Legislature(2003 - 2004)
04/15/2004 09:08 AM House RLS
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 298-DISTRIBUTIONS OF APPROPS FROM PERM FUND CHAIR ROKEBERG announced that the final order of business would be 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." CHAIR ROKEBERG related his belief that there is some question about the cash flow incidence with regard to HB 298, and therefore requested that Mr. Storer speak on the matter. He announced that no further action would be taken on HB 298 today. Number 512 ROBERT STORER, Executive Director, Alaska Permanent Fund Corporation (APFC), Department of Revenue, explained that as HB 298 now stands, it would draw down money for payment for the dividend and for government all on one day. The payment would be withdrawn 14 days after the end of the fiscal year. Mr. Storer acknowledged that as it applies to the dividend, historically there has been a single draw down, which makes sense because the funds are transferred to the Department of Revenue and then the payments go out quickly afterwards. While [APFC] can live with and manage drawing down the money on one day, it believes there are more effective ways to manage the assets of the permanent fund. Therefore, Mr. Storer recommended that the draw downs for government occur on 12 equal payments throughout the year. He explained that when large sums of money are liquidated, material adjustments to the asset allocation of the fund occur. Furthermore, there are significant transaction costs. He pointed out that the act of selling the security comes with a transaction cost. "To the degree one can make it over some systematic payout, the permanent fund can more effectively manage the asset allocation and the assets of the fund," he suggested. Mr. Storer clarified that under the suggestion of government draw downs occurring over 12 equal payments, there [APFC] wouldn't have to make material adjustments to asset allocation, but rather draw down on cash flow every month. Therefore, rather than reinvest cash flow in the equity market, it would be distributed out to the government. MR. STORER informed the committee that if the draw all goes to the general fund at the beginning of the fiscal year, the general fund would earn interest on that larger sum of money. However, if the funds are retained with the permanent fund for a longer period of time, [APFC] invests for a longer period of time and thus the permanent fund [monies] earn a higher rate of return than the general fund. "On some time basis, one would earn more money in the aggregate at the permanent fund. So, you would not only be mitigating against transaction costs, but you would earn some higher rate of return if the money resided at the permanent fund," he explained. Number 538 CHAIR ROKEBERG related his understanding that because of the cash flow requirements of the general fund, there are timing issues. He further related his understanding that currently [the legislature] draws down from the constitutional budget reserve fund (CBRF) as part of a cash cushion. The aforementioned draw down is as much as $400 million of the moving average throughout the year, depending upon the timing of other revenue receipts. MR. STORER agreed. He recalled that there is a larger draw down of the CBRF in the first quarter of the fiscal year, which diminishes as it goes along. Therefore, maybe there are other alternatives that could be worked out with the Department of Revenue. CHAIR ROKEBERG inquired as to how the primary liquidation of assets or realized gains necessary to fund the permanent fund dividend are performed. He mentioned his belief that it depends on market conditions. "I recall ... '01 or '02 where ... you caught it on the rise to be able to ... provide the availability of cash flow that most people don't recall now," he asked. MR. STORER said that's correct. Mr. Storer pointed out that over time it has varied. However, he noted that [APFC] knows fairly well what the obligation, plus or minus $50-$100 million, will be to the Department of Revenue well in advance. Therefore, to some degree the asset allocation and the market environment determine the payout and funding. He recalled that it used to be that [APFC] would structure the bond portfolio such that some [investments] matured around the payout. However, the aforementioned is no longer done because the fund is mature and fully invested in the equity markets. Currently, [APFC] makes a recommendation to the Board of Trustees of the Permanent Fund at the June board meeting. The recommendation relates how [APFC] proposes to liquidate the assets, while being mindful of market conditions and asset allocation. Furthermore, staff is driven to reduce transaction costs as much as possible. CHAIR ROKEBERG inquired as to the period of time those transactions are made. MR. STORER answered that depending upon the markets, [the transactions] could occur within a month to three months. He specified that it would be over a month because of the timing of the payment to the department. "That's not to say we don't build up some cash in the bond portfolio to mitigate transaction costs," he explained. The [APFC] reports to the board what it does in terms of liquidation. CHAIR ROKEBERG surmised, "I think the issue does need to be identified and worked with. You're asking for a 12-month window, basically, for a portion of the draw down, but ... I think you need to have some type of window in which to operate that's not a single day as required in the bill, fundamentally now. Is that correct," he asked. MR. STORER replied yes, pointing out that the legislation provides 14 days to liquidate the securities. The longer [APFC] has to liquidate the portfolio, the more efficient [APFC] can be in reducing the transaction costs. Number 579 CHAIR ROKEBERG announced, "Rather than the committee taking any action on this today, I'd like the various bill sponsors and the corporation to massage this ... rather than get too involved in the minutia of this stage of its incubation." Chair Rokeberg announced that HB 298 would be held over and that he anticipated it being before the full House next week.
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