Legislature(2003 - 2004)

04/14/2004 01:55 PM House FIN

Audio Topic
* first hearing in first committee of referral
+ 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.                                                                               

Document Name Date/Time Subjects