Legislature(2003 - 2004)

03/18/2004 01:44 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 298                                                                                                            
                                                                                                                                
     An Act  relating to  the distribution of  appropriations                                                                   
     from  the  Alaska permanent  fund  under  art. IX,  sec.                                                                   
     15(b), Constitution  of the State of Alaska,  and making                                                                   
     conforming  amendments; and  providing for an  effective                                                                   
     date.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  MIKE  HAWKER  provided  an  overview  of  the                                                                   
legislation.  He  stated that HB 298 would  be effective only                                                                   
if a Percent of Market Value (POMV)  constitutional amendment                                                                   
is approved by  the voters during the 2004  general election.                                                                   
HB 298  provides conforming language  to existing  statute to                                                                   
accommodate changing the constitutional  requirement that all                                                                   
income of  the Permanent Fund  be deposited into  the general                                                                   
fund to the more limiting appropriation  mechanism of  "up to                                                                   
5%"  of market  value  in  the proposed  POMV  constitutional                                                                   
amendment.    It  would  also recognize  the  merger  of  the                                                                   
Earnings Reserve Fund into the Permanent Fund.                                                                                  
                                                                                                                                
Representative Hawker  added that HB 298 provides  the annual                                                                   
appropriation  from   the  Permanent  Fund  under   the  POMV                                                                   
management structure,  to be  divided equally between  paying                                                                   
individual dividends and public services.                                                                                       
                                                                                                                                
Representative Hawker described each section:                                                                                   
                                                                                                                                
   ·    Section 1:  Amends the basis for the Alaska jury                                                                      
        list  to  people   applying  for  a   Permanent  Fund                                                                   
        Dividend.  Former language referenced  applicants for                                                                   
        a "distribution of Alaska income."                                                                                      
   ·    Section 2:  Changes the duties of the Legislative                                                                     
        Budget and Audit  Committee (LBA) from  making annual                                                                   
        recommendations  for   investment   policy  for   the                                                                   
        "income"  of the  Permanent  Fund  to  making  annual                                                                   
        recommendations  for   investment   policy  for   the                                                                   
        Permanent Fund.  The change would  be consistent with                                                                   
        the merger of  the Earnings Reserve  (income) Account                                                                   
        into  the  Permanent   Fund  and  with   the  general                                                                   
        oversight responsibilities  of LBA for  the Permanent                                                                   
        Fund operations.                                                                                                        
   ·    Section 3(a):  Provides that no appropriation                                                                         
        "shall" be made from the Permanent  Fund in excess of                                                                   
        the average  10-year real  rate  of return.   If  the                                                                   
        fund does not  make a 5%  real return over  10 years,                                                                   
        the  amount  available  for  appropriation  would  be                                                                   
        reduced to the real  return.  The  provision provides                                                                   
        a statutory  framework  for implementing  the "up  to                                                                   
        5%" provision  in  the proposed  POMV  constitutional                                                                   
        amendment.                                                                                                              
   ·    Section 3(b):  Provides that annual appropriations                                                                    
        from the Permanent  Fund be  divided equally  between                                                                   
        paying individual dividends and public services.                                                                        
   ·    Section 3(c): Defines the index to be used in                                                                         
        determining the Rate of Inflation.                                                                                      
   ·    Section 4:  The proposed POMV constitutional                                                                          
        amendment allows appropriations based  on the "market                                                                   
        value"  of  that  fund.    The   section  provides  a                                                                   
        statutory mandate that  "market value"  be determined                                                                   
        in  accordance  with  generally  accepted  accounting                                                                   
        principals.                                                                                                             
                                                                                                                                
Representative Croft questioned  the value flexibility and if                                                                   
it  was  realized  or  unrealized.     Representative  Hawker                                                                   
explained  that  under  the  generally   accepted  accounting                                                                   
principals,  the   value  of  business  investments   of  the                                                                   
Permanent  Fund Corporation  would  be measured  on a  market                                                                   
principal.  The unrealized earnings  and losses would be used                                                                   
for determination of the value of the fund.                                                                                     
                                                                                                                                
Representative  Croft  agreed that  would  be  easy with  the                                                                   
stocks  and bonds  but  more difficult  with  the small  real                                                                   
estate investments.  Representative  Hawker suggested that it                                                                   
would be determined in a case-by-case base.                                                                                     
                                                                                                                                
BOB BARTHOLOMEW,  CHIEF OPERATING  OFFICER, ALASKA  PERMANENT                                                                   
FUND CORPORATION,  DEPARTMENT OF REVENUE, explained  that the                                                                   
determination   of  value   under   the  generally   accepted                                                                   
accounting principals for stocks  and bonds that are publicly                                                                   
traded  in  the market  have  a  daily  pricing.   Under  the                                                                   
accounting  principals,  they are  determined  daily for  the                                                                   
value.   For the  real estate  properties direct  investments                                                                   
for buildings,  the generally accepted accounting  principals                                                                   
require that  the value be  recorded at  the cost.   They are                                                                   
not marked up and  most of the income from  real estate comes                                                                   
from the  rental income.   That  is recorded  on an  on-going                                                                   
basis.   If buildings  loose value,  for accounting  purposes                                                                   
that is recorded.                                                                                                               
                                                                                                                                
Representative Croft  asked if it  was only marked  down, not                                                                   
up.  Mr. Bartholomew replied that was correct.                                                                                  
                                                                                                                                
Representative  Croft thought,  "Games could  be played  with                                                                   
what fair market value is".  He  asked other areas that might                                                                   
be problematic.   Mr. Bartholomew advised that  at this time,                                                                   
the Permanent  Fund is  not invested  in anything other  than                                                                   
stocks,  bonds and  real  estate.   The  Board  has made  two                                                                   
decisions   during  the   last  two   meetings  to   allocate                                                                   
approximately 3%  of the value  of the fund into  alternative                                                                   
investments.  The two possible categories are:                                                                                  
                                                                                                                                
   ·    Private equities investing in start-up businesses;                                                                      
        and/or                                                                                                                  
   ·    Buying businesses already in place.                                                                                     
                                                                                                                                
A manager  would be hired to do  this work and they  would be                                                                   
responsible for providing a quarterly  evaluation.  There are                                                                   
generally accepted  accounting principals and rules  that are                                                                   
followed in evaluations.                                                                                                        
                                                                                                                                
Representative  Hawker  added  that  the  Permanent  Fund  is                                                                   
subject to an annual outside audit  that provides a benchmark                                                                   
and standardized  disclosure procedures, providing  assurance                                                                   
that the determination  of fair value would  be objective and                                                                   
consistent  and  not manipulated  by  the management  of  the                                                                   
fund.                                                                                                                           
                                                                                                                                
Mr. Bartholomew continued:                                                                                                      
                                                                                                                                
   ·    Section 5:  Eliminates the current statutory                                                                          
        provision that  any  unexpended operating  budget  of                                                                   
        the Permanent  Fund Corporation  be  included in  the                                                                   
        determination  of  "income"  of  the   fund  for  the                                                                   
        calculation  of income  available  for  distribution.                                                                   
        The   determination    of   income   available    for                                                                   
        distribution will  no  longer be  required under  the                                                                   
        proposed POMV constitutional  amendment,  which bases                                                                   
        the amount that can  be distributed on  market value.                                                                   
        Accordingly,  the  provision   would  no   longer  be                                                                   
        relevant.                                                                                                               
                                                                                                                                
Representative Croft  asked if that amount would  come out of                                                                 
the  legislative  5%.   Mr.  Bartholomew explained  that  the                                                                   
current    constitutional   amendment    would   limit    all                                                                   
appropriations  out of the  Permanent Fund  to 5%,  hence the                                                                   
operating  and the  investment  management  costs would  come                                                                   
from that  5%.  That would make  a portion be placed  for the                                                                   
cost  of management,  approximately  $45-$50 million  dollars                                                                   
per year.                                                                                                                       
                                                                                                                                
Representative Hawker continued:                                                                                                
                                                                                                                                
   ·    Section 6:  The Permanent Fund Corporation manages                                                                    
        the investment portfolio  of the Mental  Health Trust                                                                   
        Authority.  Current statute provides  that the income                                                                   
        from those funds  be determined  "in the  same manner                                                                   
        the corporation  determines  the  net income  of  the                                                                   
        Alaska Permanent  Fund."    The Mental  Health  Trust                                                                   
        Authority   previously    adopted   a   POMV    style                                                                   
        management.    The   section  provides   a  statutory                                                                   
        mandate that  the  net income  of  the Mental  Health                                                                   
        Trust  fund   be   determined  in   accordance   with                                                                   
        generally accepted  accounting principals.   That  is                                                                   
        the same language  adopted for the Permanent  Fund in                                                                   
        Section 4.                                                                                                              
                                                                                                                                
   ·    Section 7:  The section changes language in the                                                                       
        existing Permanent Fund Dividend  payment statutes to                                                                   
        language  that   conforms   to  the   proposed   POMV                                                                   
        methodology.     The   change  has   no   substantive                                                                   
        consequence   on   the   current   dividend   payment                                                                   
        statutes.                                                                                                               
                                                                                                                                
   ·    Section 8:  The section changes language in the                                                                       
        disclosures required  on  the  payment  stub for  the                                                                   
        Permanent Fund  Dividends to  language that  conforms                                                                   
        to the proposed POMV methodology.   The change has no                                                                   
        substantive consequence on the disclosures required.                                                                    
                                                                                                                                
   ·    Section 9:  Repeals statute that would be superceded                                                                  
        by operation  of  the  proposed  POMV  constitutional                                                                   
        amendment.   AS  37.13.140  defines  income  and  net                                                                   
        income of the Permanent  Fund for purposes  of making                                                                   
        distributions.       Under    the    proposed    POMV                                                                   
        constitutional amendment, distributions  are based on                                                                   
        market value,  not on income.   AS 37.13.145  defines                                                                   
        the disposition  of  income  of  the  Permanent  Fund                                                                   
        including inflation proofing and transfers  it to the                                                                   
        dividend account.  Inflation proofing  is inherent in                                                                   
        the proposed POMV constitutional  amendment.  Section                                                                   
        3 of HB  298 provides for  transfers to  the dividend                                                                   
        account.                                                                                                                
                                                                                                                                
   ·    Section 10:  Provides that Sections 3, 4 and 6-9 of                                                                   
        this Act,  take effect  only if a  POMV amendment  is                                                                   
        approved  by  the  voters  during  the  2004  general                                                                   
        election and then takes effect.                                                                                         
                                                                                                                                
   ·    Section 11:  Provides that subject to Section 10,                                                                     
                                                           st                                                                   
        the effective date  of the Act  would be  January 1,                                                                    
        2005.                                                                                                                   
                                                                                                                                
   ·    Section 12:  Provides that subject to Sections 1, 2,                                                                  
        and 5, it will take effective immediately.                                                                              
                                                                                                                                
Co-Chair Williams inquired about  Section 12.  Representative                                                                   
Hawker  noted  that  he  personally   did  not  support  that                                                                   
section,  suggesting  that  it  "clouded"  the  issue.    Mr.                                                                   
Bartholomew added  that the three  changes would  have little                                                                   
effect on the Permanent Fund.                                                                                                   
                                                                                                                                
Vice Chair Meyer questioned how  the Ways and Means Committee                                                                   
determined  the 50/50  split.   He  assumed that  it was  the                                                                   
correct split  but wondered how  it had been determined.   He                                                                   
noted that the  Conference had recommended a  60/40 split and                                                                   
that  the Permanent  Fund Corporation  had  written a  letter                                                                   
indicating that to keep the dividend  at the same level as it                                                                   
currently is, a 70/30 split should be used.                                                                                     
                                                                                                                                
Representative Hawker  advised that the 50/50  split had been                                                                   
an "intuitive  agreement".   It was  a judgment decision  and                                                                   
would be  a "fair" division  of the proceeds.   Justification                                                                   
is highlighted  in the  graph handout  contained in  member's                                                                   
packets indicating,  given the approximate five  year balance                                                                   
of $26 billion  dollars, 5% of that would make  available for                                                                   
public spending,  $1.3 billion dollars.   If that  amount was                                                                   
divided  into equal  components,  half to  the  whole of  the                                                                   
State and  half to the  general fund  for State purposes.   A                                                                   
$650 million dollar  amount would continue to be  able to pay                                                                   
a  dividend check  in  excess  of $1000  dollars  a year  and                                                                   
continue to grow.                                                                                                               
                                                                                                                                
Vice Chair  Meyer commented, based  on that chart,  the State                                                                   
would be receiving $650 million  dollars, an amount more than                                                                   
needed at present  time.  He inquired if in  that case, would                                                                   
then more go toward dividends.                                                                                                  
                                                                                                                                
Representative  Hawker advised  that the Legislature  retains                                                                   
the  complete authority  of appropriation.   Dividends  could                                                                   
either  be increased  or they  could deal  with the  deferred                                                                   
capital needs  or apply funds  to the $6 billion  dollar debt                                                                   
owed  to  the  Capital  Budget   Reserve  (CBR)  fund.    The                                                                   
Legislature is entrusted with  the management of public funds                                                                   
and would be responsible to determine  what would be the most                                                                   
appropriate manner to utilize the remaining funds.                                                                              
                                                                                                                                
Vice Chair  Meyer acknowledged  that the  proposed idea  is a                                                                   
great plan.  He thought that as  the fund grows, the 5% would                                                                   
increase,  as would the  State's needs.   He added  sometime,                                                                   
the  State needs  to consider  inflation proofing  education.                                                                   
If a spending cap was in place,  the formula could work well.                                                                   
                                                                                                                                
Mr. Bartholomew interjected that  from the Board of Trustee's                                                                   
perspective, addressing the use  of earnings would be outside                                                                   
of their  policy responsibility.   The Board has not  taken a                                                                   
position  on  how  the  money  should  be  used  but  instead                                                                   
attempts to  determine what  can be available.   There  is no                                                                   
recommendation   for   the   amounts;   however,   there   is                                                                   
information on  historical and future payments  under various                                                                   
allocation earnings.                                                                                                            
                                                                                                                                
Mr. Bartholomew  noted that the  Permanent Fund  had prepared                                                                   
several   different  analysis.     He   suggested  that   the                                                                   
information   be   looked   at  from   a   couple   different                                                                   
perspectives,  as  there is  a  lot  of volatility  and  that                                                                   
creates weakness in  the current system.  He  pointed out how                                                                   
much of the 5% has historically  been allocated to dividends.                                                                   
There  have been years  when the  entire 5%  could have  been                                                                   
needed.   If the  formula goes  back to  1990, computing  the                                                                   
actual  dividend payments  as a  percentage of  the fund  and                                                                   
then moving forward to 2015 provides  a 25-year window.  That                                                                   
amount of time can encompass the  "good and bad times" in the                                                                   
market.   A medium  case return is  predicted for  the future                                                                   
and looks  more like a  70/30 split.   By starting  next year                                                                   
and looking forward at the next  10-year period, as presented                                                                   
at the Conference of Alaskans,  that amount would result in a                                                                   
60/40  split.   The  difference  is that  in  the next  three                                                                   
years, there  is a large downward  dip in what is  being paid                                                                   
into the dividend because of the  5-year average and the bear                                                                   
market experienced.                                                                                                             
                                                                                                                                
Representative Stoltze  asked if it was intended  to pass the                                                                   
enabling legislation prior to  the passage of the resolution.                                                                   
Co-Chair Williams  responded that it  was his intent  to hear                                                                   
all the bills  that relate to  the POMV and move them  to the                                                                   
House Rules Committee.                                                                                                          
                                                                                                                                
Representative Stoltze  mentioned the applications  and their                                                                   
effective dates  and if it would  require a 2/3 vote  of both                                                                   
bodies.   He wondered what would  happen if one  piece passed                                                                   
and the  other did  not.   If that happened,  when would  the                                                                   
effective dates  take place?  Co-Chair Harris  admitted those                                                                   
were good points.                                                                                                               
                                                                                                                                
Co-Chair Harris  stated that under  the proposed  bill, there                                                                   
would  be a 50/50  split.   He asked  Mr. Bartholomew,  which                                                                   
part of  the 50% would the  fees for the Permanent  Fund come                                                                   
from.  Mr.  Bartholomew understood that if  the direction was                                                                   
to  allocate 50%  of  the available  amount  to the  dividend                                                                   
fund,  then the  Legislature goes  to  the operating  budget,                                                                   
making  the decision  of where  the fee  is taken  from.   He                                                                   
commented  that   he  had  never   been  involved   in  those                                                                   
discussions.                                                                                                                    
                                                                                                                                
Co-Chair Harris  assumed that  it would come  out of  the 50%                                                                   
appropriated to the general fund.   Mr. Bartholomew clarified                                                                   
that if the Legislature was giving  50% to the dividend, they                                                                   
would  then be  taking all  the  operating costs  out of  the                                                                   
other half.  Co-Chair Harris acknowledged that made sense.                                                                      
                                                                                                                                
Co-Chair  Harris voiced  his appreciation  for the hard  work                                                                   
done  by  Representative  Hawker   and  the  Ways  and  Means                                                                   
Committee.  He added that the  concept of taking no more than                                                                   
5% from a "pot  of money" and insuring that  nothing is taken                                                                   
from  the corpus  of the  fund, then  the Legislature  taking                                                                   
money from it would be prohibited.   He pointed out that some                                                                   
legislators  believe that the  main body  of the fund  should                                                                   
not be depleted by the Legislature.   He voiced concerns with                                                                   
the  50/50  split  because  he  did not  think  it  would  be                                                                   
"sellable".   He supported the  60/40 split with 60%  for the                                                                   
dividend and 40% to be used for work in general government.                                                                     
                                                                                                                                
Co-Chair Harris elaborated that  he would be more comfortable                                                                   
with the 40% being used for public  education rather than the                                                                   
general fund.   Public education  is a huge growing  cost for                                                                   
Alaska.   He believed  that it would  be the most  "accepted"                                                                   
funding vehicle to  come before the State, pointing  out that                                                                   
over  90%  of  Alaskans  support   greater  public  education                                                                   
funding.   Even  at  the $650  million  dollars, that  amount                                                                   
could not  cover this year's  $1 billion general  fund dollar                                                                   
cost  for public  education.   He  reiterated  that he  would                                                                   
support amendments "leaning toward" public education.                                                                           
                                                                                                                                
Representative Fate  referenced Section 8, which  would place                                                                   
eligibility    for   dividends    into   the    Constitution.                                                                   
Representative Hawker  pointed out that is  already statutory                                                                   
language.                                                                                                                       
                                                                                                                                
Co-Chair Harris  clarified that  language would only  conform                                                                   
legislation   to   the   amendment   of   the   constitution.                                                                   
Representative  Hawker  noted   that  he  had  not  read  any                                                                   
language  that would  become constitutional.    The point  is                                                                   
that there  are some  statutes under  the conditional  effect                                                                   
language currently  drafted, Sections  1, 2  & 5, would  take                                                                   
effect immediately upon being  signed by the Governor and all                                                                   
the rest  would be  conditional.   Representative Fate  noted                                                                   
that he had misunderstood the reference.                                                                                        
                                                                                                                                
Representative  Croft referenced  Section 3(b)  and asked  if                                                                   
the  5%  would be  deposited  into  the  general fund.    Mr.                                                                   
Bartholomew  looked   at  the  constitutional   amendment  as                                                                   
proposed, noting  that it  does not direct  a deposit  to the                                                                   
general  fund but instead  directs that  appropriation  to be                                                                   
limited  to 5%.   The  underlining  appropriation bill  would                                                                   
determine where money goes.                                                                                                     
                                                                                                                                
Representative  Croft  observed   that  as  a  constitutional                                                                   
matter, it  would be  sitting in the  permanent fund  and the                                                                   
Legislature   would   give   constitutional    authority   to                                                                   
appropriate up to 5% out of it.   Mr. Bartholomew agreed that                                                                   
was correct.                                                                                                                    
                                                                                                                                
Representative Croft asked if  the constitution mentioned the                                                                   
Earnings Reserve Account or if  that account in the Permanent                                                                   
Fund  was really  just a  general  fund account  in the  same                                                                   
area.    Mr.   Bartholomew  explained  that   currently,  the                                                                   
Earnings Reserve was by statute  defined as an account within                                                                   
the  Permanent Fund,  according to  the statutory  definition                                                                   
from 1982.                                                                                                                      
                                                                                                                                
Representative Croft asked the  legal effect in Section 3(b).                                                                   
He  asked  if  the  statute would  have  any  effect  of  the                                                                   
Legislature's  ability   to  appropriate  from   them.    Mr.                                                                   
Bartholomew understood  that all  the Constitution  was doing                                                                   
was limiting the total draw to  5% and then the statute would                                                                   
define where  it goes.  There  would be an  interpretation of                                                                   
Lines   14-18,  regarding   the  legal   requirements.     He                                                                   
recommended Legislative Legal confirm that query.                                                                               
                                                                                                                                
Representative  Croft maintained that  the language  "50% may                                                                   
be appropriated" was odd legal  language.  He asked the legal                                                                   
affect of  Sections 3(b)(1&2), as  he did not see  any limits                                                                   
appropriating authority in that  language without using words                                                                   
such as "must, may or more than".   He requested that someone                                                                   
address  that  concern.   Co-Chair  Harris  acknowledged  the                                                                   
language was "permissive" as voiced  by Representative Croft.                                                                   
                                                                                                                                
Representative  Croft  offered  to  check with  Tam  Cook  at                                                                   
Legislative Legal Services regarding the concerns.                                                                              
                                                                                                                                
Co-Chair Harris explained that  a lot of what the Legislature                                                                   
is allowed to do through statute  would be determined by what                                                                   
the  constitutional  provisions  indicate.   The  legislation                                                                   
would technically do away with  the Earnings Reserve Account.                                                                   
There would be  a single account and then no more  than 5% of                                                                   
that could  be used in  any one year.   If the  earnings were                                                                   
less than  5%, they could not  be used to maintain  the value                                                                   
of the single corpus.  Statutorily,  of that amount, it would                                                                   
be determined  how much  could be used  for dividends.   That                                                                   
language could be in the constitution.                                                                                          
                                                                                                                                
Co-Chair  Williams  noted  that  HB  298  would  be  HELD  in                                                                   
Committee for further consideration.                                                                                            
                                                                                                                                

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