Legislature(2003 - 2004)
05/06/2003 03:45 PM Senate STA
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
SJR 18-CONST. AM: PF APPROPS/INFLATION-PROOFING
CHAIR GARY STEVENS asked for a motion to adopt the committee
substitute (CS) for SJR 18.
SENATOR GRETCHEN GUESS made a motion to adopt CSSJR 18 as the
working document. There being no objection, it was so ordered.
ROBERT STORER, Executive Director of the Alaska Permanent Fund
Corporation, stated that the Permanent Fund Board of Trustees has
concluded there is a need for a constitutional amendment to
adjust inflation proofing on the Alaska Permanent Fund. Limiting
the amount of funds that could be appropriated in any given year
would do that. They propose the methodology be changed to a
percentage of market value (POMV), which is consistent in
approach with about 70 percent of the endowments and foundations
in the country. They suggest limiting the appropriation to no
more than five percent of the five year moving average of the
total fund.
He noted that copies of a power point presentation were in the
members' bill packets and pointed out five key differences.
· Percentage of Market Value offers constitutional
inflation proofing and protection of the entire fund.
Status quo statutorily inflation proofs just the fund
principal.
· The proposed is a spending limit because more than five
percent of the five year moving average could be
appropriated. Status quo is that the entire earnings
reserve may be appropriated.
· POMV improves the stability of the amount that may be
appropriated in any given year. Current methodology of
using realized income is considerably more volatile than
using a POMV.
· Five percent POMV is compatible with the diversified
portfolio the fund has in these volatile times. Current
methodology was established 26 or 27 years ago when there
wasn't a lot of volatility and people thought about fixed
income securities, cash flow and clipping coupons for
interest payments.
· Stability means predictability and is very important from
year to year for decision makers. Currently the dividend
is based on a five year realized income and is a moving
average.
SENATOR JOHN COWDERY asked why data from the previous year
wouldn't be used.
BOB BARTHOLOMEW, Chief Operating Officer of the Alaska Permanent
Fund Corporation, explained that in going back one extra year
legislators would know when the session begins in January exactly
how much would be available for the budget. Forecasts and
predictions wouldn't be necessary.
MR. STORER added the increased predictability works to everyone's
advantage by allowing for more informed decisions.
SENATOR COWDERY asked if they thought that dividends were an
appropriate use of the fund.
MR. STORER replied the Board of Trustees has always felt that how
the money is appropriated is the providence of the Legislature
and they have avoided any discussions or opinions on the subject.
MR. BARTHOLOMEW said he would like to go through the changes
between the original legislation and the CS.
TAPE 03-27, SIDE A
5:15 pm
· The title speaks to the five percent and that the goal is to
protect the fund and its purchasing power from inflation.
The changes are long term not on a year-to-year basis.
· Page 1, line 10 adds subsection b to the constitution.
· Line 11 the word "principal" is removed, which is a
significant policy discussion that the board recommends to
ensure an annual distribution.
· Lines 13 and 14 deletes that all income from the permanent
fund shall be deposited in the general fund unless otherwise
provided. All income will remain in the permanent fund until
appropriated subject to the five percent.
· Page 2 subparagraph b adds a sentence that states how the
permanent fund will be protected going forward.
· Line 7, section 3 is transitional language and clearly a
statement of law that the earnings of the permanent fund
that exist on the date this would pass the vote of the
people are part of the permanent fund.
· Section 4 says that at the next general election in November
2004, the voters of the State of Alaska would decide whether
changes would be made to the way distributions from the
permanent fund are determined.
CHAIR GARY STEVENS asked what happens to the Constitutional
Budget Reserve (CBR). He understood that the Earnings Reserve
Account (ERA) would disappear into the fund itself.
MR. BARTHOLOMEW explained the CBR is a sub-fund of the general
fund and wouldn't be affected by the amendment. Currently, the
permanent fund consists of principal and earnings reserve and
they are all invested the same and the CS would merge the two and
it would be referred to as the fund.
SENATOR FRED DYSON said he hopes to never again see the day that
it's a presumptuous statement to say that limiting the
appropriation to five percent is inflation proofing, but he would
like to hear a comment on that.
MR. STORER said the board spent a great deal of time studying the
issue and has determined that limiting the draw to five percent
would be the high end to achieve their goal. There are times,
like now, that drawing five percent you wouldn't be inflation
proofing, but then there are other times that you would earn well
in excess of that. The key is that the five percent limit creates
discipline in great years. Seventy six years of data indicates
that the five percent is achievable over time.
SENATOR DYSON asked how the board plans to educate the voting
public.
MR. STORER acknowledged their plans aren't fully developed but
the board is sensitive to the issue in statute that prohibits
using corporate or fund assets for political purposes. However,
they believe it is within their providence to educate the public
when they are publicly speaking about the fund performance, which
they do on a regular basis.
SENATOR DYSON asked whether it would be legal to do mass mailings
to voters or to place ads on TV to inform voters of the option
before them when they vote on the proposed constitutional
amendment.
MR. STORER said it is his personal opinion that they could not do
mass mailings or anything that would create that type of expense
to the fund.
SENATOR DYSON expressed concern that some in the capitol building
are pushing for a constitutional amendment to place the dividend
in the constitution. He hopes that those people wouldn't
characterize SJR 18 as being counter to the protection of the
dividend.
MR. STORER replied they believe there is some reasonable
probability that placing the dividend in the constitution would
jeopardize the tax-exempt status of the fund. While the board has
always held that how the money is appropriated is the providence
of the Legislature, they would probably stand mute were the
dividend to be placed in the constitution.
MR. BARTHOLOMEW said two points are critically important when you
educate the public:
· If there isn't leadership coming together from the
House, the Senate and the Executive Office, it will
be very difficult to get a vote from the public.
· Even though the corporation and the board are silent
on how to use the funds, it is important that the
Legislature go on record with regard to how they
want to use money.
SENATOR JOHN COWDERY asked what size dividend might be assured
today were the plan in place six years previous.
MR. STORER said he couldn't give a specific number, but he was
comfortable saying it would encompass both the bull market and
the bear market and would smooth out the highs and lows.
SENATOR COWDERY asked if the dividend might not be between $800
and $1,000.
MR. STORER said the dividend would probably be between $1,000 and
$1,100 if the fiscal year ended that evening because the earnings
reserve is currently about $1.5 million.
Considering the last five year average of the dividend, using
half of the five percent for dividend purposes would give a
$1,000 to $1,100 dividend.
SENATOR COWDERY remarked, "That would make a lot of people happy
and that was free advertising."
SENATOR DYSON made a motion to move CSSJR 18(STA) and attached
fiscal note from committee with individual recommendations.
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