Legislature(2003 - 2004)

05/06/2004 08:05 AM 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 second  hearing for  this bill in  the Senate  Finance                                                            
Co-Chair  Wilken stated  that this  Percent of  Market Value  (POMV)                                                            
legislation would  propose an amendment to the Alaska  "Constitution                                                            
that would  limit  appropriations from  the Permanent  Fund to  five                                                            
percent of the  average of the market value of the  Fund." He stated                                                            
that  CS HJR 26  (FIN),  Version 23-LS1006\Z,  is  accompanied  by a                                                            
Division of Elections' fiscal note.                                                                                             
BOB BARTHOLOMEW,  Chief  Operating  Officer, Alaska  Permanent  Fund                                                            
Corporation,  Department of Revenue,  noted that this resolution  is                                                            
the result of  approximately six years of effort on  the part of the                                                            
Permanent  Fund Board of  Trustees to provide  a simpler method  "to                                                            
determine  how  much   is  available  for  appropriation   from  the                                                            
Permanent Fund."                                                                                                                
SFC 04 # 109, Side B 08:52 AM                                                                                                   
Mr. Bartholomew  informed  the Committee that  The Alaska  Permanent                                                            
Fund  Board   of  Trustees  supports   the  Version  "Z"   committee                                                            
AT EASE 8:53 AM / 8:54 AM                                                                                                       
The bill was HELD in Committee.                                                                                                 
[Note: HJR 26 was re-addressed later in the meeting.}                                                                           
     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                                                            
[Note: This bill was heard earlier in the meeting.]                                                                             
Co-Chair Wilken  noted that this bill,  which is referred  to as the                                                            
Percent of Market Value  (POMV) bill, is again before the Committee.                                                            
He  stated that  the bill  proposes  to place  an  amendment to  the                                                            
Constitution  on a Statewide  ballot that  would, were it  approved,                                                            
limit the appropriation  from the Permanent Fund to  five percent of                                                            
the average  of the market  value of the Fund.  He reminded  that CS                                                            
HJR 26(FIN), Version 23-LS1006\Z is before the Committee.                                                                       
BOB BARTHOLOMEW,  Chief  Operating  Officer, Alaska  Permanent  Fund                                                            
Corporation,  Department  of  Revenue,  shared  that  the  Permanent                                                            
Fund's  Board of  Trustees  worked for  approximately  six years  to                                                            
develop this proposal  in order to prepare the Fund  for the future,                                                            
both from an investment  management perspective as well as "from the                                                            
perspective of how to make  a stable and predictable amount of money                                                            
available to the  Legislature if they desire to appropriate  it." He                                                            
stated   that  this  House   of  Representatives'   legislation   is                                                            
representative  of the language proposed  by the Board of  Trustees.                                                            
He stated that  the bill would establish  "a spending limit  of five                                                            
percent of the  value of the Permanent Fund on an  annual basis." He                                                            
exampled that  were this methodology  in effect for the next  fiscal                                                            
year   approximately   $1.3   billion   would   be   available   for                                                            
appropriation from the Fund.                                                                                                    
Mr.   Bartholomew  shared   that   were  the   current  calculation                                                             
methodology  in   affect,  and  were  the  Legislature   to  require                                                            
additional  resources, in  excess of $4 billion  could be  available                                                            
for appropriation.                                                                                                              
Mr. Bartholomew stated  that this legislation would assure that "the                                                            
Permanent  Fund is  invested  in long-term  assets" with  a goal  of                                                            
trying to provide  a stable and predictable  payout. He pointed  out                                                            
that  one  of the  Board's  concerns  was  to  assure,  were  fiscal                                                            
concerns to  be experienced in the  future, that one of the  State's                                                            
largest assets could be  as productive as possible to assist in that                                                            
effort. He stated that  inflation proofing has been conducted for 22                                                            
years. He  stated that this  would be inherent  to the system,  were                                                            
the spending  limit in place. He stated  that the goals of  limiting                                                            
spending; protecting  the fund against  inflation; and granting  the                                                            
Legislature and the public  have a predictable payout in the future,                                                            
would be achieved by this legislation.                                                                                          
Senator Bunde stated for  the record, that passing this legislation,                                                            
"while it might  be a pre-cursor to some future activity  that would                                                            
use  some  of the  earnings  for  supporting  State  services,  just                                                            
passing this does nothing to determine how the funds are spent."                                                                
Mr. Bartholomew confirmed  Senator Bunde's comment to be correct. He                                                            
stated that, "there's  two major public policy issues  regarding the                                                            
Permanent Fund  that … are being discussed  in the Legislature  this                                                            
year."  The  first,  he noted,  is  the  legislation  regarding  the                                                            
Constitutional  amendment   regarding  the  Board  of  Trust's  POMV                                                            
proposal.  This proposal,  he opined,  would serve  to identify  the                                                            
method through  which to determine what is available  and to protect                                                            
the Fund for the  future. He clarified that the POMV  proposal would                                                            
not change  how the funds  would be used,  but would rather  specify                                                            
the amount that  could be used. He advised that a  separate bill, HB
298, would  address how the Permanent  Fund's money would  be spent.                                                            
He stressed that these are two separate issues.                                                                                 
Senator Bunde  responded that the  POMV proposal, were it  approved,                                                            
would allow future Legislators  to either designate all the earnings                                                            
calculated  by the  five-percent methodology,  "as  dividends  or to                                                            
take all the  earnings and put them  into funding State services  or                                                            
some combination thereof."                                                                                                      
Mr. Bartholomew  agreed that, "this  Constitutional amendment  would                                                            
limit the annual amount available, subject to the Legislature."                                                                 
Senator Hoffman  asked regarding the intent of a Board  of Trustee's                                                            
POMV  advertisement  that had  recently  appeared in  the  Anchorage                                                            
Daily  News newspaper.  He  also  asked how  the  advertisement  was                                                            
Mr. Bartholomew  responded that the  advertisement was paid  for via                                                            
the Permanent  Fund Corporation's  operating budget. He stated  that                                                            
the intent  of  the advertisement  was  to assist  in educating  the                                                            
public  regarding the  POMV proposal  as, he noted,  such things  as                                                            
surveys indicate  that, "there's still a high level  of confusion in                                                            
the public  as to what is the proposal."  He stated that  due to the                                                            
fact that  "there's a lot  of awareness and  interest right  now" in                                                            
regards  to  the  Permanent  Fund,  the Board  viewed  this  "as  an                                                            
opportunity to  provide education in as neutral a  fashion" as could                                                            
be done. Therefore,  he concluded that the intent  was, "in a simple                                                            
way,"  to explain  the difference  between the  current process  and                                                            
"the Percent of Market Value (POMV) or endowment approach."                                                                     
Senator  Hoffman recalled  a previous Finance  Committee  discussion                                                            
regarding  the Board  of  Trustees'  request for  in  excess of  one                                                            
million dollars to inform  the public about POMV. He stated that the                                                            
response  from the Committee  was unfavorable  and that the  request                                                            
had been denied.  Therefore, he asked  why the Board was  furthering                                                            
this endeavor.                                                                                                                  
Mr. Bartholomew  responded that "the request for both  the authority                                                            
to do advocacy and for  the funding to do the education and outreach                                                            
on POMV was  because of the rule changes  that take place"  were the                                                            
legislation  passed  by  the  Legislature.  He stated  that  it  was                                                            
understood   that,  were   the  POMV   proposal   approved  by   the                                                            
Legislature,  the Board's ability  to advocate for a Constitutional                                                             
amendment would  be restricted. He  stated that, in his discussions                                                             
with the  Board, it was  not "linked" that  advertisements  prior to                                                            
the Legislative approval of the proposal would be prohibited.                                                                   
Senator Hoffman  asked for confirmation  that it was not  the intent                                                            
of the Board to get the  public to apply pressure on the Legislature                                                            
to support POMV, by running the advertisement.                                                                                  
Mr. Bartholomew  assured that the advertisement was  not intended to                                                            
be  a tool  through which  to  lobby or  influence  passage of  this                                                            
legislation.  He assured that the  Board understands that  the issue                                                            
must be presented  in a balanced fashion. He stated  that aside from                                                            
working  directly  with  the  Legislature  on issues,  it  would  be                                                            
"inappropriate"  for the Board to indirectly lobby  the Legislature.                                                            
Therefore,  he continued, the Board  viewed the advertisement  as an                                                            
educational tool.                                                                                                               
Co-Chair Wilken complimented  Mr. Bartholomew as being "good soldier                                                            
and he was glad he worked for the people of Alaska."                                                                            
Senator  Olson  characterized  the  response  to  the advertisement                                                             
questions as  "somewhat confusing,  at best, if not "questionable."                                                             
Senator  Dyson referenced  the  Permanent Fund  Corporation's  April                                                            
2004,  "Percent of  Market Value  talking points"  handout [copy  on                                                            
file]  and stated  that  in the  subsection  titled  "how does  POMV                                                            
provide the solution?"  it is stated that, "The Fund is invested for                                                            
a 5-percent real  rate of return after inflation."  He noted that he                                                            
had previously asked regarding  whether the language in Section 2(b)                                                            
of the bill on page two,  line two, meant that it was "indeed" going                                                            
to be after inflation.                                                                                                          
     (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.                                                                       
Senator Dyson  stated that is subsequent conversations,  he had been                                                            
"reminded that the whole  thing is a smoothing operation" in that it                                                            
was a five-year  average. He recalled that he had  asked whether any                                                            
language  had been considered  "that  would make  it clear that  the                                                            
five  percent that  we are  making  available for  appropriation  is                                                            
protected against  the year that we  might have high inflation,  and                                                            
actually, in  a given year might be  appropriating part of  the real                                                            
value of the corpus."  He noted that the response  was to the affect                                                            
"that anything that we  did along that line must be carefully worded                                                            
so that it was  over a board period because it would  vary from year                                                            
to year." Therefore, he  re-asked whether language could be included                                                            
to clarify that  in any given year, the amount being  proposed would                                                            
"not dip  into the  principal," as  he stated  that, in addition  to                                                            
preserving  "the value of  the principal,"  the people of the  State                                                            
must be assured that the principal would "be intact."                                                                           
Mr. Bartholomew  replied that the  issue regarding whether  the POMV                                                            
would allow  for the expenditure of  the principal or corpus  of the                                                            
Fund,  has had  a lot  of discussion.  He  stated that  it has  been                                                            
determined  that there  are  two methods  through  which to  protect                                                            
against eroding  the Fund.  First, he communicated,  the concept  of                                                            
the word principal  is included in Constitution through  the "number                                                            
that is  the sum  of all the  oil contributions,  all the  inflation                                                            
proofing  appropriations  the  Legislature  has  done,  and  special                                                            
appropriations."  This number,  he specified,  currently amounts  to                                                            
$23.5  billion,  and  "only  goes up."  He  communicated  that  "the                                                            
Legislature  would  not be  allowed to  appropriate  any money  that                                                            
would reduce the Permanent Fund below that level."                                                                              
Mr. Bartholomew  shared that an issue  raised by the Board,  regards                                                            
those times when there  might be short-term extreme downturns in the                                                            
stock market  that might reduce the  value of the Fund down  towards                                                            
the principal  level. He  stated that the  Board determined  that in                                                            
those  times, "it  would  not be  prudent for  the  economy" not  to                                                            
distribute a Permanent  Fund Dividend to the citizens. Therefore, he                                                            
continued,  the Board proposed an  endowment method of not  just the                                                            
principal of the fund,  but of the entire fund. Therefore, he stated                                                            
that  in order  to respond  to the  question  of how  to assure  the                                                            
public that the corpus  of the Fund would not be attached, the House                                                            
of Representatives'  legislation before the Committee  has adopted a                                                            
statutory limitation  through which  the Constitution would  allow a                                                            
five-percent of the total  market value to be spent in any one year.                                                            
Senator Dyson  understood that the  language specifies market  value                                                            
as opposed to principal.                                                                                                        
Mr. Bartholomew  confirmed, and stated  that this would include  the                                                            
entire  fund including  the principal  and the  excess earnings.  He                                                            
stated  that this  currently amounts  to $27.5  billion dollars.  He                                                            
stated that  it is expected that the  total rate of return  would be                                                            
eight-percent,   including   a  three  percent   inflation   factor.                                                            
Therefore,  he  stated  the real  earnings  of  five-percent,  after                                                            
inflation, would be utilized over time.                                                                                         
Mr.  Bartholomew  stated that  in  question is  how  to assure  that                                                            
public that the  principal would not be spent. He  stated that there                                                            
is a provision  in HB 298-DISTRIBUTIONS  OF APPROPS FROM  PERM FUND,                                                            
that, states  that every  ten-year period would  be reviewed  by the                                                            
Corporation  to assure that the fund  has earned five-percent  above                                                            
inflation. Were this not  to occur, he continued, the spending limit                                                            
would  be  lowered  to  the  real  rate  of  return.  Therefore,  he                                                            
recommended  that the expenditure  not be viewed  on a year  to year                                                            
basis "as  there have definitely  be years  that the Permanent  Fund                                                            
has not make  money;" however, he  attested, there has never  been a                                                            
ten year period  in which the five-percent  level was not  exceeded.                                                            
Continuing,  he stated that  over the 25-year  period that  the Fund                                                            
has existed, it  has earned six-percent over inflation.  He referred                                                            
the Committee  to a PFC graph titled "Rolling 10-year  real return -                                                            
Fiscal year"  [copy on file].  He stated  that "the Legislature  has                                                            
not spent anywhere near the available funds."                                                                                   
Mr.  Bartholomew  stated that  the  statutory  limitation  addresses                                                            
Senator  Dyson's  concern. He  stated  that were  a  higher rate  of                                                            
protection desired, a Constitutional  amendment would be required as                                                            
opposed to the statutory limitation.                                                                                            
Senator Dyson  understood that while appropriate inflation  proofing                                                            
could  not   occur  in   a  year  of  double-digit   inflation;   an                                                            
appropriation  of  up to  five percent  of  the market  value  could                                                            
continue to be  made. Doing so, he contended, might  result in a net                                                            
loss of three to five percent  of the Funds' market value that year.                                                            
Mr. Bartholomew replied  that while this is correct, what makes this                                                            
"allowable  and prudent"  is the fact  that the  rate of return  for                                                            
fiscal  year 2004,  for instance,  is going  to exceed  the rate  of                                                            
inflation by ten percent.  He stated that adoption of the POMV would                                                            
limit the expenditures  to five percent  of the market value,  which                                                            
in this  case would have  grown in excess  of ten percent.  This, he                                                            
attested "would  serve to carry that  money forward and over  time,"                                                            
he stated,  it is "believed that the  good years would outweigh  the                                                            
bad" years. He  stated that limiting the spending  in the good years                                                            
to  five  percent  by  retaining  those   excess  earnings  via  the                                                            
implementation  of  a spending  limit, would  serve  to protect  the                                                            
Permanent Fund.                                                                                                                 
Senator B.  Stevens pointed  out that on the  effective date  of the                                                            
amendment that  sweeps the Earnings  Reserve Account (ERA)  into the                                                            
Principal,  as specified  in Section  3 of the  bill, the ERA  would                                                            
crease to exist.  He stated that HB 298 would allow  the Legislature                                                            
to change the distribution  of the five percent by a simple majority                                                            
vote. Therefore,  he declared that  the concept of the distribution                                                             
of  the  earnings  "would  be  at  the  full  discretion  of  future                                                            
Legislatures,  just as it  is now," with  the only difference  being                                                            
that the ERA is swept into the principal.                                                                                       
Co-Chair Wilken  asked whether this  legislation would allow  for an                                                            
FY 05 CBR draw.                                                                                                                 
Mr. Bartholomew  replied that,  as drafted,  the POMV program  would                                                            
not allow for  an appropriation until  July 1, 2005, which  would be                                                            
the beginning  of FY 06.  Therefore, he concluded  the October  2004                                                            
Permanent Fund  Dividend, which would  occur in FY 05, is  accounted                                                            
for in the FY  04 operating budget. He noted, that  unless there was                                                            
a need  for other  appropriations  "as  written," that  would be  no                                                            
other appropriations from  the Permanent Fund until July 1, 2005. At                                                            
that time, he continued,  the appropriation would be limited to five                                                            
percent, were POMV enacted.                                                                                                     
Senator Bunde  reiterated that there are Alaskans  who are concerned                                                            
that with the adoption  of POMR, the Permanent Fund "would go away."                                                            
He referred  to the  aforementioned  Ten-year look  back chart,  and                                                            
stated that while  the past few years' stock market  performance was                                                            
dismal,  the  Fund still  made  five-percent  including  the  recent                                                            
years' worst-case  scenario.  Therefore, he  observed that  were the                                                            
POMV in  affect for the past  ten years, the  corpus would  not have                                                            
been used  and any  appropriation  would have been  limited to  five                                                            
Mr. Bartholomew  responded that this  is correct, and were  the POMV                                                            
five-percent  spending limitation  in place for the entirety  of the                                                            
Fund's history,  the expenditures  would not have exceeded  what the                                                            
Fund  had earned  above the  rate of  inflation.  He reiterated  the                                                            
importance  of viewing  the Fund  over  a ten-year  period verses  a                                                            
year-to-year basis. He  noted that HB 298 would provide "guidance to                                                            
the Legislature" to reduce  the five-percent Constitutional spending                                                            
limit  appropriation  down  to  the real  earnings  level  were  the                                                            
average earnings of the  Fund to fall below that five-percent level.                                                            
Senator  Bunde stated that  the Legislature  currently appropriates                                                             
between three  and five million  dollars of  earnings, on an  annual                                                            
basis, from the Permanent Fund to inflation proof the account.                                                                  
Mr. Bartholomew  agreed that  the Legislature,  on an annual  basis,                                                            
appropriates  money  from  the  Fund's  earnings  account  into  the                                                            
protected principal.  He stated that under POMV, the  earnings would                                                            
be protected by  the five percent limit, but would  not subject to a                                                            
future appropriation.                                                                                                           
Senator  Bunde  stated  therefore,  that  were  the  Constitutional                                                             
amendment  approved, the  State would  crease to  appropriate  up to                                                            
five million dollars of Fund earnings each year.                                                                                
Mr. Bartholomew  stated that is correct.  He stated that  POMV would                                                            
eliminate the Board's current  concerns regarding inflation proofing                                                            
the Fund when  there are other fiscal pressures such  as the need to                                                            
find  additional  funds to  support  such  things as  education  and                                                            
Senator  Bunde pointed  out  that while  "many people  say,  'don't'                                                            
spend  the  Permanent  Fund,"   they  do  not  understand  that  the                                                            
Legislature  already spends  money to inflation  proof the  Fund and                                                            
provide "for  the Permanent  Fund Dividend  itself." He stated  that                                                            
using the  POMV method  to provide  funding for  State programs  and                                                            
Dividend  checks,  "would  not  change  significantly   the  amount"                                                            
currently  being  utilized from  the  Fund were  inflation  proofing                                                            
factored into that amount.                                                                                                      
Senator  Hoffman  stated  that  the  Legislature  could  assess  the                                                            
earnings  from  the ERA  and  "spend  those dollars  with  a  simple                                                            
majority today,  but we haven't."  He attested that the Legislature                                                             
has  not  done  this,  but has  rather  chosen  to  take  "the  more                                                            
difficult road" of balancing  the budget by accessing the CBR, which                                                            
requires a three-quarter  vote of the Legislature,  because they are                                                            
aware that  spending the  Fund would be perceived  by the people  as                                                            
"tapping into… and threatening the Fund."                                                                                       
Senator Hoffman  continued that were  the POMV program adopted,  the                                                            
Legislature  could  interpret  it  to state  that  the  people  have                                                            
granted them the  authority to spend the five-percent  as needed. He                                                            
stated that  the POMV would provide  no protection to the  Permanent                                                            
Fund  Dividend. He  stated  the participants  of  the Conference  of                                                            
Alaskans stated  they went one-step above and beyond  what they were                                                            
charged to do by stating  that the Permanent Fun should be protected                                                            
in the Constitution.  Therefore, he  stressed that consideration  of                                                            
protecting the Permanent  Fund be provided were the POMV "management                                                            
tool" to be adopted.                                                                                                            
Senator  Bunde  stated  that  people  could  protect  their  PFD  by                                                            
supporting a person to represent them in the Legislature.                                                                       
Co-Chair Wilken asked for  clarification regarding whether the five-                                                            
percent  value of the  fund is the  value of the  fund at a  certain                                                            
point of time over the  last five-years, as specified in the bill in                                                            
Section 2(b).                                                                                                                   
Mr. Bartholomew  responded that the applicable rules  in this regard                                                            
as included  in statute. He stated  that the value of the  Permanent                                                            
Fund would  be determined on June  30th of each year as that  is the                                                            
end of each fiscal year.  He stated that in order to accommodate the                                                            
"ups and  downs of the  financial markets,  it's prudent to  take an                                                            
average of the previous  five years." Therefore, he stated that this                                                            
proposal  would  mandate  that, on  June  30th,  an average  of  the                                                            
previous five-years'  market value of the Fund, would  be determined                                                            
based upon Generally Accepted  Accounting Principals. That value, he                                                            
continued,  would then  be multiplied  by five-percent  in order  to                                                            
determine the amount that would be available.                                                                                   
Co-Chair  Wilken  understood therefore  that  this  would equate  to                                                            
"five June 30's divided by five."                                                                                               
Senator  Bunde  moved  to  report  the  bill   from  Committee  with                                                            
individual recommendations and accompanying fiscal notes.                                                                       
Senator Hoffman  stated that  his not objecting  to the motion  does                                                            
not mean that he supports the proposal.                                                                                         
There  being  no  objection,  CS  HJR  26(FIN)   was  REPORTED  from                                                            
Committee with  $1,500 fiscal note  #3, dated January 16,  2004 from                                                            
the Division of  Elections and new zero fiscal note  #4, dated April                                                            
13, 2004 from the Department of Revenue.                                                                                        
RECESS TO THE CALL OF THE CHAIR 10:33 AM / 5:06 PM                                                                              
[NOTE: Due to an audio  malfunction, the adjournment of this meeting                                                            
was not recorded]                                                                                                               

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