Legislature(2003 - 2004)
05/02/2004 12:04 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR HOUSE JOINT RESOLUTION NO. 26(FIN) Proposing amendments to the Constitution of the State of Alaska relating to and limiting appropriations from the Alaska permanent fund based on an averaged percent of the fund market value. This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken noted that CS HJR 26 (FIN), Version 23-LS1006\Z, which is sponsored by the House of Representatives Rules Committee, by request of the Legislative Budget & Audit Committee, would provide the opportunity to amend the State's Constitution in order to limit annual appropriations from the Alaska Permanent Fund to five percent of the Fund's average market value. REPRESENTATIVE MIKE HAWKER, Chair, House of Representatives (House) Ways and Means Committee, stated that the Alaska Permanent Fund Corporation (APFC) Board of Trustees originated this proposal, which is commonly referred to as the "'clean' Percent of Market Value (POMV) method." He characterized the proposal as "a management tool" for the operations of the APFC, as it would "best protect the value of the fund over the long-term future" and would "provide for a stable and predictable" amount of money to be available from the Permanent Fund for future Legislative appropriation. He also acknowledged that "a number of conceptions" are being discussed through which to accomplish the proposed objectives. ROBERT STORER, Executive Director, Alaska Permanent Fund Corporation, Department of Revenue, reiterated that the APFC Board of Trustees, after several years of study, developed this proposal and considers it to be a "superior method" through which to manage Fund assets. Mr. Storer explained that the proposal would "memorialize inflation proofing in the Constitution … by limiting the amount of funds that can be appropriated from the Permanent Fund to no more than the real income or no more than five percent of the Permanent Fund in any given year." He stated that the proposal would also "marry the management of the Fund with current investment strategies." Mr. Storer expressed that one benefit derived from this proposal would be that Legislators would be assured of "an annual payout from year to year." Continuing, he declared that the proposed payout methodology would be "more stable than the existing methodology based on realized income." He cautioned, however, that were the State to implement the proposed methodology there could be times when no payout would be available. Mr. Storer shared that as a result of current "considerable market appreciation," the Fund has approximately "five billion dollars in profits separated between realized income and unrealized income," and that, due to market conditions, "in just twelve short months the amount of money that has become available has changed dramatically." He cautioned, however, that the reverse scenario could occur depending on financial market volatility. He pointed out that, while the Fund has, historically, reflected steady growth, market volatility has not been incorporated in the extrapolations. He communicated that, were market volatility included, the proposed methodology would prove to provide a more stable payout. Mr. Storer stated that this proposal "would prevent overspending in the good years" as had previously occurred during the Bull Market years; specifically in the areas of the State's Retirement Plans, Endowment Funds, and Foundations. He stated that without "discipline" in spending, that scenario might re-occur under the current methodology. He declared that the proposed plan would maintain the purchasing power of the entire Fund rather than just the principal. Senator Bunde asked whether the proposed plan would address the issue of double inflation proofing which is argued to result from inflation proofing combined with additional revenue derived annually from oil royalties. Mr. Storer responded that the APFC does not support the argument that the Permanent Fund is being double inflation proofed. In fact, he continued, he would provide Committee Members with a copy of a paper [copy not provided] recently developed by the Fund's Director of Finance that addresses this issue. Continuing, he stated that "the key reason" the Fund is not considered as being double- inflation proofed "is that once the appreciation of equities is converted into realized income, it can be distributed under the current scenario." He noted that the Royalties issue is a Constitutional question "as it is embedded" in the State's Constitution. Senator Bunde stated that the financial methodologies of funds such as the Harvard University Trust Fund are often exampled when proponents discuss the POMV plan. However, he attested, these funds do not incorporate royalties and instead grow as a result of the interest generated by the endowment. Therefore, he declared that comparing the Permanent Fund to such things as Harvard's endowment fund is a more complicated issue. Mr. Storer responded that the comparison of the POMV proposal to plans such as the Harvard University Endowment Fund revolves on the issue that "the payout is limited to a percentage of the value of the total fund." Continuing, he declared that while the Permanent Fund receives additional contributions in the form of royalties, these other endowment funds annually receive donations from former students and other sources. These contributions, he attested are recognized as on-going contributions and are incorporated in the anticipated growth of the funds. Senator Bunde observed that were the State to continue to guarantee inflation proofing of the Fund, continuing discussions regarding this issue should be encouraged, as he stated, the scenario could be likened to parents continuing to contribute to a 401K plan while their children were starving. Senator Dyson voiced appreciation for the back-up material the APFC supplied to the Committee; specifically the handout titled "Alaska Permanent Corporation Percent of Market Volume talking points April 2004" [copy on file]. He referenced a section of that material that states, "Inflation proofing is inherent and no longer requires an appropriation. *The Fund is invested for a 5% real rate of return after inflation. If 5% is withdrawn, the increase in value due to inflation will remain in the Fund." He asked the location of language that supports this statement in the bill. Mr. Storer responded that this language is "probably not" specifically addressed in the bill. Continuing, he stated that the Fund's payout target is limited to no more than five-percent "over time." He also noted that currently the Fund's asset allocation targets "a five-percent return in excess of inflation" on its investments, and he stated that this legislation would provide "guidance" that would assist the PFC " He voiced confidence "that over time, we will achieve that goal." He noted that HB 298- DISTRIBUTIONS OF APPROPS FROM PERM FUND is companion legislation to this bill as it would provide additional statutory guidance, such as a "a ten-year moving average" as "the benchmark" upon which to compare Fund returns to inflation. He noted that were this goal unmet, less money would be available for appropriation. Representative Hawker understood Senator Dyson's question to be whether this bill explicitly states that, "the Fund makes its investments for a five-percent rate of return." Continuing, he noted that language in Section 2(b), on page two, lines one and two addresses the amount of money that could be appropriated. (b) Appropriations from the permanent fund for a fiscal year may not exceed five percent of the average of the market values of the fund on June 30 for the first five of the six fiscal years immediately preceding that fiscal year. Representative Hawker stated that this language would provide the Board of Trustees and the Fund's employees and managers a target of a five percent return after inflation as the necessary investment benchmark upon which to develop investment models. Therefore, he opined that this legislation does establish that benchmark rate of return. Senator Dyson voiced that the responses to his question are "somewhat" unsatisfying as he had hoped they would acknowledge that the amounts reflected in Section 2(b) be adjusted for inflation. He suggested that the language be changed to a five percent of the market value in real rather than "inflated dollars." Representative Hawker responded that adding language to the effect of allocating up to five percent of after inflation dollars each year would lead to the boarder discussion of what "is implicit" in the "pure market value formulation." Continuing, he explained that the investment model this bill is based upon recognizes that in the future there might be individual or combined years "with great market gains" or market declines. He stated that the goal of this legislation is to adopt "the concept of aggregate value" in that the Fund's investments would demonstrate that, over time, they could perform at levels in which their rate of return is in excess of five percent as opposed to dwelling on whether the gains resulted from inflation proofing or royalties. Mr. Storer declared that the Corporation "invests to achieve a five percent real rate of return" and "strongly" believes this goal is achievable. He stated that Senator Dyson's suggestion that the language be more explicit could create more problems as it might require "time to achieve that goal." He reflected that with the exception of the most recent years, the Fund's historical real rate of return, over time, has been in excess of six-percent. Therefore, he stressed that the period of time over which to achieve the goal would be an issue. Senator Dyson commented that even though the bill is strengthened by language mandating that a payout be based on a five-year average, he is concerned that the resolution's sponsors "are reluctant" to specify in the resolution that the payout would be based on a five-percent real rate of return after inflation. Mr. Storer declared that the Corporation stands by that fact that the payout would be based on a five-percent real rate of return after inflation, as depicted on the Corporation's website. However, he declared the concern is that adding further language would confuse the issue regarding long-term verses short-term issues. Senator Dyson opined that the inclusion of the language, "after inflation," would serve to garner more support for the resolution. AT EASE 12:26 PM / 12:27 PM Senator Dyson asked the sponsors to provide the Committee with further information regarding their position on this language issue. Mr. Storer responded that a "good answer" would be forthcoming. Senator Bunde commented that while he supports this resolution, he is worried about citizens' response to the complexity of the issue. Co-Chair Wilken ordered the bill HELD in Committee.