution for  a year or two                                                               
because the capital markets had  taken the value below principal.                                                               
There are  some dynamics  involved.  One  [dynamic] would  be the                                                               
effect on  the economy, which is  not the primary concern  of the                                                               
board; however, it is something that  is reviewed.  There is also                                                               
a risk of what  the public would feel if there  is this fund that                                                               
is providing  no distribution.   It is possible that  there could                                                               
be a  move that would  say that  if there is  a fund that  is not                                                               
doing anything  for us let's just  divvy it up.   Mr. Bartholomew                                                               
clarified that  the board  is not  predicting that  would happen,                                                               
but that was  part of the discussion  and it is a risk.   He told                                                               
the  members  this  is  the standard  method  followed  by  major                                                               
endowments and  trusts, which  have the  same intent  to preserve                                                               
the initial  contributions so  they will  be there  in perpetuity                                                               
while also providing a distribution.   The board wants to balance                                                               
those  goals and  protect the  fund with  this proposal.   It  is                                                               
important to note,  he said, that if capital  markets change from                                                               
what has occurred  over the last 75 years and  the real return or                                                               
the return in excess of inflation  were to be less than 5 percent                                                               
over the  long term, the legislature  would have to look  at that                                                               
and  decide  to  appropriate  less   than  the  maximum  that  is                                                               
Number 2308                                                                                                                     
REPRESENTATIVE WILSON  said that currently the  legislature never                                                               
knows  until  the end  of  the  session  how  much money  can  be                                                               
distributed.   However, with the  change in language [on  page 2,                                                               
lines 6-7]  means that the  legislature will know in  January how                                                               
much  money is  available  for distribution  because the  current                                                               
fiscal year  is not  included in that  calculation.   This change                                                               
will make  it much easier  for the  legislature to deal  with the                                                               
budget.    Representative Wilson  asked  Mr.  Bartholomew if  her                                                               
assumptions are correct.                                                                                                        
MR. LORENSEN replied that is correct.                                                                                           
Number 2157                                                                                                                     
REPRESENTATIVE OGG  asked about the  5 year running average.   He                                                               
pointed out that the date is being  set on June 30th, for each of                                                               
those years.   How does that change from what  is presently being                                                               
done, he  asked.  He also  asked if there is  more flexibility in                                                               
determining  a particular  day that  would be  used for  what the                                                               
market value of the fund is.                                                                                                    
MR. BARTHOLOMEW  responded that  the way it  is now  written, the                                                               
permanent fund  uses the end  of the  fiscal year, which  is June                                                               
30th.  This  does not change anything unless the  State of Alaska                                                               
decided  to change  its  fiscal  year end.    In  that case,  the                                                               
amendment would lock  in that date, which is  different than [the                                                               
way  it  is done  now].    Mr.  Bartholomew explained  that  from                                                               
permanent  fund's perspective,  the  constitution  will now  tell                                                               
them  to use  June  30th, but  the State  of  Alaska could  still                                                               
decide to change its year-end date,  which he said he believes is                                                               
a remote  possibility.  It  does take away a  little flexibility,                                                               
but it  is not  really something  that would  have been  used, he                                                               
Number 2008                                                                                                                     
REPRESENTATIVE OGG posed a situation  in which the permanent fund                                                               
had the flexibility to look at  the market last year and see that                                                               
it was  going down  and determine  a good day  to end  the fiscal                                                               
year as long as it was before June  30.  He asked if that kind of                                                               
flexibility existed last year.                                                                                                  
MR.  BARTHOLOMEW  responded  that  there  are  bylaws  and  other                                                               
corporate documents that currently  say the permanent fund fiscal                                                               
year [ends] on June 30.  He  told the members that he never heard                                                               
any  discussion  about   using  that  tool  to   change  what  is                                                               
available.  It is not something  that could have been done on the                                                               
short term, he said.  There  are rules that require public notice                                                               
to change  the bylaws.  The  notice must be at  least one meeting                                                               
ahead of time.  It would take  many months to effect a change, he                                                               
said.  Theoretically,  it is possible, but the fund  has been set                                                               
on using  that consistent  fiscal year  end.   Furthermore, there                                                               
are contracts based  on those dates.  Therefore,  many things set                                                               
in motion  that would make it  very difficult to change  the date                                                               
from June 30 without a very long process.                                                                                       
REPRESENTATIVE  OGG  commented that  there  really  was not  much                                                               
MR. BARTHOLOMEW  agreed that there  is very  limited flexibility.                                                               
It would  have taken two to  three months to change  the date and                                                               
the timeframes.  Theoretically,  there is some [flexibility], but                                                               
for practical purposes there is not, he said.                                                                                   
Number 1745                                                                                                                     
REPRESENTATIVE SAMUELS asked if  any other endowments [distribute                                                               
funds the way the permanent fund] does now.                                                                                     
MR. BARTHOLOMEW answered that 70-80  percent of the endowments of                                                               
public funds  that are  out there  use a  concept based  on total                                                               
market value of fund rather  than realized income.  The executive                                                               
director testified earlier this week that  in his 25 years in the                                                               
industry, he is not aware of  any other funds that use the payout                                                               
formula  that is  currently  used  by the  permanent  fund.   The                                                               
formula was written  specifically for the fund 20 years  ago.  He                                                               
told  members  the  amendment  is   an  accepted  payout  method;                                                               
however, the one currently used is unique to the permanent fund.                                                                
REPRESENTATIVE SAMUELS recalled that  Mr. Langland testified that                                                               
this method  is a common  sense [approach]  and that the  crux of                                                               
the resolution was whether the  legislature picked 4 percent or 5                                                               
percent.   How  did  the  trustees determine  5  percent [as  the                                                               
payout], he asked.                                                                                                              
MR. BARTHOLOMEW  replied that the  trustees looked at it  in many                                                               
ways, but the  primary driver of the 5 percent  is that over time                                                               
the board has [developed] a  policy statement [which strives for]                                                               
the  real  rate  of  return  that  they  are  trying  to  achieve                                                               
[through]  investment  [allocations].     The  [rate  of  return]                                                               
started out  at 3 percent and  has worked its  way up to 4  and 5                                                               
percent.  He  pointed out that for many years  the permanent fund                                                               
used asset allocations specifying the  fund would have 55 percent                                                               
in  equities, 37  percent  into  bonds, and  10  percent in  real                                                               
estate.   The  fund  works with  a consultant  who  looks at  the                                                               
capital markets, looks  at the five-year projections,  and runs a                                                               
calculation.   That  calculation  says, given  how  the fund  has                                                               
allocated  the  assets the  expected  earnings  over a  five-year                                                               
period will be a 5 percent  rate of return.  Mr. Bartholomew said                                                               
some people questioned why there  is a policy statement that says                                                               
the  earnings  should be  at  least  4  percent, while  an  asset                                                               
allocation policy  that [projects]  5 percent  was adopted.   The                                                               
response has  been that  it gives  the fund some  leeway.   The 5                                                               
percent  payout  statement  is  an  effort  to  make  the  policy                                                               
statement consistent  with the asset  allocation policy  the fund                                                               
has adopted.   There  has been  a little  bid of  uncertainty, he                                                               
said, because  the statutes are  general in saying  the permanent                                                               
fund should  maximize its return while  protecting the principal.                                                               
The professional  markets have been used  to come up with  that 5                                                               
percent [figure].   The 5 POMV statement [makes it  clear] to the                                                               
board  that there  is more  than  just its  understanding of  how                                                               
[much] the permanent fund should be  earning or how much risk the                                                               
permanent fund should take.  It  would be a state policy, that is                                                               
boarder than the board of trustees, he remarked.                                                                                
Number 1344                                                                                                                     
REPRESENTATIVE  SAMUELS  commented  that  the  trustees  have  no                                                               
opinion  on the  legislature's appropriation  of available  funds                                                               
under the  old system, and  would have  no opinion under  the new                                                               
system.     He   asked   if  that   is   a  correct   assumption.                                                               
Representative Samuels  noted that yesterday there  was testimony                                                               
that this amendment  to the constitution is really a  raid on the                                                               
fund.   In truth, the  legislature could  choose not to  fund the                                                               
dividend now  or under the  new system,  or fund it  under either                                                               
system.  That issue does not change, he surmised.                                                                               
MR.  BARTHOLOMEW responded  that this  amendment does  not change                                                               
the legislature's ability  to spend the earnings in  any way they                                                               
deem appropriate.   This  is not  a change to  the way  funds are                                                               
currently appropriated, he said.   However, inflation-proofing is                                                               
only done through  appropriation by the legislature,  so there is                                                               
the option to appropriate money  to inflation-proof or to protect                                                               
the real value  of the fund.  Under this  proposal the fund would                                                               
prioritize inflation-proofing as the  number one priority because                                                               
there  is an  effort to  retain inflation-proofing  in the  fund,                                                               
cover the effects of inflation,  and then provide a distribution,                                                               
he explained.   So the amendment does change the  priority of how                                                               
inflation-proofing  is handled  and that  would no  longer be  an                                                               
option  [for  the  legislature]   because  the  [fund]  would  be                                                               
automatically [inflation proofed].                                                                                              
MR.  BARTHOLOMEW  told the  members  that  the only  problem  the                                                               
trustees  have  had  with  the  distribution  or  payout  of  the                                                               
permanent  fund is  regarding  [how] to  improve  its ability  to                                                               
manage investments in long-term  assets [which would be possible]                                                               
if there were some constraints  or understanding of what the draw                                                               
would be.   Over the last five years the  legislature has had the                                                               
ability to take  up to $6.5 billion out of  the permanent fund at                                                               
any time, he pointed out.   He recalled that there was discussion                                                               
many years ago about taking a  large sum of the earnings reserve,                                                               
$4  billion,  and  setting  up  another  fund  for  education  or                                                               
government.   It  is  a little  bit unnerving  for  the board  of                                                               
trustees  to say  that  they have  adopted  this long-term  asset                                                               
allocation, and invested  in assets that should  only be invested                                                               
in if  they will be  held for five, seven,  or eight years.   The                                                               
[trustees] questioned  whether they  should be invested  in those                                                               
ways.  This proposal says that  the fund needs a more predictable                                                               
and  limited distribution,  so the  board can  better manage  the                                                               
fund.   He  explained that  with this  amendment the  board knows                                                               
what can  be put into long-term  assets that cannot be  drawn out                                                               
except up to  five percent per year.   Mr. Bartholomew summarized                                                               
that it is important that there  be a more stable and predictable                                                               
payout because  it matches how  the [trustees] have  invested the                                                               
fund.  The  board of trustees' responsibility ends  at this point                                                               
and  they  do  not  take  a  position  on  how  the  payouts  are                                                               
Number 0950                                                                                                                     
REPRESENTATIVE  WEYHRAUCH asked  if [5  percent] is  the accepted                                                               
industry standard of payout.                                                                                                    
Number 0934                                                                                                                     
MR.  BARTHOLOMEW responded  that the  method of  payout based  on                                                               
total  market  value  is  the   most  widely  adopted  method  in                                                               
industries or  public funds that  are established in the  form of                                                               
endowments to  protect the  corpus [of a  fund].   The percentage                                                               
[of payout] varies, he said.                                                                                                    
REPRESENTATIVE ROKEBERG  asked if this method  is widely adopted,                                                               
but not the generally accepted standard.                                                                                        
MR.  BARTHOLOMEW responded  that he  did not  mean to  imply that                                                               
this  is not  generally accepted,  it is.   It  is the  most used                                                               
method and the  industry [standard].  He  clarified his statement                                                               
by saying  that the  POMV approach is  generally accepted  and an                                                               
industry standard.                                                                                                              
REPRESENTATIVE  ROKEBERG  asked  if   the  5  percent  payout  is                                                               
[generally accepted and an industry standard].                                                                                  
MR.  BARTHOLOMEW offerred  to provide  the members  with a  chart                                                               
that shows  how many funds  are using  a 5 percent  [payout], how                                                               
many are using  more than 5 percent, and how  many are using less                                                               
than 5 percent.   There are fewer funds using  5 percent than are                                                               
using less than 5 percent.                                                                                                      
Number 0735                                                                                                                     
REPRESENTATIVE  ROKEBERG commented  that last  week he  requested                                                               
that the  corporation prepare a  memorandum for the  committee on                                                               
the  current cash  situation as  is related  to the  dividend and                                                               
allocation  formula   and  also  with  (indisc.)   regarding  the                                                               
potential  attorney general  opinion on  the unrealized  portion.                                                               
He asked if the corporation was working on that request.                                                                        
MR. BARTHOLOMEW  replied that the  request is being worked  on in                                                               
two ways.   The corporation will make available  to the committee                                                               
the actual  request that  went to  the attorney  general's office                                                               
that explains what the different  perspectives are that are being                                                               
reviewed.   The  [corporation]  will also  provide the  committee                                                               
with the updated balance of  the permanent fund that is available                                                               
for [appropriation] under the existing rules.                                                                                   
Number 0638                                                                                                                     
REPRESENTATIVE  ROKEBERG told  the  committee he  believes it  is                                                               
important that the  members have time to  debate whether adoption                                                               
of this  amendment will  influence the  appropriations investment                                                               
strategy, and  whether [the strategy]  will be  more conservative                                                               
or more aggressive.                                                                                                             
REPRESENTATIVE  ROKEBERG  asked  Mr.   Lorensen  to  explain  the                                                               
language on page 2, Section 2,  subsection (b).  He asked if this                                                               
language was used  to explain to the public the  intention of the                                                               
trustees  in this  amendment  and reassure  the  public that  the                                                               
[trustees]  were not  going to  take their  money.   He asked  if                                                               
inserting  this  language,  particularly  in  Version  (H),  with                                                               
respect to  real value  is a  prudent position  for the  state to                                                               
take.   Representative Rokeberg  added that  in his  opinion this                                                               
[amendment]   appears  to   be   constitutionally  adopting   the                                                               
inflation-proofing  concept.    He  asked   if  that  is  a  fair                                                               
MR. LORENSEN  said, in response  to the first question,  that the                                                               
board's intent  with the first sentence  was to set out  a policy                                                               
goal  that  the  public  would  be  aware  of  at  the  time  the                                                               
constitutional  amendment  was  being considered.    He  reminded                                                               
members that the  language has been modified somewhat  due to Ms.                                                               
Cook's recommendation  that the language should  read, "the money                                                               
should not  be appropriated".   Mr. Lorensen told the  members he                                                               
does   not  believe   the  language   is   inappropriate  for   a                                                               
constitutional provision.                                                                                                       
REPRESENTATIVE ROKEBERG  asked if  the trustees  do not  wish the                                                               
legislature   to  make   a  maximum   draw  from   the  fund   if                                                               
circumstances  are such  that it  would diminish  its real  value                                                               
based on inflation-proofing and  growth calculations.  He pointed                                                               
out that there is an implicit  statement [in HJR 26] that says do                                                               
not [appropriate]  up to 5 percent  if the fund cannot  afford it                                                               
under  these conditions.    Representative  Rokeberg stated  that                                                               
this is a concern and questioned  if the trustees want to express                                                               
to  the  public   that  these  are  their   instructions  to  the                                                               
Number 0327                                                                                                                     
MR.  LORENSEN   replied  that  he   does  not  know  if   he  can                                                               
characterize [what  the trustees  intention may  or may  not have                                                               
been], beyond  the fact  that this language  was inserted  at the                                                               
request of the board.  He told  the members that he does not want                                                               
to  guess as  to  what the  board  was  trying to  do.   If  this                                                               
amendment were adopted  as it is now, he said  he would interpret                                                               
this  as  a statement  of  a  policy  goal  with respect  to  the                                                               
distribution the fund.                                                                                                          
Number 0239                                                                                                                     
CO-CHAIR WHITAKER  commented that  his interpretation is  that it                                                               
is a long-term  consideration, and a long-term  invasion that the                                                               
legislature needs to be very cautious about.                                                                                    
REPRESENTATIVE ROKEBERG commented that  he thinks it is important                                                               
that the intent  of this [language] be crystal  clear so everyone                                                               
understands what this  language means.  He said  he believes this                                                               
is  a lawsuit  waiting  to happen.   If  the  legislature took  a                                                               
certain  action that  was  (indisc.) to  what  the intention  was                                                               
there could  be a constitutional  challenge that  the legislature                                                               
did not  take enough or  took too much.   Representative Rokeberg                                                               
reiterated his concern about this language.                                                                                     
Number 0133                                                                                                                     
REPRESENTATIVE  GRUENBERG  said he  is  concerned  as to  whether                                                               
there  is a  considerable  change  legally from  the  way it  was                                                               
originally [written],  "may not  be appropriated" to  "should not                                                               
be appropriated."  He pointed  out that one is legally actionable                                                               
and the other may not be.  That is a big difference, he stated.                                                                 
REPRESENTATIVE ROKEBERG said it is the reverse.                                                                                 
CO-CHAIR  WHITAKER  clarified   that  [Representative  Gruenberg]                                                               
meant "may" would  be legally actionable, and  "should" would not                                                               
be legally actionable.                                                                                                          
Number 0043                                                                                                                     
REPRESENTATIVE GRUENBERG commented  that aspirational language is                                                               
not placed  in the constitution;  that language is placed  in the                                                               
preamble of the  constitution.  Actionable language  is placed in                                                               
the constitution, he  said.  Mr. Gruenberg said  he believes that                                                               
it is the intent to make this language actionable.                                                                              
MR. LORENSEN responded that he cannot state what the intent was.                                                                
[Not on  tape, but reconstructed  from the  committee secretary's                                                               
log notes follows.]                                                                                                             
REPRESENTATIVE  ROKEBERG commented  that the  word "may"  is more                                                               
permissive than "should".                                                                                                       
REPRESENTATIVE GRUENBERG  told the  members he  wants to  see the                                                               
language changed so that it is actionable.                                                                                      
REPRESENTATIVE  ROKEBERG stated  that he  would like  to see  the                                                               
language  and intent  [written]  as clearly  and consistently  as                                                               
possible.   He said he  is concerned about inserting  language in                                                               
the  constitution, and  cautioned that  the legislature  needs to                                                               
understand the policy that is chosen.                                                                                           
REPRESENTATIVE  GRUENBERG  asked for  Ms.  Cook  to work  on  the                                                               
language of the amendment.                                                                                                      

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