Legislature(2003 - 2004)
06/23/2004 09:10 AM House JUD
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* first hearing in first committee of referral
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HJR101 - CONST. AM: PERM FUND P.O.M.V. [Contains mention of HJR 102 and HJR 26.] Number 1905 CHAIR McGUIRE asked the committee to focus attention on HJR 101. She noted that the concept embodied in HJR 101 was heard in committee during the regular session. REPRESENTATIVE OGG asked for clarification regarding the constitutional language being deleted by HJR 101. Number 1957 BOB BARTHOLOMEW, Chief Operating Officer, Alaska Permanent Fund Corporation (APFC), Department of Revenue (DOR), said that the Alaska State Constitution says that all income received from the permanent fund shall be deposited in the general fund unless otherwise provided by law, and that in 1980, the legislature passed a statute stating that all income from the permanent fund will be retained in an earnings account - within the permanent fund - available for appropriation. In response to another question, he said that the record reflects that the intent of the constitutional language was to provide the legislature with the maximum flexibility in determining the appropriate use of the earnings. REPRESENTATIVE OGG asked whether it would be fair to say that the change proposed via HJR 101 would limit the legislature's ability to utilize the earnings of the permanent fund. MR. BARTHOLOMEW offered that the proposed change will limit the amount of money that can be appropriated each year, not how that money can be utilized. He said that the board of trustees of the Alaska Permanent Fund Corporation (APFC) recommends this change because the permanent fund is invested for the long term, with one goal being to protect the principal and another goal being to generate earnings for use by the legislature. These goals will be more easily met if it is known how much money is going to be used every year. In addition, one way to protect a large pool of money is to protect it against inflation and, to that end, the board recommends constitutionally limiting appropriations from the earnings of the permanent fund to a sustainable yield so as not to erode the pool's purchasing power. MR. BARTHOLOMEW mentioned that if the formula proposed were used currently, $1.3 billion would be available each year for appropriation. He relayed the board's belief that the current rules, which were written 25 years ago, may no longer work in today's volatile, capital-market world. The change proposed by HJR 101 will allow both the legislature and the public to know what to expect from the permanent fund. REPRESENTATIVE OGG asked how much money the legislature could appropriate under the current constitutional language. MR. BARTHOLOMEW estimated that if using realized income in the calculation, it would be close to $2 billion before permanent fund dividends (PFDs) are paid, and close to $1.4 billion after PFDs are paid. He pointed out, however, that if income currently unrealized becomes realized, the amount would change. He added that it is the professional investment managers hired by the board who determine when income becomes realized, and this produces some volatility with regard to the amount that's available for appropriations. He opined that the changes proposed via HJR 101 would eliminate that volatility. MR. BARTHOLOMEW suggested that by getting caught up in the debate over how appropriated funds are to be used, people are losing sight of the fact that there are some things that can be done to help protect the permanent fund for the future when markets go down or become volatile. He reiterated that the board of trustees is seeking to protect the permanent fund and, to that end, is recommending the changes proposed in HJR 101. CHAIR McGUIRE remarked that the proposal is a sound management approach, and surmised that people are finally beginning to realize that. Number 2301 MR. BARTHOLOMEW, in response to a question, relayed his understanding that there is an attorney general's opinion that says the legislature may only appropriate the permanent fund's realized income. REPRESENTATIVE SAMUELS asked how HJR 101 differs from HJR 26. MR. BARTHOLOMEW offered his understanding that the two resolutions are very similar and contain the same concept and objectives. In response to another question, he said that all earnings are reinvested immediately and so "income" is available on paper; in other words the act of reinvesting earnings does not [preclude them from being considered realized income]. TAPE 04-87, SIDE B Number 2373 REPRESENTATIVE GRUENBERG said his concern is that the investment managers might choose to sell assets in order to make more funds available for appropriation. MR. BARTHOLOMEW said that concern is one reason to adopt a percent-of-market approach; the buying and selling of assets under a percentage of market value (POMV) proposal is separate and has no affect on what's available for distribution. Another option would be for the legislature to set an amount it wants as a spending limit on the permanent fund and then adjust statutes accordingly. In response to a question, he relayed that in 1996, when there was a large accumulation of unrealized gains, the board of trustees went through an eight- or nine-month deliberative process in order to determine whether to realize a portion of those gains and include it in the dividend formula. CHAIR McGUIRE mentioned that there is a concern that the board of trustees could be making management decisions based on political agendas. Number 2209 WILLIAM A. CORBUS, Commissioner, Department of Revenue (DOR), noted that recently passed legislation prevents the governor from removing board of trustee members except for cause. REPRESENTATIVE GARA mentioned that Legislative Legal and Research Services is drafting an amendment for him which he hopes to offer as a compromise solution that all members and the community can accept. He went on to say: There is debate ... among all of us on how much should go into a dividend: some of us want a bigger dividend, some of us want a smaller dividend, some of us want it in the [Alaska State] Constitution, some of us don't, some of us want a public vote. I don't know where that's going to go. We might come out of this special session, if we just focus on the proposals that have been made so far, with nothing. The ... two places where there seems to be consensus is, some version of POMV for managing the permanent fund seems appropriate, with maybe some tweaks here or there, ... [so] maybe we stick a clean POMV on the ballot ...; the other part that there is growing consensus on across party lines ... is that we need to reinstate some sort of municipal revenue sharing through maybe a community dividend, and so the governor has proposed - and many of the rest of us have proposed - a portion of the POMV proceeds to be used for a community dividend, whether it's 5 percent, 10 percent, [or] 7.5 percent. ... I would like everybody to think about this: a clean POMV proposal on the ballot, plus the 5 or 7.5 or 10 percent for a community dividend. [Those are] ... the parts that I think we can all agree on. Maybe [there could be] a separate advisory vote or separate bill on the dividend amount - my preference is [to use] the current dividend formula, but leave that ... whole dividend thing to the side. I want people to consider a proposal that would address the parts I think we can come out of here with some consensus on. ... [Commissioner] Corbus, do you have any thoughts about whether or not the administration might support something like that if we can't forge consensus on something bigger? COMMISSIONER CORBUS replied: "I think so; I think that ... there are two proposals on the table: pure POMV, and then the enshrinement of the dividend - and 45 percent of the payout to education, 5 percent to the municipal revenue sharing." We're just looking for a solution," he added. Number 2094 REPRESENTATIVE GARA asked whether the administration would be amenable to just a clean POMV and include in it a provision for a community dividend. COMMISSIONER CORBUS replied: "The administration has made two proposals; if [the] legislature has a counter proposal to make, we certainly would consider it." REPRESENTATIVE GARA said he might support the POMV proposal as written, but he does have a couple of reservations, one of them being that the market could take a downturn for a long period of time, for example, 20 years. He asked whether the APFC has considered adding to the POMV proposal a provision that says the legislature may not dip into the principal at all or may not dip into the principal by more than 1 or 2 percent. He asked what amount the POMV formula would yield during a 20-year market downturn. MR. BARTHOLOMEW said that the board has considered the issue of what happens in prolonged down markets under a 5 percent spending limit, and that is why the board has agreed to adopt statutory "guardrails" which would provide, in a prolonged down market, a mechanism by which to trend down payouts to keep pace with the market. The concept of leaving the protection of principal in the Alaska State Constitution has been complicated by well-meaning actions over the last 15 years of the legislature. If the permanent fund had been left alone, where all the earnings that hadn't been spent had been accumulated in an earnings account, there would be $7 billion in there; that's how much the permanent fund has earned in excess of the protection of inflation. MR. BARTHOLOMEW explained that if that amount had been in an earnings account, he suspected that there wouldn't be any worry about near-term down markets because there would be a cushion. However, the legislature swept those reserves into principal and they are now locked up; this has created a near-term problem, but only for the next 2-4 years, wherein there is a risk of going to a reduced or a zero payout. For this reason, the board is suggesting a guardrail/safeguard to protect the fund such that the payout won't be taken to zero or be at risk. And although the risk is small, if Alaska's economy depends on a dividend or a dividend is used for public services, then if things go wrong at the wrong time, it could result in an economic crises. MR. BARTHOLOMEW relayed that one of the debates that took place in the House Finance Committee was whether the aforementioned guardrails should be in statute or in the Alaska State Constitution, and that committee decided that the best place would be in statute. Number 1883 REPRESENTATIVE GARA asked what the majority of institutional funds use as their POMV percentage. MR. BARTHOLOMEW said that approximately 80 percent of institutional funds use between 4 and 5.5 percent. He indicated that those funds that used higher percentages during the bull market are now in trouble. He explained that the 5 percent figure chosen by the board and director is more conservative than it might first appear because the permanent fund uses a five-year average; this neutralizes the volatility of both up and down markets, and results in about a 4.6- or 4.7-percentage rate of payout. He also noted that most funds pay out the expenses of managing the fund before calculating the payout; the legislature, on the other hand, calculates those costs as part of the permanent fund's payout percentage. Thus, he opined, the proposal of a POMV set at 5 percent is very practical, reasonable, and appropriate. REPRESENTATIVE OGG offered his understanding that under HJR 101, there is no mandate to spend 5 percent; the legislature, in fact, could choose to spend a much smaller percentage. MR. BARTHOLOMEW concurred. REPRESENTATIVE GRUENBERG opined that the proposal before the committee would allow investment mistakes or investment actions based on political agendas to be covered up, thus reducing the public accountability of the fund's managers. COMMISSIONER CORBUS said he does not see the proposal in that light. MR. BARTHOLOMEW offered his belief that both currently and in the past, the permanent fund has been managed with as much disclosure and transparency as possible. How the permanent fund is invested is dictated by statute and the transparency of monthly reports ensures that any inappropriate investments are readily visible. Under the proposal, as an additional safeguard, it would still up to the legislature to decide whether to dip into principal. He offered his belief that there are several safeguards in place addressing Representative Gruenberg's concerns. REPRESENTATIVE SAMUELS offered his opinion that the state should follow the example set by the majority of other funds and adopt a POMV proposal. Number 1550 REPRESENTATIVE GARA made a motion to adopt Conceptual Amendment 1, "to add into HJR 101 also the community dividend at 7.5 percent, and then leave the rest of the POMV proceeds up to the legislature to allocate among dividends and other services." Number 1533 REPRESENTATIVE SAMUELS objected. He opined that it would be more appropriate to have a clean POMV resolution - such as is proposed via HJR 101 - and then perhaps alter HJR 102 by stripping out the PFD and education funding provisions. He noted that the concept embodied in HJR 102 has not yet been debated in the House Judiciary Standing Committee. REPRESENTATIVE GARA said he would like to see a municipal revenue sharing provision in HJR 101 because if HJR 102 is not adopted by the legislature, the community dividend provision in it will not go before the voters. By placing all the things that members can agree on in HJR 101, it won't matter if HJR 102, which contains provisions that members aren't yet agreeing on, fails. He suggested that it will ultimately be cleaner to put the municipal revenue sharing provision in HJR 101 and then pass both it and the POMV proposal. He then calculated that a 7.5 percent municipal revenue sharing dividend would put about $90 million into the municipal revenue sharing program, approximately equaling what it was 10 years ago, and offered his belief that Governor Walter J. Hickel once said that there are approximately 40 communities relying either exclusively or almost exclusively on municipal revenue sharing until that provision was vetoed by the [current] governor last year. REPRESENTATIVE GARA mentioned that even Anchorage has felt the absence of municipal revenue sharing via an increase in property taxes. By instituting a municipal dividend, Anchorage could get some relief from property taxes as well as enjoy an increase in education funding. He went on to say: With the understanding that [Legislative Legal and Research Services] ... is drafting the 7.5 percent community dividend provision for [HJR] 101, I would still move the conceptual amendment of POMV plus a 7.5 percent community dividend. In effect, unless we change the permanent fund dividend formula, that would leave the ... the excess earnings available for expenditure on ... whatever the legislature determined it should be spent on. But just address the community dividend here. Number 1398 REPRESENTATIVE HOLM offered his belief that in his borough, the community dividend has been eaten up 100 percent by the Teachers' Retirement System (TRS) and Public Employees' Retirement System (PERS) problem, and remarked that this problem has yet to be addressed. He characterized adopting the POMV approach such that the state won't be able to pay for the PERS and TRS problem as "hedging our bet." He remarked that although he doesn't have a problem with the POMV approach, he does have a problem with not being able to fund that which the state has already contracted to fund, and suggested that for some areas of the state any funds they receive from a municipal dividend will go to pay for the PERS and TRS shortage rather than for other needed services. REPRESENTATIVE OGG recalled that the House did pass out a clean POMV resolution, and suggested that they should do so again. He characterized Conceptual Amendment 1 as cluttering up the current proposal, said he is not willing to pass on such to the other body, and suggested altering HJR 102 instead. CHAIR McGUIRE said she admires Representative Gara for coming forward with proposed amendments as an attempt at finding consensus, adding that she agrees with his summation of what members have consensus on. REPRESENTATIVE GARA offered his belief that a POMV proposal with a community dividend provision will address Representative Holm's concern regarding funding the PERS and TRS shortages, and still leave money for other needed municipal services. The proposed changes to the constitution will not preclude other items from being funded via statutory provisions. Number 1103 REPRESENTATIVE GARA withdrew Conceptual Amendment 1, and made a motion to adopt in its stead as Amendment 1 an amendment labeled 23-GH2168\A.1, Cook, 6/23/04, which read: Page 1, line 1: Delete "and limiting" Page 1, line 2, following "fund": Insert "and limiting those appropriations" Page 1, line 15: Delete "a new subsection" Insert "new subsections" Page 2, following line 3: Insert a new subsection to read: "(c) Each fiscal year at least seven and one- half percent of the total amount available for appropriation under (b) of this section shall be appropriated as State aid to municipalities and other communities. The balance remaining available may be appropriated for other public purposes, including a program of dividend payments for residents of the State established by law." Number 1101 REPRESENTATIVE ANDERSON objected. REPRESENTATIVE OGG expressed a concern that such a change could result in the legislature being forced to fund a municipal dividend at the expense of education funding. CHAIR McGUIRE remarked that such is a concern with enshrining the permanent fund in any fashion, that it could result in something being funded at the expense of some other needed service. Number 0992 A roll call vote was taken. Representatives Gara and McGuire voted in favor of Amendment 1. Representatives Ogg, Gruenberg, Samuels, Holm, and Anderson voted against it. Therefore, Amendment 1 failed by a vote of 2-5. Number 0988 REPRESENTATIVE SAMUELS moved to report HJR 101 out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HJR 101 was reported from the House Judiciary Standing Committee.
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