Legislature(1999 - 2000)
03/24/2000 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 BILL NO. 18
"An Act making a special appropriation from the
earnings reserve account to the principal of the
permanent fund; and providing for an effective date."
REPRESENTATIVE RAMONA BARNES noted that she has only offered
two bills in her legislative career. She read from her
sponsor statement:
I am offering House Bill 18 to ensure an alternative
approach is available to the ongoing debate over the
Permanent Fund and the use of its earnings.
As the title suggests, HB 18 would make a special, one-
time appropriation from the Earnings Reserve to the
corpus of the Permanent Fund. The appropriation would
include the existing balance of the Earnings Reserve on
June 30,1999. As the bill's sponsor, I ask the Finance
Committee to amend the effective date in HB 18.
I believe placing the existing balance of the earnings
reserve into the corpus of the Fund would serve the
dual purpose of further protecting the funds and
ensuring the growth of the Permanent Fund.
Representative Barnes added that she received additional
information that needed to be considered by the House
Finance Committee. She observed that if the whole earnings
of the Permanent Fund were put into the corpus of the fund
that it could lead to the reduction or elimination of the
dividend. She asked the Committee to take action to protect
the dividend.
Co-Chair Mulder observed that members were provided with a
proposed committee substitute, work draft, 1-LS0163\D,
Cramer, 3/20/00 (copy on file). The committee substitute
would lower the appropriation to $250 million dollars. He
agreed with Representative Barnes that if there were a
deposit of the unappropriated balance that there is a real
likelihood that there could be insufficient funds remaining
in a protracted downward market to pay the dividend.
BOB STORER, EXECUTIVE DIRECTOR, ALASKA PERMANENT FUND
CORPORATION, DEPARTMENT OF REVENUE observed that the
Corporation contracted with Callan Associates Incorporated
for a sophisticated model to evaluate a number of asset
allocations and decisions including the volatility of any
given year. He provided members with a handout titled
"Volatility Model, Move Realized Earnings Reserve to
Principal at the end of FY00" (copy on file).
Mr. Storer reviewed assumptions used in the modeling
provided to the Committee in the handout. Actual investment
results were used through December 31, 1999. He explained
that expected median returns for the next 5 years were
developed in each asset class. The risk associated with each
asset class is also reviewed. The statutory formula for the
dividend and the current limitations of the Earnings Reserve
Account were used. The model was based on the Department of
Revenue's fall 1999 estimates for new income. The model was
based on the transfer of the realized earnings reserve into
the principal at the end of fiscal year 2000.
Mr. Storer reviewed current asset allocation as contained on
page 3 of the handout:
Cash Equivalents 0%
Domestic Bonds 35%
Active Large Cap Domestic Equities 17%
Passive Large Cap Domestic Equities 13%
Small Cap Domestic Equity 7%
International Equity 16%
Real Estate 10%
International Bonds 2%
Mr. Storer reviewed the market assumptions as contained on
page 4 of the handout:
Inflation over the next 5 years - 3.25%
Median expected return - 6.7 %
U.S. Equity market of large companies - 8.9%
U.S. Equity market of small companies - 10.40%
International Equities - 9.75%
Real Estate - 8.3%
International Bonds - 6.5%
Mr. Storer noted that the standard deviation on domestic
bonds would be 5.5%. Two-thirds of the time the median would
be expected at plus or minus 5.5 percent. Returns between
12.2 and 1.2 percent would be expected two-thirds of the
time.
Vice Chair Bunde pointed out that the expected return could
be twice as much or twice as little. Mr. Storer agreed and
gave further examples of the range of returns.
Mr. Storer reviewed page 5 of the handout: range of ending
market value. At the end of 1999 the Fund was $25.132
billion dollars. The median expected at the end of the year
2000 is $27,216 billion dollars. At the end of the year
2003, the median of $32,453 billion dollars is expected. At
the 75th pecentile in the year 2003, the Fund would be
$27,633. He noted that there is a 10 percent chance that the
Fund would be worth $25,246 billion dollars in the year 2003
if there were a prolonged bear market.
Co-Chair Mulder clarified that the range of ending market
value includes the total fund assets.
Mr. Storer reviewed the range of principle balance. The
median expected return is 8.25 percent with the balance
inflation proofed. If the earnings were not realized there
would be difficulty inflation proofing. The range of
inflation proofing includes the deposit of the realized
earnings reserve into the fund. Under a median case, the
principle balance would be $19,699 billion dollars at the
end of the year 2000. This would increase to $24,551 in the
year 2001.
Vice Chair Bunde clarified that the chart indicates what
would have occurred if HB 18 had been law and the excess
earnings were placed back into the fund.
Mr. Storer discussed page 7: the range of ending realized
earnings reserve balance. Realized earnings drop from $3.9
billion dollars in FY00 to $928 million dollars in FY01.
This reflects the deposit into the principle. Additional
realized income in FY01 would be $928 million dollars. In
the lower case scenario there would be virtually no income
or a probability of negative income. At the 90th percentile
the Earnings Reserve Account would be a negative $953
million dollars by the year 2003. There is a 10 percent
chance that the Account could grow to $6.2 billion dollars.
Vice Chair Bunde clarified that by law the Corporation is
required to use the imprudent investor rule. Mr. Storer
agreed and added that a prudent investor would use the
median base.
Mr. Storer reviewed the range of total distributed income.
The mid case scenario at the end of the year 2000 would be
$1,260 billion dollars of available distributed income. If
the decision were made to put the earnings reserve balance
into the corpus the distributed income for the year 2003
would be $1,390 billion dollars under the median scenario.
He reviewed further scenarios and noted that available
distributed income could range from $190 million dollars to
$1,976 million dollars in the year 2003.
Mr. Storer referred to the range of the per capita dividend.
In 1999 the dividend was $1,770 thousand dollars. By the
year 2003, the dividend would be $2,264 thousand dollars
under the median scenario. The pay out could range from $263
dollars to $3,240 thousand dollars by the year 2003.
Co-Chair Mulder stressed that there is a range of
volatility. In response to a question by Co-Chair Mulder,
Mr. Storer clarified that current statute provides that the
determination of the dividend is derived from one half of
the balance in the Earnings Reserve Account if there are not
sufficient funds to make a pay out on the five year rolling
average. Co-Chair Mulder observed that in a protracted bear
market where a deposit of the Earnings Reserve balance were
made into the Permanent Fund there would no longer be funds
available for the default mechanism to kick in with any
strength similar to the current size of the dividend.
Mr. Storer noted that the Earnings Reserve is currently $7.7
billion dollars. Unrealized gains are $3.6 billion dollars.
The balance of $4.1 billion dollars is income realized
through February 29, 2000. This is the amount that would be
available for transfer into the principle of the Fund.
Vice Chair Bunde questioned the affect of the legislation on
the dividend. Mr. Storer stated that the deposit of $250
million dollars would have a nominal affect on dividends.
Co-Chair Mulder questioned if there would be risk to the
dividend. Mr. Storer stated that the more that is retained
the less the impact on the dividend on the out going years.
Co-Chair Mulder observed that the intent is not to create
risk to dividends, but to make a contribution to the Fund.
Vice Chair Bunde questioned how much the legislature had
deposited into the Fund over the last 10 years. Mr. Storer
did not have an exact number, but stated that the amount has
been significant.
HB 18 was Heard and Held in Committee for Further
deliberation.
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