Legislature(2017 - 2018)BUTROVICH 205

02/16/2017 03:30 PM STATE AFFAIRS

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Audio Topic
03:30:44 PM Start
03:31:34 PM SB21
03:59:06 PM SB26
04:31:10 PM Discussion: Angela Rodell, Executive Director, Alaska Permanent Fund Corporation
05:04:20 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 PERMANENT FUND: INCOME; POMV; DIVIDENDS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+= SB 26 PERM. FUND:DEPOSITS;DIVIDEND;EARNINGS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
         SB 21-PERMANENT FUND: INCOME; POMV; DIVIDENDS                                                                      
                                                                                                                                
3:31:34 PM                                                                                                                    
CHAIR DUNLEAVY announced the consideration of SB 21.                                                                            
                                                                                                                                
3:31:57 PM                                                                                                                    
SENATOR BERT STEDMAN, Alaska State Legislature, Juneau, Alaska,                                                                 
sponsor of SB 21, stated that the bill is before the committee                                                                  
for the second time and provided an overview as follows:                                                                        
                                                                                                                                
     In essence what  this bill does, rather  than address a                                                                    
     packet solution  for the  budget deficit  is to  take a                                                                    
     look  at the  permanent fund  or big-earning  engine of                                                                    
     roughly $55 billion  and take a look at that  as far as                                                                    
     how  much  it  could  produce  in  payouts  that  would                                                                    
     include  dividends or  other  sources of  expenditures,                                                                    
     and what percent we can pull  out of that and how could                                                                    
     we  manage   that  asset  to  protect   if  for  future                                                                    
     generations of Alaskans.                                                                                                   
                                                                                                                                
     We were  fortunate enough  to be here  when we  had the                                                                    
     massive  wealth  oil-bubble   run  through  the  state;                                                                    
     unlike  some of  our grandfathers  or grandparents  who                                                                    
     missed  it  just  due  to   the  age  cycle  or  future                                                                    
     generations  of Alaskans  that  aren't  even born  yet,                                                                    
     that they  can see, especially the  future generations,                                                                    
     can see  that we  secured a vast  amount of  the wealth                                                                    
     bubble for  their benefit  also, that  we don't  use it                                                                    
     over the next dozen year or less on ourselves.                                                                             
                                                                                                                                
3:33:43 PM                                                                                                                    
SENATOR STEDMAN specified what SB 21 does as follows:                                                                           
                                                                                                                                
     This bill  what it does  it would limit  the withdrawal                                                                    
     annually  to  4.5  percent  of  the  market  value  and                                                                    
     there's  an averaging  over the  last  five years  that                                                                    
     takes place,  so you  don't take  just the  last year's                                                                    
     ending balance, but you back  up six years and take the                                                                    
     first five  of that,  so it  makes it  very predictable                                                                    
     for the  budgetary folks to  know exactly  what revenue                                                                    
     they would have.                                                                                                           
                                                                                                                                
     A  4.5  percent withdrawal  on  average  over time  the                                                                    
     market  should and  returns  should  suffice and  there                                                                    
     will be  other presenters with better  backgrounds that                                                                    
     can address  that to  the committee  to ensure  that we                                                                    
     don't diminish  the purchasing power and  or spend down                                                                    
     the fund. Of  that 4.5 percent, 2.25  percent would be,                                                                    
     or one half of it  would go to dividends automatically,                                                                    
     to the  citizens, and  that would  grow over  time. The                                                                    
     other 2.25 percent  of the 4.5 percent,  the other 2.25                                                                    
     percent or  one half, could  be added to  the dividends                                                                    
     if we are so fortunate  as to have robust economies and                                                                    
     an easy  time balancing  the budget,  it could  also go                                                                    
     back to  the permanent  fund, or  could be  used, which                                                                    
     would  happen over  the next  several years  go to  the                                                                    
     general  fund of  the state  to  help us  when we  have                                                                    
     financial  difficulties like  we  have  today. So  that                                                                    
     would ensure that  the public gets 50 percent  of it in                                                                    
     a dividend, the other 50  percent every year would come                                                                    
     before  the  Legislature  and the  elected  body  would                                                                    
     decide to add it to the  dividends, send it back to the                                                                    
     permanent  fund,  or  take it  to  core  services  like                                                                    
     education  or health  and human  services or  what have                                                                    
     you.                                                                                                                       
                                                                                                                                
3:35:53 PM                                                                                                                    
SENATOR STEDMAN summarized as follows:                                                                                          
                                                                                                                                
     In a nutshell, that's what  this bill does; again, it's                                                                    
     not a one-bill solution to  our deficit issue, but it's                                                                    
     a protective  mechanism to ensure  that we have  a very                                                                    
     valuable  asset for  future generations  to be  able to                                                                    
     rely  on   also,  that  we  don't   basically,  we  the                                                                    
     Legislature, including  myself, all 60 of  us, all good                                                                    
     intended  elected  officials,  collectively we  can  be                                                                    
     dangerous,   don't  start   taking   chunks  out,   the                                                                    
     billions,  and  hurt  the  last   40  years  of  wealth                                                                    
     accumulation.                                                                                                              
                                                                                                                                
CHAIR DUNLEAVY remarked that during  the past several years there                                                               
have been  people trying  to sell that  using the  permanent fund                                                               
would be immune from market  fluctuations versus the volatile oil                                                               
markets. He asked  Senator Stedman to confirm  that the permanent                                                               
fund is not immune from fluctuations.                                                                                           
                                                                                                                                
3:38:20 PM                                                                                                                    
SENATOR STEDMAN answered correct. He  pointed out that SB 21 uses                                                               
five years  of market values  to smooth out volatility.  He noted                                                               
that he  worked with the City  of Sitka 30 years  ago in changing                                                               
their all-bond  portfolio to  a percentage  of market  value that                                                               
took a five-year average. He noted  that unlike SB 21 with a 4.5-                                                               
percent payout, Sitka chose a  6-percent payout. He admitted that                                                               
Sitka's  6-percent payout  has shown  to  be too  high and  their                                                               
fund's  purchasing power  has decreased.  He emphasized  that the                                                               
financial markets are  not linear and noted that  the economy has                                                               
experienced 3-economic shocks over the  past 30 years; however, a                                                               
withdrawal  based on  averages  from  4 to  6  years smooths  out                                                               
fluctuations and makes things more predictable.                                                                                 
                                                                                                                                
3:42:22 PM                                                                                                                    
CHAIR DUNLEAVY  asked Senator Stedman  to dispel the  notion that                                                               
withdrawing funds from  the permanent fund will take  care of the                                                               
state's fiscal issue.                                                                                                           
                                                                                                                                
SENATOR STEDMAN concurred  with Chair Dunleavy. He  noted that SB                                                               
21  is a  bill for  statutory change  rather than  constitutional                                                               
change. He admitted  that the Legislature could  still get around                                                               
the  bill's  4.5  percent withdrawal  by  spending  the  earnings                                                               
reserve which is not protected  by the constitution. He disclosed                                                               
that approximately $14 billion is  available for the Legislature,                                                               
"To get its hands  on." He pointed out that if  SB 21 was adopted                                                               
in the constitution as an  amendment, the Legislature would never                                                               
be  able to  take more  than the  4.5 percent  in any  given year                                                               
without the permission of the citizens.                                                                                         
                                                                                                                                
He  addressed  scenarios  on  the  Legislature  sharing  the  4.5                                                               
percent withdrawal with Alaskans as follows:                                                                                    
                                                                                                                                
     That 4.5  percent, if we  gave them no dividend  out of                                                                    
     it  and  took it  all  to  the  general fund  we  could                                                                    
     probably  make it  work and  get  out of  this hole;  I                                                                    
     think   that's  politically   not   attainable  and   I                                                                    
     personally would not  support it. I think if  we have a                                                                    
     sharing  relationship  with  the  dividends,  with  the                                                                    
     people, with  the state, there's a  balance clearly. If                                                                    
     we  take it  all to  the  general fund,  the whole  4.5                                                                    
     percent, we are  going to pretty much  fix our problem,                                                                    
     make it  pretty easy  to get  out of;  but, if  we take                                                                    
     none of it  and it all goes to the  dividends, we can't                                                                    
     get out of this hole,  I don't see any mathematical way                                                                    
     we can do  it. So somewhere there's a  balance and that                                                                    
     in  lies the  50 percent  split and  I think  hopefully                                                                    
     gets the public's support behind it.                                                                                       
                                                                                                                                
CHAIR DUNLEAVY reiterated  that the permanent fund will  not be a                                                               
constant  flat stream  and  will  not take  care  of the  state's                                                               
fiscal problems. He  pointed out that the  state's fiscal problem                                                               
is so  great that  $1.2 billion  to $1.5  billion draws  would be                                                               
nowhere near the $2.8 to $3 billion deficit.                                                                                    
                                                                                                                                
3:45:27 PM                                                                                                                    
SENATOR STEDMAN answered correct. He  set forth that a withdrawal                                                               
from the permanent fund would act  as a base, but other solutions                                                               
such  as  budget  reductions and  revenue  enhancements  will  be                                                               
required to fix  the budget deficit. He said the  state's hole is                                                               
structural  and  the quicker  the  Legislature  can dissolve  the                                                               
structural deficit  and get back  to balanced budgets  the better                                                               
off all of us are.                                                                                                              
                                                                                                                                
SENATOR WILSON  noted that Senator Stedman's  presentation showed                                                               
the permanent  fund's balance growing.  He asked  Senator Stedman                                                               
to explain how  he came up with the numbers  that showed the fund                                                               
growing.                                                                                                                        
                                                                                                                                
SENATOR STEDMAN explained as follows:                                                                                           
                                                                                                                                
     If  the  average rate  of  return  is higher  than  4.5                                                                    
     percent, it  will get larger;  if it's higher  than 4.5                                                                    
     percent plus  the rate  of inflation,  say the  rate of                                                                    
     inflation is 2 percent, just  as a number, and you made                                                                    
     over  6.5  percent,  your real  purchasing  power  will                                                                    
     start to  increase. There  will be  times I  can assure                                                                    
     you  that  the purchasing  power  will  decline in  the                                                                    
     short run just due to market reductions.                                                                                   
                                                                                                                                
3:48:11 PM                                                                                                                    
SENATOR  WILSON asked  to confirm  that  the additional  earnings                                                               
would go into the earnings reserve account.                                                                                     
                                                                                                                                
SENATOR STEDMAN  specified that the  bill does not  eliminate the                                                               
earnings reserve and detailed as follows:                                                                                       
                                                                                                                                
     The   earnings   reserve   are  trading   profits   and                                                                    
     potentially the unrealized gains.  The corpus is what's                                                                    
     protected by the constitution,  roughly $40 billion. So                                                                    
     we  can,  we  the  Legislature, if  we  adopt  this  in                                                                    
     statute, we  still can get  around the 4.5  percent and                                                                    
     spend   the  earnings   reserve;   it   would  take   a                                                                    
     constitutional change  to block that and  limit us just                                                                    
     to 4.5 percent and that  discussion would come later. I                                                                    
     personally support  that, but it  has to take  the will                                                                    
     of the  people. So  you could  adopt this  statute, pay                                                                    
     out  4.5   percent  and  then   have  an   election  of                                                                    
     spendthrifts and  they decide to  come in and  say, "We                                                                    
     don't  like  4.5 percent,  we  want  $4 billion  or  $5                                                                    
     billion because we  want to do this project  or we want                                                                    
     to build roads  or more ferries," or  whatever they are                                                                    
     going  to build  and  go  in and  take  it  out of  the                                                                    
     earnings  reserve.   There  still  needs  to   be  some                                                                    
     prudence on sticking with the  4.5 percent to make sure                                                                    
     that that does not happen. If  and when we take it to a                                                                    
     constitutional  amendment,  the earnings  reserve  then                                                                    
     would eliminated,  it would  have no,  from what  I can                                                                    
     see, no value.                                                                                                             
                                                                                                                                
SENATOR STEDMAN disclosed that SB 21 does not change the Alaska                                                                 
Permanent Fund Corporation's structure and detailed as follows:                                                                 
                                                                                                                                
     We are not  turning the permanent fund on  its head and                                                                    
     changing its  time horizon or  its liquidity  needs and                                                                    
     things of that nature; it  pretty much keeps the status                                                                    
     quo and  it puts them  out, kind  of silos them  off on                                                                    
     the side where  we clearly would have in front  of us a                                                                    
     deficit  issue.   We  can't  just  look   over  to  the                                                                    
     permanent fund and  grab billions out and  not make the                                                                    
     hard decisions  because we have  some tough ones  as we                                                                    
     all know to make and they are not going to be fun.                                                                         
                                                                                                                                
3:50:55 PM                                                                                                                    
CHAIR DUNLEAVY asked if SB 21 sets an amount for inflation                                                                      
proofing, not passive inflation proofing.                                                                                       
                                                                                                                                
SENATOR STEDMAN answered that SB 21 does not and detailed as                                                                    
follows:                                                                                                                        
                                                                                                                                
     What sets the  trigger or the mechanism to  allow it to                                                                    
     inflation  proof itself  is the  payout  rate, and  the                                                                    
     asset allocation  and performance  of the  fund itself.                                                                    
     So given  roughly the  current allocation  and historic                                                                    
     performance of all of those  asset classes helps derive                                                                    
     the payout rate and there's  no magic number. I thought                                                                    
     4.5 percent  just from my past  professional experience                                                                    
     is reasonable  and attainable,  some folks  might think                                                                    
     it should be  4.75 percent or 5.0 percent  and the next                                                                    
     guy  might think  it should  be 4.25  percent; I  think                                                                    
     that  should   be  left  up   to  the   discussion  and                                                                    
     recommendations from  the permanent fund and  maybe the                                                                    
     Department  of  Revenue  and  debated  in  the  finance                                                                    
     committees or whatever, I just  picked that number from                                                                    
     professional experience of what I thought would work.                                                                      
                                                                                                                                
He addressed  a scenario where  the fund's  rate of return  was 5                                                               
percent over 10 years with a 4.5-percent withdrawal as follows:                                                                 
                                                                                                                                
     We would  be going  backwards with purchasing  power if                                                                    
     inflation is 2.0 percent,  2.5 percent, historically it                                                                    
     has been 2.5 percent the  last century; but you have to                                                                    
     have an  asset allocation mix  that is in  balance with                                                                    
     your  payout.   So  if  you  ratchet   the  payout  up,                                                                    
     sometimes you could  push your performance requirements                                                                    
     of your portfolio  managers to a point  where your risk                                                                    
     level gets  a little bit  too high, in my  opinion, and                                                                    
     that works with  this or a retirement fund  or your own                                                                    
     personal stuff also.                                                                                                       
                                                                                                                                
3:53:01 PM                                                                                                                    
CHAIR  DUNLEAVY  asked  if  SB   21  would  automatically  pay  a                                                               
permanent fund  dividend (PFD) or  if paying a dividend  would be                                                               
optional for the Legislature to appropriate.                                                                                    
                                                                                                                                
SENATOR STEDMAN replied  that the dividend would  be 2.25 percent                                                               
of the  market value. He noted  that there has been  a discussion                                                               
and debate  as to whether  the PFD  is an appropriation,  but the                                                               
bill  does not  address  that. He  emphasized  that the  dividend                                                               
payout  would be  a minimum  of 2.25  percent. He  said there  is                                                               
almost a compact agreement with citizens on the split.                                                                          
                                                                                                                                
CHAIR DUNLEAVY asked  Senator Stedman to address  Section 3, line                                                               
13, which says, "The Legislature  may appropriate." He asked what                                                               
would happen if the word "may" was changed to "shall."                                                                          
                                                                                                                                
SENATOR STEDMAN  replied that Chair Dunleavy's  question would be                                                               
a  good question  for the  attorneys. He  said he  understood the                                                               
difference between  "may" and "shall,"  and would  be comfortable                                                               
with either one of the words.                                                                                                   
                                                                                                                                
CHAIR DUNLEAVY replied that the words are very different.                                                                       
                                                                                                                                
SENATOR  STEDMAN  responded that  he  knows  the words  are  very                                                               
different and detailed as follows:                                                                                              
                                                                                                                                
     If I  can put on  my "elected official hat,"  it's 2.25                                                                    
     percent.  I personally  would not  care speaking  to my                                                                    
     constituents if it  said "may" or "shall,"  it would be                                                                    
     2.25 percent  and the  check should  be written  and we                                                                    
     should deal with  our fiscal issues however  we need to                                                                    
     deal with them.                                                                                                            
                                                                                                                                
3:55:01 PM                                                                                                                    
CHAIR DUNLEAVY remarked  that you would never  hear from Alaskans                                                               
when the  dividend was  calculated by  market outcomes,  but they                                                               
have  become  suspicious and  untrusting  when  the dividend  was                                                               
vetoed  last year.  He  said  the suspicion  by  Alaskans is  the                                                               
reason why he brought up the  concepts of "mays" and "shalls." He                                                               
pointed out  that legislation and  appropriations could  still be                                                               
vetoed, but  constitutionalization gives  Alaskans a  little more                                                               
feeling that  they and  future generations  are being  treated as                                                               
partners.                                                                                                                       
                                                                                                                                
3:57:55 PM                                                                                                                    
CHAIR  DUNLEAVY  thanked  Senator  Stedman  and  held  SB  21  in                                                               
committee.