Legislature(2003 - 2004)
04/14/2004 01:55 PM House FIN
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
HOUSE JOINT RESOLUTION NO. 46
Proposing amendments to the Constitution of the State
of Alaska relating to the principal of the Alaska
permanent fund; limiting appropriations from the Alaska
permanent fund to amounts equal to that part of the
market value of the fund that exceeds the principal
based on an averaged percent of the fund market value.
Co-Chair Harris summarized that in addition to the Percent
of Market Value (POMV) provision, the legislation would
incorporate in a constitutional amendment the value of
$22,988,000,000 plus deposits made between June 30, 2003 and
the date of the principal is determined.
PETE ECKLUND, STAFF, CO-CHAIR WILLIAMS, noted that the
intent is to define principal. Any deposits after June 30,
2003 will increase the principal. The principal would be
protected and could not be appropriated. Only the value of
the fund that exceeds the principal amount could be
appropriated. He noted that the principal amount as of
February 29, 2004, was $23,195,500,500.
Co-Chair Harris questioned if the Earnings Reserve Account
would remain.
BOB BARTHOLOMEW, CHIEF OPERATING OFFICER, ALASKA PERMANENT
FUND CORPORATION, DEPARTMENT OF REVENUE, provided
information relating to the legislation. He clarified that
there would be an account that would record the value in
excess of principal. He did not know what the account would
be called. Income or value from investments earned above
principal would be accounted for.
Co-Chair Harris noted that 5 percent of the earnings would
be the maximum amount that could be appropriated in any one
year. Mr. Bartholomew explained that there would be a two-
step process: calculate based on the total value of the Fund
a five percent payout; and determine if there is enough in
the account to make the appropriation. The payout would be
reduced if there were insufficient funds to an amount above
principal.
In response to a question by Vice-Chair Meyer, Mr.
Bartholomew observed that the Alaska Permanent Fund
Corporation Board had not met on the new proposal, but
observed that it would meet their number one priority to
establish a spending limit. A proposal that retains
principal would be a workable solution. Short-term drops in
the stock market could reduce what is available for
spending, which would remove the benefit of a stable,
predictable payout amount.
Vice-Chair Meyer observed that if the average earnings were
only 2 percent, there would only be 1 percent for government
and 1 percent for dividends. He noted that people want at
least $1,000. He questioned if the pure POMV method would
provide the safest manner to insure a $1,000 dividend. Mr.
Bartholomew agreed and noted that [the constitutional
protection of the principal] adds the risk of less than a
full payout during a short-term down market.
Vice-Chair Meyer asked how many years the Fund has been
below the 5% threshold in earnings. Mr. Bartholomew observed
that the balance in the account has been less than 5 percent
a couple of times "intra-year" or during the year. However,
there was a rally during 2003, the year in which they were
most at risk, and funds were available to pay the 5%. He
observed that, last year, the amount in the available
spending account of the Permanent Fund grew by $3.5 billion,
which is more than enough to fund a 5 percent payout.
Vice-Chair Meyer supported the "pure" Percent of Market
Value method; at times earning 12-15% so he believes in long
run, always would get average 8%. He thought this method
would be "separate buckets" and would be easier to explain
to the voters.
Mr. Bartholomew observed that the Permanent Fund is invested
as one fund. It is not separated into buckets of principle
and the value above principal. There is one pool of money,
which is only treated differently for accounting purposes.
He observed that under HJR 26, it would be accounted and
invested as one fund.
Representative Croft asked re the new language on page 1,
lines 13-15 through line 2, page 2 and asked if envision it
would rise over time. Mr. Bartholomew, said under this
proposal it would be accounted for under what is not
principal, and it is not envisioned to appropriate it for
inflation-proofing while not losing that option.
Appropriations from any source would go into the principal.
Representative Croft asked what would happen to the 3
percent used for inflation proofing; would it be
appropriated each time. Mr. Bartholomew understood that the
3 percent, which would be retained over time to offset
inflation, would be kept in the Permanent Fund. Under the
proposal it would be accounted for in the account that is
not principle. There is no intent to annually appropriate a
portion of this to principal, but the option of a special
appropriation would remain. Any appropriation from any
source or an appropriation of earnings within the Fund would
be principal.
Representative Croft asked if a deposit to the Fund would be
an appropriation made to the principal. Mr. Ecklund
explained that the constitutional 25 percent royalties occur
automatically under subsection (1). Subsection (2) applies
to any other appropriation to principal. Since June 30, 2003
there have been appropriations to the principal for
inflation proofing. Any appropriation, along with the 25
percent automatic deposits will help the Fund grow.
Mr. Bartholomew observed that the 25 percent automatic
deposits are between $200 and $400 million. The FY04 fiscal
year is anticipated to be about $350 million. Last year's
appropriation under the current law was $400 million.
MR. Ecklund explained that the payout is limited to five
percent of the 5-year average of the earnings. Any accruing
of profits or value that rises would be in excess of
principal. The spending appropriation limit would still be
up to 5%. A future legislature could put money back into
the principal.
Representative Croft asked if the January 30, 2004 principal
amount was with realized gain. Mr. Bartholomew clarified
that it is without both the realized and unrealized gains.
Under the proposal, both the realized and unrealized
earnings would start in the account that is not principal.
Representative Croft asked if there was an opinion by
Attorney General Renkes that the realized gains should be
included in the principal amount. Mr. Bartholomew affirmed,
result of that opinion was the realized earnings went into
available to spend account and the unrealized gains and
losses were attributed to the principal. The proposal would
go back to the definition used prior to the Attorney
General's opinion, which placed all earnings accounted for
outside of that principal.
Co-Chair Harris MOVED to report HJR 46 out of Committee with
the accompanying fiscal note. There being NO OBJECTION, it
was so ordered.
HJR 46 was REPORTED out of Committee with individual
recommendations and with two fiscal impact notes.
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