Legislature(2021 - 2022)BUTROVICH 205
08/30/2021 10:00 AM Senate JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| SB53 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 53 | TELECONFERENCED | |
SB 53-PERM FUND; ADVISORY VOTE
10:30:27 AM
CHAIR HOLLAND announced the consideration of SENATE BILL NO. 53
"An Act relating to use of income of the Alaska permanent fund;
relating to the amount of the permanent fund dividend; relating
to the duties of the commissioner of revenue; relating to an
advisory vote on the permanent fund; providing for an effective
date by repealing the effective date of sec. 8, ch. 16, SLA
2018; and providing for an effective date."
[SB 53 was previously heard on 4/21/21, 4/26/21, and 8/27/21.
Public testimony was open and closed on 4/26/21.
10:30:30 AM
CHAIR HOLLAND advised the committee would hear a PowerPoint from
Malan Rietveld, PhD., an international sovereign wealth fund
(SWF) advisor.
10:31:44 AM
At ease
10:32:08 AM
CHAIR HOLLAND reconvened the meeting.
10:33:03 AM
MILAN REITVELD, PhD; International Sovereign Wealth Fund
Advisor, The Center for International Development at Harvard
University, Kennedy School, Cambridge, Massachusetts, provided
introductory comments. He said he previously worked with the
Alaska legislature and Governor Walker's administration in 2015
and 2016 on issues related to transitioning to an historic
first-time draw on the permanent fund income to support the
state's budget.
10:34:10 AM
DR. RIETVELD began a PowerPoint on Fiscal Rules for Permanent
Funds: Global Trends and Practices. He reviewed his credentials
outlined on slide 1, including that he worked with a number of
governments and the public sector on fiscal reform and sovereign
wealth funds (SWFs). He has worked in diverse countries
including Botswana and Mongolia and in Alaska and Wyoming. He
currently serves as a senior expert consultant to the Asian
Development Bank. In addition, he has worked on pension funds.
CHAIR HOLLAND advised that the presentation is posted on BASIS.
10:35:14 AM
DR. RIETVELD continued to review his background on slide 2. He
related that he has also worked at Harvard University and
Columbia University producing publications on SWFs.
10:35:40 AM
DR. RIETVELD reviewed the growth of SWFs on slide 3. He directed
attention to the map that identified commodity-based SWFs, which
are established to invest a share of the proceeds from natural
resources rather than to spend them immediately in a budgetary
process. In recent years, there has been a proliferation of SWFs
funded by other forms of public sector revenue and windfall. For
example, privatization proceeds in a number of Asian economies,
foreign exchange reserves and new funds since the turn of the
century. The total aggregate in assets under management by all
SWFs in at least 15 countries is $8-10 trillion. It is difficult
to assess the size of the very large Middle Eastern portfolios.
10:36:56 AM
DR. RIETVELD said the Alaska Permanent Fund Corporation (APFC)
is a major player in global SWFs and its investment team is very
highly regarded. Other funds seek to learn more about how
Alaska's permanent fund was established, its iterations and its
investment team's track record.
10:37:31 AM
DR. RIETVELD emphasized that the current discussions in Alaska
are ones he hears in countries throughout the world. He provided
three examples of commodity-producing countries with large
sovereign wealth funds: Abu Dhabi Investment Authority (ADIA),
Kuwait Investment Authority, and Norway. The Abu Dhabi
Investment Authority (ADIA) owned by the Emirate of Abu Dhabi
has a fund estimated at $800 billion in assets under management
primarily funded by commodity and oil revenues. Currently, ADIA
is engaged in multi-year discussion on transitioning towards a
spending rule that would allow them to not only rely on oil
revenues while saving a significant portion of its revenue but
on its earning potential. Abu Dhabi's configuration is somewhat
different since it has a number of SWFs, of which the ADIA is
the most significant. He characterized ADIA as being on a very
similar process as Alaska.
10:39:05 AM
DR. RIETVELD related that the Kuwait Investment Authority (KIA)
is a less positive example. KIA's fund is estimated at $650-700
billion. In 2020, KIA saw significant draw downs on one of its
two funds, its general fund (GF) during COVID-19 which affected
its second fund, the future generations fund (FGF). What came to
light was that KIA had no formal rule-based framework but relied
on custom, consensus and negotiation. That framework has broken
down with a standoff between the minister, the legislature and
the KIA Board. In the past three months or so there has not been
a sitting board, which is just now being resolved. However, it
is an example of what can happen absent having appropriate rules
in place that are understood by all the stakeholders.
10:40:19 AM
DR. RIETVELD turned to Norway, which has the largest SWF in the
world at $1.4 trillion. In addition, its SWF provides 75 percent
of its revenues from other sources, including sales and income
taxes. Although Norway has rarely made draws on its earnings or
income from its SWF, in recent years that is starting to shift,
he said.
10:41:14 AM
DR. RIETVELD turned to slide 5. In 2016, Norway made the first
historic draw from its SWF. It subsequently made record draws in
2020 and 2021 for relief during the pandemic. Norway forms its
budget exclusive of oil revenues, then allows its budget deficit
to grow to the estimated earnings of its SWF. Norway
conservatively estimates its SWF earnings at 3 percent or
approximately $50 billion in current terms. It then withdraws 3
percent to cover the non-oil deficit. He pointed out that Norway
invests more conservatively than the Alaska Permanent Fund
(APF). Since this year's draw has been above 3 percent,
something must give in the coming years. He said he wouldn't be
surprised if Norway formalizes their rules, especially the
spending rule.
10:42:58 AM
SENATOR MYERS asked for the size of the three wealth funds
mentioned compared to the size of their economies.
DR. RIETVELD answered that he would need to guess on the first
two since Abu Dhabi Investment Authority (ADIA) and Kuwait
Investment Authority (KIA) keep their portfolio figures private.
But using an estimated $850 billion for Abu Dubai and $650
billion for Kuwait and considering pure assets versus the
average size of their budget in recent years, most Middle
Eastern funds have 3-5 years of budget cover from their SWF
assets. He contrasted that Norway has 7-8 times budget cover. He
estimated that Alaska would be 10-15 times budget cover from the
APF. He pointed out that solely based on the size of the budget
versus the size of the sovereign wealth fund (SWF), Alaska has
the largest SWF relative to the size of spending. That doesn't
speak to the fund's structure or accessing the fund through the
spending rule but rather it is a pure "rule of thumb" about the
fund.
10:45:38 AM
DR. RIETVELD turned to a comparison with endowments on slide 6.
10:46:00 AM
SENATOR HUGHES asked him to repeat the number of budget years
the permanent fund could cover.
DR. RIETVELD responded that it would depend on the size of the
annual budget, noting that Alaska's budget has increased over
time. He acknowledged that Alaska has cut its budget in recent
years. He estimated the budget range is 10-15 times budget
cover. He added he worked with the Alaska Permanent Fund
Corporation Board of Trustees on the publication of a trustee
paper in 2020. At that time, a comparison of the size of SWFs
relative to spending needs showed Alaska came out favorably. He
cautioned against using his exact projection of the number of
budget years as a certainty since it is merely an indication.
10:47:15 AM
CHAIR HOLLAND recalled that he referred to the Alaska Permanent
Fund as the largest SWF per capita.
DR. RIETVELD answered that it could be scaled through the size
of the gross domestic product (GDP), population or the average
spending outlay of government. In all those comparisons, Alaska
has a healthy endowment of savings. However, using other
metrics, Alaska has vulnerabilities, he said. He highlighted
that Alaska has a more certain near-term outlook for commodity
production but uncertainty around the timing or magnitude of the
state's oil production. Some other funds do not have to draw on
the fund and preserve the fund into perpetuity to the extent
Alaska does.
10:48:30 AM
SENATOR HUGHES said the rough comparison is helpful to see how
Alaska compares to other SWFs.
10:49:00 AM
SENATOR SHOWER acknowledged that members who served on the
Fiscal Policy Working Group (FPWG) were grappling to find
solutions, such as considering using some of funds from the
permanent fund to bridge the fiscal gap. He said he was curious
if Norway and other countries were using some of their SWFs to
help get through the pandemic.
10:50:00 AM
DR. RIETVELD answered that the overwhelming majority of SWFs are
used to provide fiscal support or direct economic support. He
opined that the current structure is correct and appropriate for
Alaska. One way that SWFs have helped during the pandemic is to
shore up private and public financial markets. In Norway, the
last two years have seen the largest draw from their SWF for
direct budget support but also the highest POMV draw in the
history of its fund. The answer is most certainly yes, he said.
10:51:28 AM
SENATOR SHOWER remarked that he wanted to highlight that it
would not be unusual or unreasonable for Alaska to consider
using available funds.
10:51:52 AM
DR. RIETVELD offered to create a side-by-side analysis of SWFs
based on the size of the GDP, budget and population, if
requested. He suggested that could be helpful.
10:52:32 AM
DR. RIETVELD said it was useful to not only compare what is
happening with SWFs, but also to consider a close peer, which is
university endowments, particularly U.S. university endowments.
He directed attention to the chart on slide 6. He said income
spending rules vary widely. One major feature is realized income
on fixed income and dividends paid on equities. Historically,
the majority of endowments have had such spending policies. He
directed attention to total investments shown in the first
column. Roughly three-fourths of university endowments make use
of a POMV approach to spending, which is considered best
practice and suitable for the Alaska Permanent Fund (APF). He
said he was pleased to see that concept has been adopted since
it makes more sense than focusing on realized income.
10:54:37 AM
SENATOR KIEHL asked for the difference between the "average
percentage" and the "Average pre-specified percentage" lines
shown on slide 6.
DR. RIETVELD answered that the pre-specified percentage has to
do with the timing. He explained the importance of the timeframe
being used in POMV calculations. He acknowledged that Alaska has
emphasized a five-year lag average, which is more common and by
far the best for use with a permanent fund. In universities it
is a little trickier because the administration argues that the
departments need longer lead times for financial planning due to
the leads and lags in university outlays. Thus, universities
often pre-specify a POMV based on a historic value, which can be
difficult. If the portfolio fluctuates dramatically, it can
appear as though there is a massive overspend because the pre-
specified amount is being compared to a smaller portfolio.
10:56:25 AM
SENATOR KIEHL pointed out that the only pre-specified spend
amount that exceeded the average percentage funds were the
smallest endowments funds under $25 million. He asked if this
was due to their size.
DR. RIETVELD said he thought Senator Kiehl was correct that it
is related to smaller schools. He suggested that in typical
American universities, the endowment will be a small fraction of
their income. He noted that Harvard has the largest university
endowment in the world. The endowment income and earnings
potential represent a significant contributor to the overall
revenue sources of the university in terms of operational
purposes. The short answer is that a rule like that is probably
a peculiarity of the small endowment which isn't a significant
contributor to revenue.
10:57:54 AM
SENATOR HUGHES recalled he mentioned that using the lag was
particularly valuable for Alaska and others are moving to it.
She asked if any endowments base their POMV draws on current
balance or if these endowments use some type of lag model.
10:58:18 AM
DR. RIETVELD answered that there are endowment POMV models that
work on current value, including Harvard. The POMV calculation
is not the motivating factor for determining how much money to
draw from the endowment in any given year. Harvard is more
focused on a stable spending plan for the university. If other
sources of revenue student enrollment fees, gifts, and grants
are down in a particular year, the objective of the endowment is
to fill the gap. The universities will look back at the POMV
size to provide a backward look to provide a sense of spending.
Instead of considering the POMV a driving factor, the
universities will use it as one of a number of factors to
determine whether the university has overspent or underspent. In
the event that Harvard has overspent, the university will pull
back in subsequent years and likewise, if it has underspent, it
will recognize there is room to increase the spending rate. That
model has more discretion and it places more of an onus on the
corporations that run the university. He said some fairly
controversial things happened at Harvard, which he will discuss.
11:00:00 AM
SENATOR HUGHES asked if during the pandemic these percentages
average 4-5 percent or if some SWFs were taking above the amount
listed on the chart.
11:00:14 AM
DR. RIETVELD answered that the survey data he reviewed suggests
that spending rates have gone up, but there is variance. In some
cases, endowments have pulled back because market losses led to
some panic. He pointed out the study cited on slide 6, which was
done by the National Association of College and University
Business Officers' (NACUBO) Commonfund Study of Endowments
(NCSE), which is considered the gold standard for endowment
studies. It showed an increase in the average spend rate of 4-5
percent for endowments but the trend is upward in response to
COVID-19.
11:01:21 AM
DR. RIETVELD turned to slide 7 and discussed what happened at
Harvard. He said Harvard's endowment consists of over $40
billion in assets under management so it is the most famous and
largest endowment in the world.
DR. RIETVELD said Harvard's spending rule leaves some wiggle
room. Harvard's balance of "spending stability" is highly
influenced by non-endowment revenue, which fluctuates. The
second goal is preservation for the university as a whole as
people gift the university.
11:02:19 AM
DR. RIETVELD highlighted the general target of 5.0-5.5 percent
POMV. Although the POMV rate is not binding, it represents the
long-term consideration and real earnings potential of the
Harvard endowment. He explained that if the long-term earnings
are not exceeded, the fund is not drawn down. He noted that
Harvard POMV draws have ranged as low as 4.2 percent in 2006 to
a pre-COVID high of 6.1 percent in 2010. This year's POMV rate
is not yet finalized as Harvard must figure out the value of the
portfolio and the size of the draw. He said he could well
imagine that the 2021 POMV will exceed 6.2 percent. It will
likely be its biggest draw.
DR. RIETVELD highlighted that two things happened in the last
two fiscal years. In 2020, Harvard had a highly unusual draw on
restricted funds inside the endowment. He noted that 80 percent
of Harvard's endowment is earmarked or restricted for specific
purposes.
11:04:11 AM
DR. RIETVELD turned to slide 8. The first bar provides the
revenue sources for Harvard for 2020. He pointed out that 37
percent was endowment income or transfers from the endowment. As
the other bars show, different parts of the university received
bigger shares of the endowment income since some benefactors and
donors of the university specify funds for specific purposes or
colleges.
11:05:29 AM
DR. RIETVELD reverted back to slide 7, on Harvard, which read:
• Most famous and largest endowment in the world
• Spending rule leaves some wiggle room
• Balance of "spending stability" (highly
influenced by non-endowment revenue) and
endowment growth/preservation
• "Generally targets" 5.0% to 5.5% POMV but not
binding, and not how the Harvard Corp decides
• Low of 4.2% in 2006 and pre-Covid high of 6.1% in
2010
• In 2020: highly unusual draw on restricted funds
inside the Endowment
• In 2021: growth of dollar value of draw on Endowment
originally capped at 1%; but later increased to 2.5%
(note: dollar-value spend, not POMV)
• POMV calculation is tricky at Harvard, given timing
of financial-planning process and no 5-year
averaging
• Harvard has a diversified pool of revenue sources
(and access to CARES and PPP funds); with none
subject to expectations of structural decline
11:05:31 AM
DR. RIETVELD said in 2020, the Harvard Corporation, which
essentially serves as the legislature for Harvard, agreed to use
some of its restricted funds in consultation with donors. This
was the first innovation and tweaking of the framework inducted
in 2020 to meet the COVID-19 challenges. In 2021, Harvard
planned on a smaller POMV draw but later adjusted their figures
because the donations and student fees did not recover to the
expected level. It then planned to increase the dollar spend
from the endowment at 1 percent, but ultimately agreed to
increase it to 2.5 percent. Although that is not a jump in POMV
from 5 to 7.5 percent POMV, it represents the 2.5 percent growth
in the dollar-value drawn. He predicted that this would be a
record POMV depending on the timeframe for assessing the size of
the portfolio. The portfolio has changed due to market collapse
during COVID-19, but it was experiencing a strong recovery in
recent months.
11:06:45 AM
SENATOR HUGHES referred to the bullet on slide 7, which read:
• POMV calculation is tricky at Harvard, given
timing of financial-planning process and no 5-
year averaging
SENATOR HUGHES asked if the POMV calculation is done on the
current balance.
11:06:58 AM
DR. RIETVELD responded that the POMV is more of a communication
tool than a binding rule. The rule is intended to ensure a
stable spending plan without drawing down on the endowment in
the long run. Although Harvard reports the POMV in its financial
reports, it is done in a backward-looking sense to show in the
final analysis, how big was the draw related to the asset size
by taking the average value of the endowment over that fiscal
year. It's more of a communication tool, he said. For example,
if sharp fluctuations occurred in the portfolio, the POMV might
need to be applied over a longer period, he said.
11:07:51 AM
SENATOR HUGHES pointed out that in 2010, the 6.1 percent would
reflect the effective rate since it was on the balance sheet.
She explained that doing the calculation for the five percent
POMV draw in Alaska on 3.069 billion, the effective rate on the
current balance would be 3.7 percent. She asked if Harvard's 6.1
percent would be similar to Alaska's 3.7 percent effective rate
draw.
11:08:30 AM
DR. RIETVELD responded that the right way to consider it is as
an effective draw. He said he was not entirely sure about
whether it is calculated at the end of the fiscal year or if
some type of weighted average is done during the fiscal year. He
offered to clarify it but reiterated that it is an effective
draw based on the most recent fiscal year.
SENATOR HUGHES indicated she would specifically like to know if
there is some type of weighted average during the year or if it
is done on the end balance.
11:09:10 AM
SENATOR KIEHL asked if the Harvard Corporation made similarly
high draws after its historic high draw.
11:09:33 AM
DR. RIETVELD replied that what drives the amount of draw on the
Harvard endowment is how the other sources of revenue are
performing. He explained that if the corporation determined the
draw was too high in a particular fiscal year (FY) because other
revenue sources were down, it would look for recovery in other
revenue sources in subsequent years which would make it possible
for them to lower the POMV. He offered to provide the data for
the backward-looking POMVs.
11:10:26 AM
SENATOR KIEHL said the information would be helpful. He also
asked if the Harvard Corporation generally is in structural
deficit or if revenue and expenditures are balanced annually.
Finally, he asked how the decision-makers are appointed or
selected.
11:11:01 AM
DR. RIETVELD replied that the decision-making authority is the
Harvard Corporation, which is independent from the Harvard
Investment Management Company (HIMC). The Harvard Corporation is
an elected body with stakeholders from the donor community,
faculty and student representatives. He offered to follow up
with particulars on the stakeholder composition. The Chief
Financial Officer (CFO) and the Chief Executive Officer (CEO) of
the HIMC deliberate on the feasible amount to draw and report it
to the Harvard Corporation, which ultimately approves it or
requests amendments.
11:12:07 AM
CHAIR HOLLAND related his understanding that the Harvard
Corporation reviews the amount needed based on recent gifts from
supporters, then draws from the endowment and the POMV amount
drawn is reported after the fact.
DR. RIETVELD answered yes. The best way to describe it is that
the POMV is not really the equation being solved. Instead, the
Harvard Corporation is solving for spending stability with the
constraint that the endowment cannot be depleted in real terms
over a two-to-three-year period. The Harvard Corporation uses a
backward look to ensure that it is not overspending.
11:13:53 AM
CHAIR HOLLAND said he didn't want to be misunderstood by saying
it was a good method. He recalled earlier remarks that some
endowments rely on consensus and negotiation, which is what
Alaska has relied on for years. The legislature is currently
negotiating a resolution to the impasse. He expressed concern
that the PFD payout to Alaskans bounced around from 4-4.5
percent in the first 20 years and it gradually declined such
that a $1,000 PFD is a 1 percent payout of the POMV of the
permanent fund. He argued that the PFD should be more than that.
11:15:12 AM
DR. RIETVELD said he had two final thoughts about Harvard to
cover on slide 8. He explained that Harvard Corporation framed
its decision to sign off on a 2.5 percent excess draw in 2021 by
explicitly citing exceptionally high investment returns it
received in the past six months. He commented that the Harvard
Corporation's CFO and CEO were comfortable with the decision.
11:16:07 AM
SENATOR HUGHES recalled he mentioned that the draw from the
Harvard endowment fund provides the bulk of the revenue for its
operations. She asked if he could provide the percentage in a
typical year.
11:16:39 AM
DR. RIETVELD directed attention to the bar chart on slide 8. In
FY 2020, 37 percent of the university's operating budget was
derived from its endowment fund. This was a relatively high
share given that other contributors were likely down in 2020. He
said the projected range would likely be from 25-37 percent.
Thus, it is a significant amount but it is not a dominant one.
11:17:06 AM
DR. RIETVELD related his final point was about Harvard versus
Alaska or any country whose economy with a permanent fund funded
by commodity revenues. Harvard has volatility and
unpredictability in its other sources of income outside of the
endowment but it is nowhere near the volatility of revenues from
oil and gas, copper or gold. There is no reason to expect that
Harvard's donations in 20, 30 to 100 years should decline in
real terms. Although it could decrease, it might also increase.
Harvard is not confronted with the possibility that one day its
source of income will completely dry up and the endowment must
provide the revenue source. He viewed it as useful to consider
how Harvard contemplates its spending rate and justifies changes
to it.
11:18:14 AM
DR. RIETVELD turned to slide 9, Alaska in Context and discussed
how Alaska sits in terms of global SWFs.
• Functions: savings, income and stabilization
• The savings function is firmly established
(constitutional certainty); although large share
in ERA is a risk
• The income-producing has come into sharper
focus with the POMV
• However, it currently rests on less solid
institutional foundations than savings
• Can be undermined fairly easily
• The POMV rule also promotes the stabilization
function
• Could be enhanced through a rule to transfer
surplus revenues to APF (spending cap; oil
price ceiling, etc.). Increases the size of the
APF and revenue it generates
11:18:40 AM
DR. RIETVELD stated that SWFs perform in commodity-based
economies in some combination of three functions. One function
is to operate as a recipient in savings so future generations
can enjoy proceeds from natural resource extraction. The second
function is to produce income with one form of asset replacing
another asset and one revenue stream replacing another revenue
stream. The third function of SWFs provide fiscal and economic
stability.
11:19:21 AM
DR. RIETVELD related that the savings function in the Alaska
Permanent Fund occurs with the constitutional provision
requiring 25 percent of Alaska's mineral royalties be deposited
to the fund, which is somewhat undermined by the structure of
the permanent fund. In particular, this is because of the
existence of the earnings reserve account (ERA) within the fund
and the ease in accessing those funds. In fact, it isn't really
a savings account since 25 percent of the fund is available for
appropriation by a simple majority vote in the legislature. Even
though Alaska has a history of periodically inflation proofing
the fund by transferring funds from the ERA, as it stands right
now, roughly 25 percent of the fund sits in a structure that is
not really a permanent fund in the true sense of the word.
11:20:33 AM
DR. RIETVELD said what has come into focus since 2014 is the
role of the permanent fund as an income source and fiscal
stabilizer. On the one hand, the income producing potential of
the permanent fund has become well understood and accepted by a
majority of the citizens and the legislature through the POMV
process. On the other hand, the permanent fund still sits on a
less solid institutional foundation since its spending policies
lie outside the Alaska Constitution. Since the POMV model and
the amount of the POMV draw can easily be changed up or down, it
is not ideal for a long-term framework to ensure that one
function does not undermine another. Specifically, in Alaska
this relates to ensuring that the income-producing function of
the SWF does not undermine the savings that has historically
occurred.
11:21:40 AM
DR. RIETVELD directed attention to the bubble chart on the right
of slide 9, which provides a visual sense of Alaska's place in
the world. The horizontal axis shows that Alaska sits with a
group of countries and economies that are highly dependent on
commodity revenues, such that 80-90 percent and sometimes
upwards of 90 percent of their revenue is derived from oil and
gas. This puts Alaska in the company of Middle Eastern economies
of United Arab Emirates (UAE), Kuwait, Saudi Arabia, Qatar, and
Bahrain. The countries of Bahrain and Saudi Arabia in the green
bubble are in trouble if oil prices are below $80 per barrel. He
characterized it as the "break even" price needed to balance the
budget. Alaska was in the same position given the size of the
budget in recent years. However, with the use of the permanent
fund it moves Alaska into the blue bubble. Although the $50
range shown can't be considered the true "break even" point, it
is indicative that is the rate at which the state could likely
meet its obligations. That puts Alaska in a group with UAE and
Kuwait, he said.
11:23:24 AM
DR. RIETVELD stated that Norway is less dependent on oil
revenues with its budget at 33 percent or lower dependent on oil
so it can get by with lower oil prices.
11:23:43 AM
DR. RIETVELD turned to the role of the permanent fund in
providing fiscal stability. The use of the POMV rule,
specifically using the five-year moving average provides
significant stability to the state's finances. It provides a
stable source of income to help avoid fiscal cliffs and crashes.
It should help the legislature avoid overspending.
11:24:14 AM
DR. RIETVELD emphasized that the legislature should consider
supplementary measures. If another commodity boom occurred, 75
percent of this revenue automatically is not deposited to the
permanent fund. This raises the question of to how to allow the
majority of the surplus revenue flow to the permanent fund and
avoid increasing the budget three-fold during a boom. One option
would be to create a spending cap and deposit the remaining of
the windfall revenues to the permanent fund or to replenish
other fiscal buffers. Another option would be to adopt a rule,
which is discussed in the APFC Trustees paper, Volume 9, in
which any revenues that exceed $80 per barrel would be deposited
to the permanent fund. Further, on the savings side, the state
could have a more dynamic rule and spending caps are one way to
get there.
11:25:43 AM
SENATOR SHOWER commented that Dr. Rietveld highlighted a number
of issues the FPWG recommended solving to provide fiscal
stability, including the spending cap. He related that a Senate
Finance Co-Chair recently stated that the state doesn't have a
spending problem but a cash-flow problem so a spending cap is
not needed. Several members have been working tirelessly on the
FPWG to find a solution. He emphasized that Alaska needs
structural certainties moving forward and the state needs
constitutional changes to provide certainty.
11:27:23 AM
SENATOR HUGHES agreed with Senator Shower. She stated that some
have proposed that the POMV draw itself is a spending cap but as
Dr. Rietveld pointed out, the POMV does not serve as a spending
cap during periods of economic booms. However, when there aren't
booms, the POMV can function this way, she said. She emphasized
the importance of avoiding the fiscal problems that occurred in
the 2000s during an uptick in revenue.
11:28:10 AM
DR. RIETVELD responded that the POMV acts as a spending cap on
what might be spent on the permanent fund, but three-fourths of
Alaska's windfall revenues will continue go elsewhere unless a
mechanism is in place. He suggested placing language in statute
or in the Alaska Constitution to state that above a percentage
that a significant share of the excess should be deposited to
the permanent fund. This would allow the state to increase
spending but at a much more gradual rate. In fact, it would help
the legislature increase the level of spending permanently but
sustainably rather than moving up and down with the commodity
cycle. He pointed out that this is not solely an Alaskan issue
but is an ailment that afflicts most commodity-based economies
and SWFs. A fiscal rule for the SWF is one way to address that,
he said.
11:29:43 AM
DR. RIETVELD reviewed slide 10, Alaska in Context.
• Alaska has considerable advantages over peers
• Constitutional clarity and history of savings
• Very large asset pool
• World-class investment capacity and asset
allocation
• But also weaknesses and vulnerabilities
• High oil revenue dependence & uncertain long-term
production outlook
• Spending rule lacks constitutional certainty: ERA
balances are really exposed (in downturn and a
boom)
• More can be done to save windfalls and break
boom-bust link between oil revenues/prices and
spending
DR. RIETVELD acknowledged that he just discussed some of the
items on this slide but it may be worth repeating. He directed
attention to the table on the right-hand side of the slide,
which consists of a summary that compares the advantages and
weaknesses of Alaska, Wyoming, Norway, Alberta and Saudi Arabia.
He reviewed the advantages and the vulnerabilities of Alaska
compared to other countries with SWFs.
11:30:41 AM
DR. RIETVELD highlighted one advantage is the constitutional
clarity that Alaska must save 25 percent of its oil royalties in
the permanent fund. Further, the legislature has done the right
things like inflation proofing the corpus of the fund from the
ERA. Many countries with SWFs struggle to adhere to their best
intentions to save. He applauded the management team at the APFC
for their efforts, including the APFC Board of Trustees' asset
allocation.
11:32:18 AM
DR. RIETVELD elaborated on the weaknesses and vulnerabilities,
noting that Wyoming is also dependent but to a lesser magnitude
given that a sales tax provides another source of income. Norway
is a large oil producer but it has other sources of income [such
as fish, forests, hydropower, and minerals].
11:33:04 AM
DR. RIETVELD pointed out that Alaska has an uncertain long-term
production outlook. He clarified that he was not trying to say
it was the end of oil and gas era in Alaska, but the timing of
those potentials is uncertain. Further, in the long-term it is
difficult to assess the effects of climate change and policies
may affect the viability of all producers of fossil fuels.
11:33:35 AM
DR. RIETVELD related he just discussed the lack of continuity on
the spending rule. Although the POMV was adopted in the Alaska
statutes in the last few years, the intention to put it into
constitutional language is very valuable. He emphasized that the
ERA is a legacy of a model framed in terms of realized
investment income, related to how the PFD was funded and the old
formula. By moving to a POMV model and adopting the mindset that
the permanent fund is a permanent source of income to the
budget, the ERA is really a piece of legacy architecture that
creates not only political risk but also financial risks. The
APFC Trustee Paper, Volume 9, also outlined what the state could
do if the ERA was depleted through a series of financial market
events and ways to ensure that money is available to fund the
POMV draw.
11:34:53 AM
DR. RIETVELD emphasized that rolling the ERA into one SWF
portfolio and trying to find a way to finance the POMV is a much
more suitable set of arrangements.
11:35:15 AM
DR. RIETVELD spoke to the last bullet point on slide 10, which
encourages the state to save a large portion of any windfalls to
raise the level of spending on a more permanent basis and to
break the boom-bust cycle between oil revenue prices and
spending.
11:35:49 AM
DR. RIETVELD turned to slide 11, building on reforms.
• APFC Trustee Paper 2020 Vol. 09
• The Role of Sovereign Wealth Funds in Saving,
Stabilization and Generating Income
• Considered what has worked and what has failed in
past amongst comparable peers
• SWFs and Permanent Funds in accountable, commodity-
based democracies
• Alberta, Wyoming, New Mexico, Texas, Norway and
Chile
11:35:54 AM
DR. RIETVELD read the first bullet point on slide 11. He pointed
out that he keeps coming back to the three points: saving,
stabilization, and generating income. The APFC study on the role
of SWFs in savings and stabilization considered what worked and
failed in the past for comparable peers. The focus was on
commodity-based democracies of Alberta, Wyoming, New Mexico,
Texas, Norway and Chile.
11:36:43 AM
DR. RIETVELD turned to slides 12 and 13 listing five key
messages.
Slide 12:
• Lesson #1: Mission clarity
• There has been a shift in the APF's mission:
income generation and fiscal stability
increasingly important
• This is now well understood, and should be
supported by constitutional language
• Lesson #2: Rules matter
• Very clear that reliance on custom, discretion
and negotiation leads to inferior long-term
outcomes
• Rules de-escalate tough decisions and promote
consistency
• Lesson #3: Enforcing rules
• Alaska (and other US Permanent Funds) have saved
because it is Constitutionally mandated
• Same is rarely true where it is not
Constitutionally mandated (many examples:
Alberta, Middle Eastern funds, US permanent
funds)
11:37:07 AM
DR. RIETVELD reviewed Lesson 1, mission clarity on slide 12. He
noted that there is often no consensus on the purpose of SWFs.
Some people think it is there to save while others think it
should support the budget in times of crisis. Some think the SWF
is available to invest in the economy and help diversity it. The
mission has clarity in Alaska but it has shifted from purely
savings to a multitude of functions, including savings, income
generation and fiscal stability. He emphasized the need to shore
up the Alaska Permanent Fund by adopting constitutional
language.
11:38:30 AM
DR. RIETVELD reviewed Lesson 2 relating to rules. It is
difficult to adhere to savings policies during boom times and
hard not to draw down on SWFs during tough times. Rules de-
escalate tough decisions. Thus, it's a good idea to develop
rules for spending the permanent fund in constitutional
language.
11:39:37 AM
DR. RIETVELD reviewed enforcing rules in Lesson 3. He related
that the study reviewed permanent funds in the US. Often, the
rules relied on statutory provisions, but there were departures
from the rules. He acknowledged that Alaska and Wyoming have
rules enshrined in their constitutions. He characterized
constitutional language as important. He pointed out that Norway
has always relied on a consensus model. However, he would not be
surprised if Norway does constitutionalize their rules.
11:40:29 AM
DR. RIETVELD turned to slide 13, building on reforms.
• Lesson #4: Getting a POMV rule right
• Focus on total returns rather than realized
earnings: mindset shift
• Moving averaging is essential
• Long-term POMV rate must match long-term
portfolio returns, minus inflation and costs
• Lesson #5: Mechanics of the draw and the ERA problem
• The ERA/principal split creates unnecessary
risks: political and financial
• Having the POMV and the appropriate risk
allocation is more important that the Fund's
mechanics
• Trustee Paper 2020-09 considered reform options
• But no compelling reasons to have the ERA, if one
move away from earnings-based spending rule
11:40:31 AM
DR. RIETVELD explained that the APFC Trustee paper was written
during the time Alaska's POMV concept was taking shape. He
emphasized that the POMV rule is best practice that is a
technical means to formulate a rule for Alaska. It brings a
shift in focus from realized earnings to a total return concept.
Moving averaging is essential in an economy as volatile as
Alaska's economy. Thus, a five-year moving average lag is the
best way to smooth some of the volatility in a portfolio that is
risk orientated and will have significant fluctuations.
11:41:29 AM
DR. RIETVELD related that as discussed about Harvard, the POMV
provides a sense check about its overall spending. The POMV rate
must match the long-term portfolio returns, minus inflation and
costs of managing the portfolio. Otherwise, the state risks
eating into its portfolio in the long run. Essentially, if a
mistake is made by overspending the POMV by .5 percent for a
decade, it is much more devastating on a compound basis to the
real value of the portfolio than short term overspending
followed by a commitment to a more sustainable level of
spending. He maintained that the constitutional language is the
best way to ensure the POMV rate matches the long-term portfolio
returns.
11:42:49 AM
DR. RIETVELD turned to the bullet point on Lesson 5, related to
the concerns about the split between the ERA and the corpus of
the fund. He stated that the ERA and principal split does create
unnecessary political and financial risks. It results in
frequent annual standoffs about how much money to spend from the
ERA. In fact, all of the ERA could be appropriated, which would
be detrimental to the long-term sustainability of the permanent
fund. Further, it creates financial risks. Given a certain set
of market circumstances, it would be possible to draw down the
ERA to the extent that it would be difficult to fund the POMV on
a cash-flow basis. Although the legislature might be reluctant
to move funds from the ERA to the corpus of the fund, which
would be prudent. It might raise concerns whether there are
enough funds to provide coverage. However, it is important that
the portfolio is allocated to risk rather than maintaining the
ERA.
11:44:24 AM
DR. RIETVELD said the APFC Trustee Paper, Volume 9, considered a
number of ways to retain the ERA by developing a number of
supplementary rules like a coverage ratio for the ERA relative
to the last two or three years of budget spending. However, if
the option is to roll the ERA into one SWF portfolio, it is much
more desirable than trying to retrofit "legacy plumbing" like
the ERA, which is not required or suitable to a POMV spending
rule.
11:45:12 AM
SENATOR HUGHES referred to his recommendation to roll the ERA
into the corpus of the permanent fund as one means to protect
the permanent fund. The state currently requires voter approval
for constitutional changes. She related her desire to provide
residents with a fair and reasonable dividend. If so, it would
encourage voters to approve the constitutional amendment, she
said. However, doing so would require an additional 1-1.5
percent draw above the five-percent POMV draw. This would result
in a five-percent effective rate draw on the current balance.
11:46:20 AM
SENATOR HUGHES expressed concerned that if the constitutional
amendment fails, it may set a precedent of going above the five-
percent POMV. One option could be to place a caveat in statute
to reduce the draw to 4-4.5 percent to build up the fund. She
highlighted that due to the Alaska Supreme Court decision in
Wielechowski v. State, the PFD statutes are considered
guidelines. She asked if the tradeoff to draw more funds to
provide a better dividend is too risky.
11:47:29 AM
DR. RIETVELD deferred commenting on political judgement. He
acknowledged that people are hurting due to the COVID-19 crisis.
The additional dividend amount could be considered an economic
stimulus so there is an economic logic to it. In addition, there
is a need for people to feel they are part of the reform
process. The constitutional language for a 50:50 split could be
a way to assure people that they are still stakeholders in how
the permanent fund performs. The goal is to get the system on a
sustainable five-percent POMV. In terms of a course correction
in the event the constitutional amendment did fail, the
legislature would need to ensure that there was a stronger
reaction toward sustainability in subsequent years. He compared
it to Harvard's course corrections. The state would need to
review its non-permanent revenues and the need to maintain
fiscal stability. It means not suddenly withdrawing the amount
of activity that government puts into the economy.
11:49:43 AM
DR. RIETVELD characterized it as a very tricky balancing act. He
opined that the policies in the constitutional amendment are
sound.
11:50:13 AM
SENATOR KIEHL asked if his response is why the APFC Trustee
Paper, Volume 9, was limited to accountable democracies. He
pointed out that the Harvard overseers are elected by the alumni
so they are not accountable to the staff and faculty or students
paying tuition. It is limited to the donor class. Thus, there is
a reasonable likelihood the Harvard Corporation is not going to
substantially diminish the endowment, which contrasts with what
Senator Hughes aptly described.
11:51:12 AM
DR. RIETVELD answered that is part of the reason the APFC
Trustee Paper did not consider non-democratic authoritarian
systems. Another reason is that non-democratic authoritarian
systems are not predictable. For example, the Saudi Arabia fund
has gone through massive fluctuations. It is not clear to him
whether the Saudi Arabia fund is primarily a fiscal
stabilization fund, a savings fund or a domestic development
bank. One practical point is that the democratic systems have a
documented history, which cannot be done in systems that lack
transparency. He acknowledged that it is clear that passing good
reforms is not easy. Certainly, legislators have thought about
ways to garner support for good long-range ideas to
constituents, but it is important to find ways to frame the
proposed changes for stakeholders. He recalled that the history
of the PFD was a means to garner public stakeholders in the
process.
11:53:21 AM
SENATOR KIEHL noted that since the overseers of Harvard have a
fiduciary responsibility, they could be sued if they did not get
their endowment back on track. However, it is not possible to
sue legislators or princes.
11:53:49 AM
SENATOR SHOWER reiterated that many points Dr. Rietveld made
today are in line with what the FPWG came up with, including
similar conclusions. The FPWG recognized that multiple solutions
were needed. He asked for his insights on the potential for
other revenue streams, such as instituting a sales or other tax
in addition to the constitutional amendment.
11:55:56 AM
DR. RIETVELD responded that he did not do a deep look at the
numbers but he has some sense. It is clear the permanent fund
earnings and POMV alone can't solve the problem, he said. The
legislature must develop a comprehensive package that includes
new revenues and cuts, not just the earnings. If the permanent
fund was $150 billion, perhaps it could solve the issue, but it
is not. He acknowledged that there are many considerations when
deciding between a sales tax versus an income tax or a corporate
tax. However, he is not an expert on Alaska's overall fiscal
situation.
11:58:13 AM
SENATOR MYERS said the presentation discussed stability, but it
appeared to focus on a narrow area of stability for government
revenues and hence, government spending. He solicited his
comments on how SWFs create stability for the rest of the
economy. He expressed concern that the state would be on a path
moving forward with a stable government and revenues, with a
volatile and anemic economy for the rest of the state.
11:59:20 AM
DR. RIETVELD stated that there is an innate volatility in the
Alaska economy. First, fiscal policy and government spending in
Alaska has exacerbated volatility. Thus, spending has risen when
revenue has risen due to rising oil prices. It has been cut when
oil prices drop, revenues collapse and jobs drop. The initial
principal is to do no harm with fiscal policy. The second point
is that for lower-income Alaskans, the permanent fund is
important to their wellbeing. He emphasized that having a stable
and more predictable dividend, which the proposed constitutional
amendment would achieve will be helpful. Again, it is like the
contribution the permanent fund can make to the fiscal problem.
The contribution that the permanent fund can make to the overall
volatility is limited but must ensure that the fiscal policy
doesn't contribute to the volatility that the Alaskan economy is
inherently exposed to. This is quite important, he said.
12:01:26 PM
CHAIR HOLLAND remarked that no one thought the permanent fund
would rise to $82 billion at this point. He acknowledged that the
state borrowed $14.5 billion from the CBR several years ago that
it decided not to repay. Many people would argue that the
legislature has not followed the five percent POMV 50:50 plan
which could have brought in another $7 billion. He offered his
view that it is important to appropriately address the spending
limit. He suggested that this resolution is in the right range.
12:02:20 PM
DR. RIETVELD noted that the summary on slide 14 was already
discussed.
CHAIR HOLLAND asked if there was any value to make a partial
repayment to the constitutional budget reserve (CBR) to provide
some liquidity, especially if the state does away with the
earnings reserve account (ERA).
DR. RIETVELD responded that he would need to consider that
aspect. He said he was not sure if it would be better to have
funds in the CBR versus the ERA. He related his understanding
that it was considered a rainy day fund that was depleted. He
said he discussed putting some percentage of any windfalls back
into the permanent fund if revenues recover, which is his first
option. Another option could be to replenish the CBR and other
rainy day funds to avoid an unsustainable draw on the permanent
fund in future years. There are merits to replenishing the
buffer funds, he said.
12:02:45 PM
SENATOR HUGHES directed attention to the last bullet point on
slide 14, which read:
• Alaska enjoys a number of critical structural
advantages
• Big reforms have been made: income- and
stabilization functions established
• Time to invest in infrastructure, mechanisms and
institutions that ensure this transition which is
permanent enjoys Constitutional certainty
• The ERA created unnecessary political and financial
risks under POMV
• No compelling reasons to have the ERA, if one
move away from earnings-based spending rule
• Ensure unanticipated future revenue windfalls aren't
immediately spent, but rather grow the APF or
replenish other fiscal buffers
• For example, spending caps, oil-price trigger,
supplementary windfall savings rule
• A bridge period is needed as Alaska transitions to a
system with Constitutionally protected savings and
spending
• The bridge should be comprehensive, with all
available options on the table
• One-time higher draws do happen,
• Key is having a credible commitment mechanism to
sustainability and rule-based constraint
SENATOR HUGHES related that the committee is working on SB 53,
which would make statutory changes to link up with a
constitutional amendment. She reviewed the bullet points and
said she believes this is what the committee is working towards
in SB 53.
[SB 53 was held in committee.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| Presentation_SJC_Alaska_30 Aug.pdf |
SJUD 8/30/2021 10:00:00 AM |
SB 53 |