Legislature(2003 - 2004)

05/02/2004 12:04 PM Senate FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
     CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN)                                                                                  
     Proposing  amendments  to  the  Constitution  of the  State  of                                                            
     Alaska relating to  and limiting appropriations from the Alaska                                                            
     permanent fund based  on an averaged percent of the fund market                                                            
This  was the first  hearing  for this  bill in  the Senate  Finance                                                            
Co-Chair  Wilken noted that  CS HJR 26  (FIN), Version 23-LS1006\Z,                                                             
which is sponsored by the  House of Representatives Rules Committee,                                                            
by  request of  the  Legislative  Budget  & Audit  Committee,  would                                                            
provide the opportunity  to amend the State's Constitution  in order                                                            
to limit  annual appropriations  from the  Alaska Permanent  Fund to                                                            
five percent of the Fund's average market value.                                                                                
REPRESENTATIVE MIKE HAWKER,  Chair, House of Representatives (House)                                                            
Ways and  Means Committee,  stated  that the  Alaska Permanent  Fund                                                            
Corporation  (APFC)  Board  of Trustees  originated  this  proposal,                                                            
which is  commonly referred  to as  the "'clean'  Percent of  Market                                                            
Value  (POMV)   method."  He  characterized   the  proposal   as  "a                                                            
management tool"  for the operations of the APFC,  as it would "best                                                            
protect the value  of the fund over the long-term  future" and would                                                            
"provide  for  a stable  and  predictable"  amount  of money  to  be                                                            
available   from  the   Permanent   Fund  for   future  Legislative                                                             
appropriation.  He also acknowledged that "a number  of conceptions"                                                            
are  being  discussed  through  which  to  accomplish  the  proposed                                                            
ROBERT   STORER,   Executive   Director,   Alaska   Permanent   Fund                                                            
Corporation, Department  of Revenue, reiterated that  the APFC Board                                                            
of Trustees, after  several years of study, developed  this proposal                                                            
and considers  it to be a "superior method" through  which to manage                                                            
Fund assets.                                                                                                                    
Mr. Storer explained that  the proposal would "memorialize inflation                                                            
proofing in the Constitution  … by limiting the amount of funds that                                                            
can be  appropriated from  the Permanent  Fund to  no more than  the                                                            
real income  or no more than five  percent of the Permanent  Fund in                                                            
any given year."  He stated that the proposal would  also "marry the                                                            
management of the Fund with current investment strategies."                                                                     
Mr. Storer  expressed that  one benefit derived  from this  proposal                                                            
would be  that Legislators  would  be assured of  "an annual  payout                                                            
from  year to  year."  Continuing,  he declared  that  the  proposed                                                            
payout  methodology   would  be  "more  stable  than   the  existing                                                            
methodology based  on realized income." He cautioned,  however, that                                                            
were the State to implement  the proposed methodology there could be                                                            
times when no payout would be available.                                                                                        
Mr. Storer shared  that as a result of current "considerable  market                                                            
appreciation,"  the Fund has approximately "five billion  dollars in                                                            
profits separated  between realized  income and unrealized  income,"                                                            
and that,  due to market  conditions, "in  just twelve short  months                                                            
the  amount  of  money   that  has  become  available   has  changed                                                            
dramatically."  He cautioned,  however,  that the  reverse  scenario                                                            
could occur  depending on  financial market  volatility. He  pointed                                                            
out  that,  while  the  Fund has,  historically,   reflected  steady                                                            
growth,  market   volatility  has  not  been  incorporated   in  the                                                            
extrapolations.   He  communicated  that,  were  market   volatility                                                            
included,  the proposed methodology  would  prove to provide  a more                                                            
stable payout.                                                                                                                  
Mr. Storer stated that  this proposal "would prevent overspending in                                                            
the good years"  as had previously  occurred during the Bull  Market                                                            
years; specifically  in the areas  of the State's Retirement  Plans,                                                            
Endowment   Funds,  and   Foundations.   He  stated   that   without                                                            
"discipline"  in spending,  that scenario  might re-occur under  the                                                            
current  methodology.  He  declared  that the  proposed  plan  would                                                            
maintain the  purchasing power of  the entire Fund rather  than just                                                            
the principal.                                                                                                                  
Senator  Bunde asked  whether the  proposed plan  would address  the                                                            
issue of double  inflation proofing  which is argued to result  from                                                            
inflation   proofing  combined  with   additional  revenue   derived                                                            
annually from oil royalties.                                                                                                    
Mr. Storer  responded that  the APFC does  not support the  argument                                                            
that the Permanent Fund  is being double inflation proofed. In fact,                                                            
he continued,  he would provide Committee  Members with a  copy of a                                                            
paper [copy not provided]  recently developed by the Fund's Director                                                            
of Finance  that addresses  this issue. Continuing,  he stated  that                                                            
"the  key reason"  the  Fund  is not  considered  as  being  double-                                                            
inflation  proofed "is  that once  the appreciation  of equities  is                                                            
converted  into realized  income, it  can be  distributed under  the                                                            
current  scenario."   He  noted  that  the  Royalties   issue  is  a                                                            
Constitutional   question  "as  it  is  embedded"   in  the  State's                                                            
Senator Bunde stated that  the financial methodologies of funds such                                                            
as  the  Harvard University   Trust Fund  are  often  exampled  when                                                            
proponents discuss the  POMV plan. However, he attested, these funds                                                            
do not  incorporate royalties  and instead  grow as a result  of the                                                            
interest  generated by the  endowment. Therefore,  he declared  that                                                            
comparing the  Permanent Fund to such things as Harvard's  endowment                                                            
fund is a more complicated issue.                                                                                               
Mr. Storer  responded that  the comparison  of the POMV proposal  to                                                            
plans such as the Harvard  University Endowment Fund revolves on the                                                            
issue that  "the payout is limited  to a percentage of the  value of                                                            
the total fund."  Continuing, he declared  that while the  Permanent                                                            
Fund receives  additional  contributions in  the form of  royalties,                                                            
these other endowment  funds annually receive donations  from former                                                            
students  and other sources.  These contributions,  he attested  are                                                            
recognized  as on-going contributions  and  are incorporated  in the                                                            
anticipated growth of the funds.                                                                                                
Senator Bunde observed  that were the State to continue to guarantee                                                            
inflation  proofing of the  Fund, continuing  discussions  regarding                                                            
this issue  should be encouraged,  as he stated, the scenario  could                                                            
be likened to parents continuing  to contribute to a 401K plan while                                                            
their children were starving.                                                                                                   
Senator Dyson voiced appreciation  for the back-up material the APFC                                                            
supplied to the  Committee; specifically the handout  titled "Alaska                                                            
Permanent Corporation Percent  of Market Volume talking points April                                                            
2004" [copy on file]. He  referenced a section of that material that                                                            
states, "Inflation  proofing is inherent  and no longer requires  an                                                            
appropriation.  *The Fund is invested  for a 5% real rate  of return                                                            
after inflation.  If 5% is withdrawn,  the increase in value  due to                                                            
inflation  will  remain  in the  Fund."  He asked  the  location  of                                                            
language that supports this statement in the bill.                                                                              
Mr.  Storer   responded  that  this   language  is  "probably   not"                                                            
specifically addressed  in the bill. Continuing, he  stated that the                                                            
Fund's payout  target is limited to no more than five-percent  "over                                                            
time."  He also noted  that currently  the Fund's  asset  allocation                                                            
targets  "a five-percent   return in  excess  of inflation"  on  its                                                            
investments,  and  he stated  that this  legislation  would  provide                                                            
"guidance"  that would assist the  PFC " He voiced confidence  "that                                                            
over  time, we  will  achieve  that goal."  He  noted  that HB  298-                                                            
DISTRIBUTIONS OF APPROPS  FROM PERM FUND is companion legislation to                                                            
this bill as  it would provide additional  statutory guidance,  such                                                            
as a "a ten-year  moving average"  as "the benchmark" upon  which to                                                            
compare  Fund returns  to inflation.  He noted that  were this  goal                                                            
unmet, less money would be available for appropriation.                                                                         
Representative  Hawker  understood Senator  Dyson's  question to  be                                                            
whether  this  bill explicitly  states  that,  "the Fund  makes  its                                                            
investments  for  a five-percent  rate  of return."  Continuing,  he                                                            
noted that language in  Section 2(b), on page two, lines one and two                                                            
addresses the amount of money that could be appropriated.                                                                       
     (b) Appropriations  from the  permanent fund for a fiscal  year                                                            
     may  not exceed  five  percent  of the  average  of the  market                                                            
     values  of the fund on  June 30 for the  first five of  the six                                                            
     fiscal years immediately preceding that fiscal year.                                                                       
Representative  Hawker stated that  this language would provide  the                                                            
Board of Trustees and the  Fund's employees and managers a target of                                                            
a five percent  return after inflation  as the necessary  investment                                                            
benchmark  upon which to  develop investment  models. Therefore,  he                                                            
opined that this  legislation does establish that  benchmark rate of                                                            
Senator  Dyson  voiced  that  the  responses  to  his  question  are                                                            
"somewhat" unsatisfying  as he had hoped they would acknowledge that                                                            
the amounts reflected in  Section 2(b) be adjusted for inflation. He                                                            
suggested  that the language  be changed  to a  five percent  of the                                                            
market value in real rather than "inflated dollars."                                                                            
Representative  Hawker responded that adding language  to the effect                                                            
of allocating  up to five  percent of after  inflation dollars  each                                                            
year would lead  to the boarder discussion of what  "is implicit" in                                                            
the "pure market  value formulation." Continuing,  he explained that                                                            
the investment model this  bill is based upon recognizes that in the                                                            
future  there might  be individual  or  combined  years "with  great                                                            
market gains"  or market declines.  He stated that the goal  of this                                                            
legislation  is to adopt  "the concept of  aggregate value"  in that                                                            
the  Fund's investments  would  demonstrate  that,  over time,  they                                                            
could perform  at levels in which their rate of return  is in excess                                                            
of  five  percent  as opposed  to  dwelling  on  whether  the  gains                                                            
resulted from inflation proofing or royalties.                                                                                  
Mr. Storer declared that  the Corporation "invests to achieve a five                                                            
percent real  rate of return" and  "strongly" believes this  goal is                                                            
achievable.  He stated  that  Senator  Dyson's suggestion  that  the                                                            
language  be more explicit  could create more  problems as  it might                                                            
require  "time to achieve  that goal."  He reflected  that with  the                                                            
exception of the most recent  years, the Fund's historical real rate                                                            
of return, over time, has  been in excess of six-percent. Therefore,                                                            
he stressed that  the period of time over which to  achieve the goal                                                            
would be an issue.                                                                                                              
Senator Dyson  commented that even  though the bill is strengthened                                                             
by  language  mandating  that  a payout  be  based  on  a  five-year                                                            
average,  he  is  concerned  that  the  resolution's  sponsors  "are                                                            
reluctant"  to specify in  the resolution that  the payout  would be                                                            
based on a five-percent real rate of return after inflation.                                                                    
Mr. Storer  declared that the Corporation  stands by that  fact that                                                            
the payout  would be  based on a  five-percent  real rate of  return                                                            
after inflation, as depicted  on the Corporation's website. However,                                                            
he  declared the  concern  is  that adding  further  language  would                                                            
confuse the issue regarding long-term verses short-term issues.                                                                 
Senator  Dyson opined  that the  inclusion of  the language,  "after                                                            
inflation," would  serve to garner more support for  the resolution.                                                            
AT EASE 12:26 PM / 12:27 PM                                                                                                     
Senator  Dyson asked  the  sponsors to  provide the  Committee  with                                                            
further  information  regarding  their  position  on  this  language                                                            
Mr. Storer responded that a "good answer" would be forthcoming.                                                                 
Senator Bunde  commented that while he supports this  resolution, he                                                            
is worried about citizens'  response to the complexity of the issue.                                                            
Co-Chair Wilken ordered the bill HELD in Committee.                                                                             

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