Legislature(2001 - 2002)
04/08/2002 02:06 PM Senate HES
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 311-STATE TRUST FUND MONIES
MR. ZACH WARWICK, staff to Senator Therriault, sponsor of SB 311,
gave the following testimony. SB 311 was introduced after Senator
Therriault met with Department of Revenue staff who came up with
the suggestions in the bill. SB 311 will give greater flexibility
to the commissioner of the Department of Revenue in investing the
principal of the public school trust fund, the Alaska children's
trust, and the Alaska heritage endowment fund.
When the trust funds were set up, the statute was written so that
any money appropriated would come from the net income account of
the fund. However, when investing in securities that appreciate
in value rather than produce an income, it is impossible to
appropriate any income. As a result, the funds are invested in
CDs and bonds.
SB 311 will allow investments to be made in higher yield
securities. Current statutory language provides no incentive to
invest in securities that receive higher yields. SB 311 will
allow appropriations to be made based on the market value. It
directs the commissioner to invest assets in instruments that
yield at least five percent, to inflation proof the funds, and to
report the market value of the funds to the legislature annually,
as well as the money appropriated from the fund. Basically, SB
311 will create a more productive group of funds that can be
better used by the trust boards.
CHAIRWOMAN GREEN asked if SB 311 applies to two funds.
MR. WARWICK said it applies to three: the public school trust
fund, the Alaska children's trust fund and the Alaska heritage
endowment fund.
CHAIRWOMAN GREEN asked about the Alaska heritage endowment fund.
MR. WARWICK said it is a fund for public museums.
CHAIRWOMAN GREEN asked if SB 311 will allow a more competitive
and aggressive investment scheme.
MR. WARWICK said that is correct.
SENATOR DAVIS asked how much money is in the public school trust
fund.
MR. NEIL SLOTNICK, Deputy Commissioner of the Department of
Revenue, said SB 311 is important to DOR because it creates a new
and better system for managing funds. He emphasized that SB 311
does not create new trusts or change the status of any of the
trusts created in statute.
MR. SLOTNICK explained that this issue grew from Senator
Phillips' effort last year to establish the Arctic Winter Games
endowment. Senator Phillips worked with DOR to create an optimal
set of instructions to manage an endowment, using modern
portfolio theory to provide a set of instructions so that the
portfolio is managed on the basis of total return. The
instructions also provide for automatic inflation proofing. He
asked Mr. Jenks to elaborate.
MR. JOHN JENKS, chief investment officer for the Treasury
Division, DOR, informed members that SB 311 will improve
flexibility and align the investment process with the long term
nature of these trust funds. It separates the investment decision
from the accounting decision. Under current statute, the type of
income, whether it be dividend or interest income or a stock that
increases in value, determines what happens to the income. That
results in an inefficient investment mix of stocks and bonds with
a lower long-term return. To not have to distinguish between the
type of income each produces will significantly improve the
flexibility and efficiency of the investment process. SB 311 also
incorporates a market value payout method that is spread out over
a three year rolling monthly average of the market value. That
method provides a relatively stable and predictable revenue
stream, which will enable better planning for long term programs.
SB 311 also contains an explicit inflation-proof mandate.
CHAIRWOMAN GREEN asked if DOR did something similar to this about
three or four years ago with the permanent fund.
MR. JENKS said there are a couple of places where this process
comes in. It has not been used with the permanent fund but it was
talked about extensively when the legislature provided
instructions on a portion of the constitutional budget reserve
fund. He added that a slight variation of this method is used for
power cost equalization.
MR. SLOTNICK responded to a question posed by Senator Davis
earlier and said the public school fund contains about $275
million.
CHAIRWOMAN GREEN asked why the phrase "programs and" was changed
to the word "project" on page 5.
MR. SLOTNICK indicated the Alaska children's trust supports the
bill but requested that word change. He believed it has to do
with federal language that specifically describes what a program
or project is that limits the way the children's trust can
administer its grants. Using the generic term "project" will make
it easier for the children's trust.
SENATOR WARD asked if a larger dollar amount can be invested if
principal and income is combined.
MR. JENKS said the same dollar amount will be invested but it
will be invested more efficiently by getting rid of the
distinction between the principal and income parts of the fund
and by removing the constraint on the type of earnings the
investments make. DOR expects that over time, the funds will earn
about .65 percent more if SB 311 is enacted.
SENATOR WARD asked if the principal could be invested in a lower
risk instrument than the income or whether they can both be
invested in the same types of investment.
MR. JENKS said right now they are invested differently. When DOR
constructs the investment policy for the principal of these
funds, it must keep in mind these investments are expected to
produce either capital gains or dividends and interest. The
current statutory language instructs DOR to create an ever-
increasing stream of income so that when DOR creates the
investment policies for the principal, it has constructed a logic
that says it should inflation proof the fund. DOR tries to create
an investment policy that will produce capital gains in one form
or another equal to the expected inflation rate plus a bit more
to grow the principal ever so slightly in real terms. After that,
DOR makes investments that maximize current income: dividends and
interest payments on bonds. The interest payments and dividends
are transferred into a separate fund because the [statute]
currently requires DOR to keep track of principal and income
separately.
Each year, the legislature makes appropriations from that income
to the various programs. Because the income fund is likely to be
appropriated in the near term, it is invested more
conservatively. DOR is also fairly conservative with the
principal because it believes if it invests for more capital
gains than just barely enough to offset inflation, a current
beneficiary could claim DOR is making an investment for the
future while its statutory charge is to get the maximum current
income. DOR ends up investing more conservatively in total to
meet the first charge. Right now that policy allows the trusts to
earn about 7.25 percent over time. If SB 311 passes, the funds
are expected to earn almost 8 percent, resulting in more money
for the programs.
2:22 p.m.
SENATOR WILKEN asked if SB 311 contains the same concept that is
being promoted for the permanent fund, except that SB 311 uses a
three-year instead of a five-year average.
MR. JENKS said he does not believe there are any other
fundamental differences.
SENATOR WILKEN asked if inflation proofing is based on the
assumption that the returns will be greater than five percent.
MR. JENKS said that is correct and, under the current statute,
DOR is constrained to 7.25 percent. He added that DOR and the
Permanent Fund Corporation use the same consulting firm to get
capital market assumptions and estimates.
SENATOR WILKEN asked if DOR expects the public school trust fund
to increase if SB 311 is enacted.
MR. JENKS said over time all three funds are expected to produce
more income for the programs. The amount they produce now is
about $2 million per year.
SENATOR WILKEN asked if the public school trust fund will be
jeopardized in any way because changes will be made to a
constitutionally protected fund. He added, "Does this change now
make it just like any other fund that doesn't have that
constitutional protection as being in place at the time the
Constitution was assigned?"
MR. JENKS said no, there would be no such effect. The management
would not affect in any way the fund's designation as a
constitutionally protected trust fund.
CHAIRWOMAN GREEN reiterated her concern about changing the word
"program" to "project."
MS. SHARI PAUL, project coordinator for the Alaska Children's
Trust, informed members that the intent of the children's trust
was to provide communities with a way to prevent child abuse and
neglect. However, the Trust has found over years of awarding
grants to communities, more interest from major organizations
looking for supplemental funds to continue operating. The statute
says the children's trust should fund community-initiated
projects. It has been pushing hard to communicate in its grant
applications that communities need to come together to present
and create projects that address the problem of child neglect.
The children's trust requested the language change in SB 311 to
clarify the intent of the statute and what the trust is actually
doing: funding projects, not programs that keep agencies afloat.
CHAIRWOMAN GREEN asked Ms. Paul to describe her definition of
"program."
MS. PAUL said the words "project" and "program" are often used
interchangeably but she wants to make sure everything published
by the children's trust says it funds community-initiated
projects.
CHAIRWOMAN GREEN asked for an example of a program.
MS. PAUL said the children's trust funds a parenting education
program at the Anchorage Center for Families. She repeated that
the terms are intermixed all of the time but the children's trust
wants to be consistent in its publications.
CHAIRWOMAN GREEN asked for an example of a project.
MS. PAUL said the children's trust funded a child abuse
prevention project within the youth program at the Nome Community
Center. Part of the project entails getting youth mentors to
accompany other youth to work on April child abuse prevention
month activities. That is a specific project within an overall
program called YES - Youth Empowered to Serve program. The
children's trust funded a small portion of that program to do a
prevention project.
CHAIRWOMAN GREEN asked where APRN would fall.
MS. PAUL said the children's trust no longer funds APRN but APRN
funded public service announcements that provided parenting
messages.
CHAIRWOMAN GREEN said she can see a scenario in which one group
could have a project in 17 communities and the children's trust
is funding the "genesis" group, or group that drove the project.
She said she wants to be sure that the legislature will not be
allowing the children's trust to grant seven $50,000 projects
that, under the definition of a program, would be one $50,000
project. She repeated her concern that changing the definition
could allow one group to get a bigger share than it would get
under the current system.
MS. PAUL said an organization or a community can only receive up
to $30,000. The board lowered the ceiling to $30,000 three years
ago because it had a limited amount of money to award.
CHAIRWOMAN GREEN referred to language on page 7, line 18, and
asked for clarification.
MS. PAUL replied, "It says may not exceed $50,000 so the board
three years ago said well, if we funded - we only had
approximately $260,000 to award and we weren't able to award that
many grants so the board made a unanimous agreement to lower that
- may not exceed $30,000. Well no, it still may not exceed
$50,000 but it's $30,000."
CHAIRWOMAN GREEN asked if next year's board could fund each
project at $50,000 if it has more money.
MS. PAUL said it could but it will fund only one award per agency
or community. For instance, if the Anchorage Center for Families
applied three times, the Board would look at funding structures
and geographic distribution so it would not award three grants.
CHAIRWOMAN GREEN gave the example of the Boys and Girls Club that
does a special project on child abuse in many communities
throughout the state. She asked if the group in each community
would qualify for a grant.
MS. PAUL said yes, if they applied separately.
CHAIRWOMAN GREEN asked if the language change from "program" to
"project" would make any difference.
MS. PAUL said that will help clarify that the children's trust is
just funding a specific project, not a whole program in itself.
For example it will not be funding the Boys and Girls Club, but a
small portion of it.
CHAIRWOMAN GREEN said she is saying the program would be the Boys
and Girls Club and the location would be the individual projects.
She said she wants to be sure the children's trust is not funding
seven distinct projects within one entity. She asked whether the
trust has language that pertains to that scenario.
MS. PAUL said that is not the trust's intent. The intent is to
support projects.
CHAIRWOMAN GREEN announced that SB 311 needs more work so the
committee will set it aside and perhaps revisit it on Wednesday.
She also reminded members that the committee will hold a
discussion on the ATAP legislation at that time. She noted that
Sandy Hoback and Ted Abrams (ph) are in Juneau to visit with
members to answer any questions.
| Document Name | Date/Time | Subjects |
|---|