Legislature(2021 - 2022)BUTROVICH 205
02/09/2021 03:30 PM Senate STATE AFFAIRS
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| Audio | Topic |
|---|---|
| Start | |
| SB53|| SJR6 | |
| SJR1 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 53 | TELECONFERENCED | |
| += | SJR 6 | TELECONFERENCED | |
| *+ | SJR 1 | TELECONFERENCED | |
| += | SB 39 | TELECONFERENCED | |
| + | TELECONFERENCED |
SJR 6-CONST. AM: PERM FUND & PFDS equal
SB 53-PERM FUND; ADVISORY VOTE
3:35:21 PM
CHAIR SHOWER announced the consideration of SENATE JOINT
RESOLUTION NO. 6 Proposing amendments to the Constitution of the
State of Alaska relating to the Alaska permanent fund,
appropriations from the permanent fund, and the permanent fund
dividend.
and
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."
3:35:59 PM
MIKE BARNHILL, Deputy Commissioner, Department of Revenue,
Juneau, Alaska, suggested that it would make sense for the
committee to start with SJR 6, which lays out the structure,
followed by SB 53 that implements the details of the structure.
CHAIR SHOWER agreed.
3:37:06 PM
MR. BARNHILL stated that SJR 6 proposes to convert the Alaska
Permanent Fund in the Alaska Constitution from its existing two-
account structure to a one-account endowment structure. The goal
is for the assets to fund the objectives of the endowment both
today and in the future. The assets of the endowment are
invested with a long-term investment horizon to take advantage
of long-term capital appreciation. An endowment has a
distribution of spending rule that balances spending with
preserving the inflation-adjusted value of the deposited funds.
He emphasized that an endowment preserves intergenerational
equity; it is designed to be of indefinite duration.
3:39:17 PM
SENATOR COSTELLO asked if this elevates the existing endowment
approach that is in statute to the constitution.
MR. BARNHILL answered that the permanent fund currently has a
two-account and SJR 6 proposes to convert that to a one-account
structure in the constitution.
3:40:26 PM
SENATOR REINBOLD asked, 1) why change the permanent fund to an
endowment structure and 2) how doing so will change the
permanent fund dividend (PFD).
MR. BARNHILL answered that it is modernization of the permanent
fund two-account structure that follows the spending rule to
save the principal and spend the income that is generated by
holdings in the principal account. He said the problem with the
legacy trust approach was that trust investment managers tended
to tilt the asset allocation to investments that generated cash
rather than capital appreciation, and that limits the potential
growth of the trust.
He related that beginning in the 1950s interest grew in
diversifying trust assets to take advantage of the stock market
and capital appreciation. The solution was to develop the one-
account endowment structure, and that spread throughout the
country and world in the 1970s, '80s and '90s. He noted that it
has taken time for the legal and accounting rules governing
funds to catch up with investment practices.
3:44:02 PM
MR. BARNHILL advised that since 1976 the permanent fund has been
picking up elements of an endowment. In 1980, the statute was
changed to allow realized capital gains to flow to the earnings
reserve account and inflation-proofing was appropriated back to
the principal account. The legislature started to permit the
permanent fund to invest in an increasing array of investments,
including stocks and real estate. Then in 2005 the Permanent
Fund Corporation received permission to invest as it saw fit so
long as it followed the prudent investor rule on a portfolio
wide basis.
He said the last step the legislature took towards an endowment
structure was in 2018 when it adopted a distribution rule in
Senate Bill 26. Initially the distribution rule was 5.25 percent
of the lagging five-year market value of the permanent fund and
today it is five percent.
MR. BARNHILL advised that the remaining step to convert to an
endowment is to adopt the one-account structure and SJR 6 does
that in the constitution. He maintained that the benefit of
converting to a one-account structure was that there would no
longer be the recurring issue of whether to exhaust the earnings
reserve account. The one-account structure eliminates the
earnings reserve account.
3:47:25 PM
SENATOR REINBOLD commented that the extremely long answer
probably lost many listeners. She asked him to justify, briefly
and in layman's terms, the reason for modernizing the legacy
two-account structure.
MR. BARNHILL said the risk of the two-account structure is that
the balance of the earnings reserve could be drawn down to zero,
and that would mean no money for either permanent fund dividends
or government spending. SJR 6 ensures that never happens.
SENATOR REINBOLD said the idea of keeping the principal in one
account was to prevent it from being used and shifting to a one-
account structure would make the entire account available. She
asked if a percent of market value (POMV) of the total of the
earnings reserve and the principal would be available to
withdraw.
MR. BARNHILL responded that endowments only spend a certain
percentage of the market value each year and the distribution
rule is designed to protect the inflation-adjusted value, so the
endowment remains the same from an inflation perspective at all
points in time. The concept of intergenerational equity is that
the corpus will be maintained for all time.
3:49:56 PM
CHAIR SHOWER asked, under the one-account structure, what size
majority vote would be required to access funds beyond the 5
percent POMV draw.
MR. BARNHILL answered that SB 53 establishes the annual
distribution rule of 5 percent of the lagging 5-year market
value, and SJR 6 establishes that the legislature cannot access
funds in excess of that amount.
3:52:31 PM
SENATOR COSTELLO commented on the legislature's poor track
record in following its own laws and asked what protections the
legislation provides to assure Alaskans that the legislature
would be unable to deplete the fund.
MR. BARNHILL answered that the basic protection is the
legislature setting the distribution rule guided by advice from
the Alaska Permanent Fund Corporation about their projection of
real returns over the next 10-20 years. The idea is that the
legislature should not spend any more than the real return out
of the endowment.
MR. BARNHILL said it is up to the legislature to set the
distribution rule in statute but the legislature would have the
flexibility and discretion to change that distribution over
time. He cautioned that any change should be done in in a way
that preserves the inflation-adjusted value of the permanent
fund so it is sustainable and permanent.
CHAIR SHOWER asked if he agrees that there is no guarantee that
the legislature would not change the statutory distribution rate
at some time in the future.
MR. BARNHILL agreed that the legislation gives the legislature
the ability to set the distribution rule higher than 5 percent.
He described this as a strength of the legislation, maintaining
that the legislature has consistently followed the statute since
the inception of the permanent fund.
3:58:14 PM
CHAIR SHOWER asked him to discuss the reason for setting the 5
percent draw because a number of economists consider a 4.5
percent draw to be more reasonable.
MR. BARNHILL answered that the goal is to find the number that
balances when you look at the real return going back 1-10 years
and you look at the projected real return going forward 1-10
years. For years, 5 percent was thought to be a fair balance,
but many people think that will be hard to achieve going
forward. He advised that the Permanent Fund Corporation and the
Department of Revenue have a lot of information to help inform
the legislature in achieving the right balance.
CHAIR SHOWER asked if the administration was amenable to
reducing the 5 percent distribution rate if the legislature
determines that 4.5 percent or 4.75 percent is more prudent.
4:01:49 PM
MR. BARNHILL replied he can't speak for the administration but
he believes it would be appropriate for the legislature to
schedule hearings so all the information about striking the
right balance can be put on the table.
CHAIR SHOWER asked if he was ready to move on to SB 53.
MR. BARNHILL said he first wanted to touch on dynamic
distribution rules that float based on inflation and market
returns. The point is to smooth the volatility in distributions.
He noted that a number of university endowments use dynamic
distribution rules and that the permanent fund trustees recently
issued Trustees' Paper Volume 9 that discusses different
distribution rules used for endowments. He also mentioned House
Bill 213 that authorized the conversion of the public-school
trust to an endowment. Following the conversion, DOR redeployed
the trust assets to take better advantage of capital
appreciation and so far it is working well. He suggested that
this could also work for the legislature.
MR. BARNHILL restated that SB 53 proposes a static 5 percent
distribution rule and a 50:50 allocation of the distribution
between the permanent fund dividend and government expenses.
CHAIR SHOWER asked Mr. Milks to present the sectional analysis
for SJR 6.
4:05:57 PM
BILL MILKS, Department of Law, Juneau, Alaska, presented the
sectional analysis for SJR 6:
Section 1: This section would amend the existing
language of the permanent fund amendment to provide
that permanent fund income shall be retained in the
permanent fund except as provided in new subsections
(b), (c) and (d) as set forth in Section 2.
Section 2: This section would create three new
subsections in the permanent fund amendment.
Subsection (b) would provide that each fiscal year the
legislature may appropriate an amount as provided by
law from the permanent fund to the general fund that
represents a percentage of the market value of the
permanent fund for the first five of the preceding six
fiscal years.
Subsection (c) would provide that a portion of the
amount appropriated under subsection (b) shall be
allocated for permanent fund dividends as provided by
law. Subsection (c) further provides that a change in
the amount allocated for dividends must be approved by
the voters as set forth in subsection (d).
Subsection (d) would require that a law passed by the
legislature to amend the amount allocated for
permanent fund dividends would not take effect unless
the voters approved the proposed law at the next
statewide election. If approved by the voters, it
would take effect 90 days after certification of the
election or on a special effective date concurred in
by two-thirds of the members of each house upon
passage, whichever date is later.
Section 3: This transition provision would address
four issues.
Subsection (a) would provide that on June 30, 2023,
the unencumbered balance of the earnings reserve
account would be deposited in the permanent fund and
become part of the principal of the fund.
Subsection (b) would provide that the amendments to
the permanent fund would apply to appropriations made
for fiscal year 2024 and thereafter.
Subsection (c) would provide that for purposes of the
permanent fund amendment, the law governing the
percentage of the market value of the permanent fund
that may be appropriated to the general fund under
Section 15(b) would be the law in place at the time of
the adoption of the 2022 amendments to the permanent
fund. Additionally, the law setting forth that
percentage would not be a law that is enacted in an
appropriation bill.
Subsection (d) would provide that for purposes of the
permanent fund amendment, the law governing the amount
allocated for permanent fund dividends under Section
15(c) would be the law in place at the time of the
adoption of the 2022 amendments to the permanent fund.
Additionally, the law setting forth that amount would
not be a law that is enacted in an appropriation bill.
Further, a change in the law regarding dividends would
be subject to the requirements set forth in Section
15(d) requiring voter approval.
Section 4: This section would require that this
amendment be placed on the ballot in the 2022 general
election.
4:10:22 PM
CHAIR SHOWER held SJR 6 in committee for further consideration.
4:10:49 PM
CHAIR SHOWER turned attention to SB 53.
MIKE BARNHILL, Deputy Commissioner, Department of Revenue, said
he explained the mechanics of SB 53 during the discussion of SJR
6, but Mr. Milks would present the sectional analysis.
4:11:03 PM
BILL MILKS, Department of Law, Juneau, Alaska, presented the
sectional analysis for SB 53. [Original punctuation provided.]
4:11:09 PM
Section 1: This bill would establish a new statutory
framework for spending of permanent fund income. The
spending, based on the market value of the permanent
fund, would be allocated for two purposes divided
equally: 50% would be available for dividends and 50%
to the general fund.
Because the bill would establish a new framework for
spending permanent fund income, Section 1 would delete
language from the current AS 37.13.140(a) that
describes a formula to determine the amount of income
of the fund that is available for distribution.
Section 1 would also provide that the amount available
for appropriation from the earnings reserve account is
5% of the average market value of the fund for the
first five of the preceding six fiscal years including
the fiscal year just ended. That percentage is a
reduction from 5.25% that has been in place since SB
26 passed in 2018 although the reduction to 5% is
scheduled to become effective on July 1, 2021 based on
a delayed effective date in SB 26. Finally, Section 1
would amend AS 37.13.140(b) to clarify that the amount
available for appropriation from the earnings reserve
account may not exceed the balance in the earnings
reserve account.
Section 2: This section would amend AS 37.13.145(b) to
provide that of the amount appropriated each year from
the earnings reserve account under AS 37.13.140(b):
• 50 percent may be appropriated to the dividend
fund for dividends and
• 50 percent may be appropriated to the general
fund.
Section 3: This section amends AS 37.13.145(c) to
authorize an appropriation, after the appropriation to
the dividend fund and the general fund, to the
principal of the permanent fund for inflation
proofing.
Section 4: This section regarding permanent fund
income earned as a result of the State v. Amerada Hess
case clarifies that such money is not available for
appropriation to the dividend fund or the principal
and that it shall be deposited into the capital income
fund.
Section 5: This section clarifies that net income of
the mental health trust fund is not included in the
computation of the amount available for appropriation
from the permanent fund earnings reserve account under
AS 37.13.140(b) as described in section 1 of the bill.
Section 6: This section clarifies that the Alaska
Permanent Fund Corporation shall calculate annually
the net income of the fund according to generally
accepted accounting principles and excluding any
unrealized gains or losses.
4:14:06 PM
CHAIR SHOWER noted that he mentioned the ERA and asked him to
clarify how SB 53 and SJR 6 would work separately or in
conjunction.
MR. MILKS explained that SB 53 proposes a 50:50 framework for
spending the permanent fund income if a constitutional amendment
such as SJR 6 were to pass. SB 53 is also trying to work under
the permanent fund provision in existing constitutional law,
which maintains the principal and income (ERA) distinction. In
summary, SB 53 is proposing a framework to work right now when
utilizing the ERA but also to be the pathway forward under SJR
6.
MR. MILKS deferred further explanation to Mr. Barnhill.
CHAIR SHOWER said he wanted the record to reflect the
administration's explanation of how it might work if both bills
passed or if just one or the other passed. SB 53 proposes
statutory changes whereas SJR 6 proposes constitutional changes
with a vote of the people, which are very different lifts.
4:17:43 PM
SENATOR COSTELLO mentioned the obligation to inflation proof and
directed attention to Section 3 on page 2, lines 26-27 of SB 53
that deletes the phrase, "corporation shall transfer" and
inserts the phrase, "legislature may appropriate." She
questioned the reason for making the appropriation to inflation
proof permissive. She also asked why the legislature should be
able to change the five percent of market value (POMV)
appropriation if the people of Alaska voted for a five percent
POMV appropriation. "If the people of Alaska say five percent, I
would want to be held to that." She asked if this package of
legislation provides any assurance that the legislature would be
held to the POMV appropriation that the people of Alaska choose.
4:19:42 PM
MR. BARNHILL answered that the people only vote if the
allocation of the distribution between government and the
permanent fund dividend changes. The people do not get to vote
on the distribution percentage that the legislature sets.
4:20:44 PM
MR. MILKS referenced Senator Costello's question about inflation
proofing in Section 3 and explained that the practice has been
to appropriate the amount for inflation proofing and that is the
reason that SB 53 uses the term "appropriate."
SENATOR COSTELLO clarified that her question was about the
change from the term "shall" to the term "may." Existing law
says the "corporation shall transfer" so they do inflation
proof. She questioned the reason for changing the language to
the permissive the "legislature may appropriate."
MR. MILKS answered that the bill says that because the Alaska
Supreme Court ruled in Wielechowski v. Alaska that to move the
money it must be by appropriation. The "shall transfer" language
is also in the permanent fund dividend section and the Alaska
Supreme Court said that is subject to appropriation.
CHAIR SHOWER said legislators get a little antsy when
legislation does not appropriately require adherence to the
intent. He noted that the assurances that Senator Costello has
asked for are difficult to come by.
4:23:22 PM
MR. MILKS continued the sectional analysis for SB 53.
Section 7: This section clarifies consistent with
section 2 that the legislature places money in the
dividend fund by appropriation.
Section 8: This section repeals AS 37.13.145(e) and
37.13.145(f) which relate to total appropriations from
the earnings reserve. The framework for appropriations
from the earnings reserve are set forth in Sections 1
and 2 which provide for an appropriation from the
earnings reserve account based on the average market
value of the fund and that the money from that
appropriation would be used based on a 50 percent and
50 percent split for dividends and the general fund.
Section 9: This section provides for an advisory vote
at a special statewide election not less than 90 nor
more than 120 days after adjournment of the first
regular legislative session which would ask the voters
whether they approve of this law providing that the
legislature may appropriate five percent of the market
value of the permanent fund each year which would be
used as follows: 50 percent for dividends and 50
percent for government services.
Sections 10 and 11: These sections repeal the existing
provisions of SB 26 related to percentage of market
value appropriation from the permanent fund which are
replaced by Section 2 of this bill providing for a 5
percent of market value appropriation.
Section 12: This section provides that the advisory
vote provision (section 9) takes effect immediately
under AS 01.10.070(c).
Section 13: This section provides that except for
section 12, this Act would take effect July 1, 2021.
4:25:46 PM
CHAIR SHOWER held SB 53 and SJR 6 in committee.