Legislature(2009 - 2010)HOUSE FINANCE 519

01/23/2009 01:30 PM House FINANCE


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01:35:54 PM Start
01:38:17 PM the Principles of the Permanent Fund Principal
02:56:02 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ The Principles of the Permanent Fund TELECONFERENCED
Principal
                  HOUSE FINANCE COMMITTEE                                                                                       
                     January 23, 2009                                                                                           
                         1:35 p.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Hawker  called the House Finance  Committee meeting                                                                    
to order at 1:35:54 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Hawker, Co-Chair                                                                                            
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Vice-Chair                                                                                      
Representative Allan Austerman                                                                                                  
Representative Harry Crawford                                                                                                   
Representative Anna Fairclough                                                                                                  
Representative Richard Foster                                                                                                   
Representative Les Gara                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Woodie Salmon                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative Mike  Doogan; Senator Con Bunde;  Senator Joe                                                                    
Paskvan;  Gregg Erickson,  Economic  Consultant, Erickson  &                                                                    
Associates;   Pat   Galvin,  Commissioner,   Department   of                                                                    
Revenue;    Jerry    Burnett,    Director,    Division    of                                                                    
Administrative Services, Department  of Revenue; Mike Burns,                                                                    
Executive Director,  Permanent Fund  Corporation, Department                                                                    
of  Revenue; Michael  Barnhill, Assistant  Attorney General,                                                                    
Department of Law.                                                                                                              
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
NONE                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^The Principles of the Permanent Fund Principal                                                                                 
                                                                                                                                
Overview: The Principles of the Permanent Fund Principal                                                                        
                                                                                                                                
1:38:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  HAWKER queried  the  process that  results in  the                                                                    
Revenue Sourcebook  numbers that  the state uses  to project                                                                    
revenue for the coming  year. The Revenue Sourcebook applies                                                                    
to the remainder of the  current fiscal year ending June 30,                                                                    
2009, and  to the fiscal year  of July 1, 2009  through June                                                                    
30, 2010. He questioned whether   the recent dramatic change                                                                    
in  the  world  economy  was cause  for  review  of  current                                                                    
projections for FY09 and FY10.                                                                                                  
                                                                                                                                
PAT  GALVIN, COMMISSIONER,  DEPARTMENT OF  REVENUE responded                                                                    
that an  FY09 interim  revenue forecast associated  with the                                                                    
supplemental  budget  would  be   provided  in  a  week.  He                                                                    
confirmed that the price of  oil is currently lower than the                                                                    
price used for projections in  the fall. The number used for                                                                    
forward price  projection would  be in  the low  $50s, which                                                                    
was  expected  to  create  a shortfall  of  over  a  billion                                                                    
dollars.  He assured  the committee  that  he would  provide                                                                    
more information as the exact dollars were known.                                                                               
                                                                                                                                
1:41:25 PM                                                                                                                    
                                                                                                                                
Commissioner  Galvin expressed  concern about  spending more                                                                    
than  was coming  in. He  reiterated that  the FY09  numbers                                                                    
used   to   project   the    FY10   numbers   have   dropped                                                                    
significantly.  He  elaborated  on the  fluctuation  in  oil                                                                    
prices over the last few months.                                                                                                
                                                                                                                                
1:43:05 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin thought that  the numbers would be lower                                                                    
for the fall forecast.                                                                                                          
                                                                                                                                
Co-Chair Hawker explained that  a significant budget surplus                                                                    
or   budget   deficit   would   affect   budget   decisions.                                                                    
Commissioner  Galvin stated  that he  would provide  as much                                                                    
information, in a timely manner, as he could.                                                                                   
                                                                                                                                
Representative Kelly advised using the lower numbers.                                                                           
                                                                                                                                
1:45:44 PM                                                                                                                    
                                                                                                                                
Commissioner  Galvin voiced  that the  Office of  Management                                                                    
and Budget (OMB) was working with  DOR and were aware of the                                                                    
drop  in the  revenue forecast.   Co-Chair  Hawker explained                                                                    
that  OMB  director  Karen Rehfeld  would  come  before  the                                                                    
committee soon to answer further questions.                                                                                     
                                                                                                                                
Representative Gara  asked for  clarification as to  why the                                                                    
FY09  budget  has a  potential  $1  billion deficit  but  $5                                                                    
billion  in  savings.  He questioned  Commissioner  Galvin's                                                                    
definition of the word "deficit".                                                                                               
                                                                                                                                
Commissioner  Galvin   noted  that   there  was   a  revenue                                                                    
shortfall  of over  $1 billion  dollars, not  a deficit.  He                                                                    
mentioned  other  funds  that could  be  considered  savings                                                                    
accounts. The  budget can  be rolled  together from  year to                                                                    
year.  It  can be  confusing  understanding  what funds  are                                                                    
located where.                                                                                                                  
                                                                                                                                
1:48:31 PM                                                                                                                    
                                                                                                                                
Co-Chair Hawker  summarized that "shortfall" means  that the                                                                    
state simply has not saved as  much as it planned. The state                                                                    
will have saved $4 billion instead of $5 billion.                                                                               
                                                                                                                                
Commissioner Galvin concurred. He  elaborated that a revenue                                                                    
estimate is given  in order to create a budget  and that the                                                                    
numbers  are   subject  to  change.  The   FY09  budget  had                                                                    
designated $1 billion for  the constitutional budget reserve                                                                    
(CBR),  automatically resulting  in $1  billion less  income                                                                    
for the state.                                                                                                                  
                                                                                                                                
1:50:35 PM                                                                                                                    
                                                                                                                                
Commissioner Galvin  admitted that using the  word "deficit"                                                                    
may confuse the  public when the state may  be putting money                                                                    
into savings at the end of the year.                                                                                            
                                                                                                                                
Representative Gara  asked that  the administration  not use                                                                    
the word deficit when presenting  to the public if there was                                                                    
no real deficit as the  public understands the definition of                                                                    
the word. He expressed that  it affects the public's mood to                                                                    
hear  the word.  Co-Chair Hawker  agreed that  clarification                                                                    
between "deficit" and "shortfall"  should be made for public                                                                    
understanding.                                                                                                                  
                                                                                                                                
1:52:31 PM                                                                                                                    
                                                                                                                                
GREGG ERICKSON, ECONOMIC  CONSULTANT, ERICKSON & ASSOCIATES,                                                                    
and  founder  of  the  Alaska  Budget  Report  introduced  a                                                                    
PowerPoint  presentation, "How  the Permanent  Fund Dividend                                                                    
(PFD) Came to be at Risk" (Copy on File).                                                                                       
                                                                                                                                
1:56:18 PM                                                                                                                    
                                                                                                                                
Mr. Erickson went over Slide  2, "1976 Amendment to Alaska's                                                                    
Constitution":                                                                                                                  
                                                                                                                                
     At  least  twenty-five  percent of  all  mineral  lease                                                                    
     rentals,  royalties,  royalty  sale  proceeds,  federal                                                                    
     mineral revenue  sharing payments and  bonuses received                                                                    
     by the state  shall be placed in a  permanent fund, the                                                                    
     principal  of  which  shall  be  used  only  for  those                                                                    
     income-producing  investments  specifically  designated                                                                    
    by law as eligible for permanent fund investments.                                                                          
                                                                                                                                
          (Article IX, Section 15 (Effective February 21,                                                                       
          1977).)                                                                                                               
                                                                                                                                
Mr.  Erickson   cautioned  misinterpretation  of   the  1976                                                                    
amendment. At  the time the  amendment was made  he believed                                                                    
that the  Permanent Fund  was meant  to be  income producing                                                                    
and permanent.                                                                                                                  
                                                                                                                                
Mr. Erickson  continued with "Orange County  Debacle" (Slide                                                                    
3):                                                                                                                             
                                                                                                                                
     The new rule arises in  part out of the losses incurred                                                                    
     in 1993  by the  government of Orange  County. Managers                                                                    
     of county  investments were able  to avoid  showing the                                                                    
     declining market value of  bad investments because they                                                                    
     were not required to show  the loss on the county-owned                                                                    
     fund's  income  statement. Accounting  experts  believe                                                                    
     that  requiring  unrealized  gains  and  losses  to  be                                                                    
     reported  will  help  provide  early  warning  of  such                                                                    
     investment problems.                                                                                                       
                                                                                                                                
          ("Alaska  Permanent Fund  Corporation (APFC)  asks                                                                    
          for   legal   opinion   on   status   of   income,                                                                    
          principal,"  Alaska  Budget Report,  February  17,                                                                    
          1999)                                                                                                                 
                                                                                                                                
Mr.  Erickson  pointed  out  that  the  Alaska  Supplemental                                                                    
Benefits  System   had  placed  money  in   Orange  County's                                                                    
Guaranteed  Investment/Insurance  Contracts.  The  contracts                                                                    
were  not  guaranteed.  The  value   of  the  contracts  was                                                                    
declining, yet  dividends continued  to be paid  out. Orange                                                                    
County and  subsequently the state  of Alaska lost a  lot of                                                                    
money. The Corporation therefore instigated the new rule.                                                                       
                                                                                                                                
Mr.   Erickson   continued   with   "Government   Accounting                                                                    
Standards Board (GASB)31" (Slide 4):                                                                                            
                                                                                                                                
     Governmental entities,  including governmental external                                                                    
     investment  pools, should  report  investments at  fair                                                                    
     value in the balance sheet.                                                                                                
                                                                                                                                
     Fair  value   is  the  amount  at   which  a  financial                                                                    
     instrument could be exchanged  in a current transaction                                                                    
     between  willing parties,  other  than in  a forced  or                                                                    
     liquidation sale.                                                                                                          
                                                                                                                                
          ("Summary of Statement No. 31, Accounting and                                                                         
          Financial Reporting for Certain Investments and                                                                       
          for   External   Investment   Pools,"   Government                                                                    
          Accounting Standards Board, March 1997)                                                                               
                                                                                                                                
Mr. Erickson recounted that GASB  31 presented a problem for                                                                    
the Alaska  Permanent Fund because its  accounting practices                                                                    
in determining  dividends were comparable to  Orange County.                                                                    
This was not an issue when  the fund was heavily invested in                                                                    
bonds, but  into the 1990s  the Fund was invested  mainly in                                                                    
equities.  Equities  are  less  stable. The  fear  was  that                                                                    
Alaska might  find itself in  a position like  Orange County                                                                    
because the  value of the  assets was in danger  of becoming                                                                    
less  than the  value of  the  principal. The  value of  the                                                                    
principal  is determined  by  adding up  all  the money  the                                                                    
legislature  by appropriation  or constitutional  dedication                                                                    
had  put into  the fund  since  its conception  in 1977.  He                                                                    
disclosed that the current principal is $29 billion.                                                                            
                                                                                                                                
2:02:29 PM                                                                                                                    
                                                                                                                                
Mr.  Erickson  took his  definition  of  principal from  the                                                                    
"1999 Request for Legal Opinion" (Slide 5):                                                                                     
                                                                                                                                
   The Alaska  Permanent Fund  Corporation (APFC)  has asked                                                                    
   the national  law  firm  of  Morrison  and  Forrester  to                                                                    
   prepare  a  legal  opinion  on   whether  the  governor's                                                                    
   proposal in House Bill  90 to remove $4  billion from the                                                                    
  permanent fund would invade the principal of the fund.                                                                        
                                                                                                                                
   …Communications Director Jim Kelly told the Senate State                                                                     
   Affairs Committee that a legal opinion had been                                                                              
   requested. The  issue arose  in the  context of…testimony                                                                    
   on…a bill  by  Sens.  Jerry  Ward  and  Rick  Halford  to                                                                    
  transfer…the fund's earnings reserve to the principal.                                                                        
                                                                                                                                
          ("APFC asks for legal opinion on status of income                                                                     
          principal," Alaska Budget Report, February 17,                                                                        
          1999.)                                                                                                                
                                                                                                                                
Mr.  Erickson recalled  that  in  1999 the  PFD  had a  huge                                                                    
budget  reserve.   The  Knowles  administration   wanted  to                                                                    
transfer   the   reserves   to    the   CBR.   The   Knowles                                                                    
administration   and  the   Department  of   Law  contracted                                                                    
Morrison &  Foerster LLP  to determine  the legality  of the                                                                    
Knowles  plan. Morrison  & Foerster  found in  favor of  the                                                                    
plan  but discovered  that the  dividend formula  had to  be                                                                    
changed in order  to avoid a conflict  with the Constitution                                                                    
of Alaska (see  "1999 letter Morrison and  Foester," Copy on                                                                    
File).                                                                                                                          
                                                                                                                                
Mr. Erickson turned to "1999 Legal Opinion" (slide 6):                                                                          
                                                                                                                                
   Attorneys from Morrison and Foster say Gov. Tony Knowles'                                                                    
   proposal to take $4 billion from the permanent fund won't                                                                    
   violate the Alaska Constitution.  But a formula  in state                                                                    
   law that  is  used  to  calculate  income  available  for                                                                    
   dividends (or other purposes) should be  changed to avoid                                                                    
   a possible  conflict-of-laws situation  that could  occur                                                                    
   under new accounting interpretations, the lawyers said in                                                                    
   a March 3 opinion.                                                                                                           
                                                                                                                                
          ("Lawyers OK $4 billion transfer from earnings                                                                        
          reserve to CBR," Alaska Budget Report, March 10,                                                                      
          1999.)                                                                                                                
                                                                                                                                
2:06:30 PM                                                                                                                    
                                                                                                                                
Mr.  Erickson  continued  with "The  2002  Crisis,  Part  1"                                                                    
(Slide 7):                                                                                                                      
     For a few days in July a falling stock market shaved                                                                       
     $399.9 million off the principal of the permanent                                                                          
fund.     The erosion of principal,  the first such event in                                                                    
the  fund's 25-year  history, reached  its deepest  point on                                                                    
     July 23, culminating a slide that took the fund's                                                                          
     reserves from a comfortable $8.6 billion in the spring                                                                     
     of 2000 to a negative value in July.                                                                                       
                                                                                                                                
          ("Fund  recovers  after  market  slide  eats  $400                                                                    
          million hole in  principal." Alaska Budget Report,                                                                    
          September 17, 2002.)                                                                                                  
                                                                                                                                
Mr.  Erickson explained  that this  was the  first time  the                                                                    
value of  the fund had  fallen below its  principal. Because                                                                    
of  the fallen  numbers there  was concern  within the  APFC                                                                    
that dividends would be paid out by invading the principal.                                                                     
                                                                                                                                
                                                                                                                                
Mr. Erickson continued with "The 2002 Crisis, Part 2"                                                                           
(slide 8):                                                                                                                      
                                                                                                                                
    Later in July rising market values erased the deficit,                                                                      
    but the issues raised by the episode remain,                                                                                
   including;                                                                                                                   
                                                                                                                                
        1. worries that the fund's constitutional structure                                                                     
          is more vulnerable to  meltdown that officials had                                                                    
          ever realized,                                                                                                        
        2. unsettling legal questions about APFC's authority                                                                    
          to  transfer money  to the  state government  when                                                                    
          reserve drops into the red, and                                                                                       
        3. increased doubt over whether the fund will be                                                                        
          able to  meet its dividend  and inflation-proofing                                                                    
          obligations in 2003.                                                                                                  
                                                                                                                                
          ("Fund  recovers  after  market  slide  eats  $400                                                                    
          million hole in  principal." Alaska Budget Report,                                                                    
          September 17, 2002.)                                                                                                  
                                                                                                                                
Mr. Erickson  shared that  due to  this situation,  APFC and                                                                    
the  Murkowski administration  agreed  it would  be best  to                                                                    
abandon the  concept of  principal and  embrace the  idea of                                                                    
Percent of Market Value (POMV) to eliminate ambiguity.                                                                          
                                                                                                                                
2:10:39 PM                                                                                                                    
                                                                                                                                
Representative  Gara  queried  the  difference  between  the                                                                    
earnings  reserve  and  the  Permanent  Fund  Principal.  He                                                                    
wondered  if money  is taken  from the  earnings reserve  to                                                                    
keep  the  principal  intact  when  there  is  more  in  the                                                                    
earnings  reserve  than  in   the  principal.  Mr.  Erickson                                                                    
responded  that  before  2003  the money  came  out  of  the                                                                    
reserves. He  discussed the difference between  realized and                                                                    
unrealized reserves.                                                                                                            
                                                                                                                                
Representative  Gara asked  if  the  monies were  separately                                                                    
invested.  Mr.  Erickson   answered  that  investments  were                                                                    
pooled. Presently  the practice of  the fund is  to allocate                                                                    
unrealized gains and losses to the principal.                                                                                   
                                                                                                                                
2:13:49 PM                                                                                                                    
                                                                                                                                
Mr.  Erickson explained  that  the Murkowski  administration                                                                    
inquired of  Attorney General  Renkes an  opinion concerning                                                                    
the idea of a POMV payout from the fund.                                                                                        
                                                                                                                                
Mr.  Erickson cited  "Renkes Opinion  and  POMV (Percent  of                                                                    
Market Value)" Slide 9:                                                                                                         
                                                                                                                                
   Only  through  a  constitutional   amendment,  like  that                                                                    
   currently   proposed   by   the    corporation   trustees                                                                    
   establishing a  payout limit  of 5  percent of  the total                                                                    
   fund value, can the  rate of dedication be  increased and                                                                    
   the deposit  of  income  available  for  distribution  be                                                                    
   limited. Absent  such an  amendment, the  full amount  of                                                                    
   income, made  up of  the  realized gains  and losses,  is                                                                    
   available for expenditure.                                                                                                   
                                                                                                                                
          (Renkes 2003 opinion AG file 663-03-0153.)                                                                            
                                                                                                                                
2:14:54 PM                                                                                                                    
                                                                                                                                
Mr. Erickson interpreted from the  Renkes Legal Opinion that                                                                    
the notion  of the principal  does not limit the  ability to                                                                    
spend as long as realized earnings are in hand.                                                                                 
                                                                                                                                
Mr. Erickson continued with "Renkes'  Legal Opinion, Part 2"                                                                    
(slide 10):                                                                                                                     
                                                                                                                                
     There is no basis for expanding the concept of                                                                             
     principal by creating a notational number that serves                                                                      
     as a limitation on the deposit of income for                                                                               
     distribution purposes.                                                                                                     
                                                                                                                                
          (Renkes 2003 opinion AG file 663-03-0153.)                                                                            
                                                                                                                                
     Rep.  Eric   Croft  of  Anchorage  says   he  is  still                                                                    
   pondering   a  lawsuit  to   challenge  Attorney  General                                                                    
   Gregg Renkes'    opinion that  unrealized gains shouldn't                                                                    
   be considered    'available for appropriation'.                                                                              
                                                                                                                                
          ("What do Democrats really want," Alaska Budget                                                                       
          Report, December 23, 2003.)                                                                                           
                                                                                                                                
Mr.  Erickson declared  that the  concept of  POMV was  less                                                                    
antiquated  than the  idea of  principal. He  furthered that                                                                    
the Renkes  Opinion would  not have been  a problem  had the                                                                    
POMV  been  approved.  He  explained  that  POMV  cannot  be                                                                    
reached without  revisiting how the  PFD is  calculated. The                                                                    
POMV annual payout compromise set  forth by Hollis French in                                                                    
2003  was  resisted  by the  Murkowski  administration.  Mr.                                                                    
Erickson felt that  was the reason the  POMV plan eventually                                                                    
failed in the Senate.                                                                                                           
                                                                                                                                
2:18:19 PM                                                                                                                    
                                                                                                                                
Mr.  Erickson  discussed  "Investment losses  of  2008-2009"                                                                    
(Slide 11).  He revealed  that on  Friday, October  10, 2008                                                                    
the PFD dropped below principal for a second time.                                                                              
                                                                                                                                
Mr. Erickson "APFC's October 23 letter to OMB" (slide 12):                                                                      
                                                                                                                                
     Erosion  of  the  supposedly  permanent  principal  has                                                                    
     stimulated  Alaska  Permanent Fund  Corporation  (APFC)                                                                    
     officials   to    seek   guidance   from    the   Palin                                                                    
     administration on the  appropriateness of continuing to                                                                    
     draw money from the fund  to pay their own salaries and                                                                    
     other  corporation  expenses.  …'In  times  of  extreme                                                                    
     market  volatility  with  downward trends,  as  in  the                                                                    
     current case,  questions arise regarding  the Permanent                                                                    
     Fund's ability to make cash  payments for items such as                                                                    
     its  operating budget,'  wrote APFC  executive director                                                                    
     Mike Burns…in an October 23  memorandum to OMB Director                                                                    
    Karen Rehfeld.                                                                                                              
                                                                                                                                
          ("Fund recovers after market slide eats $400                                                                          
          million hole in principal," Alaska Budget Report,                                                                     
          September 17, 2002.)                                                                                                  
                                                                                                                                
  Mr. Erickson pointed  out that the Permanent  Fund is $1.1                                                                    
billion below  the principal. He  stressed that if  the fund                                                                    
remains  below principal  there will  not be  enough in  the                                                                    
reserves to pay the dividend  without further erosion of the                                                                    
principal.                                                                                                                      
                                                                                                                                
2:23:04 PM                                                                                                                    
                                                                                                                                
Mr. Erickson highlighted "OMB's reply to Mr. Burns" (Slide                                                                      
13):                                                                                                                            
                                                                                                                                
     A  consultation with  the Department  of Law  regarding                                                                    
   the    corporation's   current    circumstances   affirms                                                                    
   APFC's  interpretation that  the  APFC  operating  budget                                                                    
   should be   paid from the positive  cash flow in order to                                                                    
   meet the    FY09 appropriated budget.                                                                                        
                                                                                                                                
          (OMB Director Karen Rehfeld, Memorandum to APFC                                                                       
          Executive Director Mike Burns, November 5, 2008.)                                                                     
                                                                                                                                
 2:24:47 PM                                                                                                                   
                                                                                                                                
Mr. Erickson  "Current Status" (Slide 14):                                                                                      
                                                                                                                                
   · Principal  exceeds market  value: fund  is 1.6  billion                                                                    
     underwater.                                                                                                                
   · $1.1 billion needed on June 30 to pay PFD                                                                                  
   · $3.9  billion in  realize  earnings "reserve"  account,                                                                    
     but…fund investments must grow by about $2.7 billion                                                                       
     (1.6 billion + $1.1 billion) to avoid threat of court                                                                      
     intervention.                                                                                                              
                                                                                                                                
 Mr. Erickson concluded his presentation with "Options"                                                                         
(Slide 15):                                                                                                                     
                                                                                                                                
   1. Take no action                                                                                                            
                                                                                                                                
   ƒHope markets rise as in 2002.                                                                                              
   ƒHope nobody sues.                                                                                                          
   ƒIf dividends are blocked, deal with economic                                                                               
     consequences separately.                                                                                                   
   ƒTry to find consensus on  a POMV amendment that can win                                                                    
     voter approval in 2010.                                                                                                    
                                                                                                                                
   2. Adopt backstop plan.                                                                                                      
                                                                                                                                
   ƒPay PFD  (all or part)  out of CBR, Alaska  Housing and                                                                    
     Finance Corporation (AHFC) equity, or other sources.                                                                       
   ƒHope markets rise before June 30, 2010.                                                                                    
   ƒTry to find consensus on  a POMV amendment that can win                                                                    
     voter approval in 2010.                                                                                                    
                                                                                                                                
2:27:33 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker asked  about  protection  of the  principle                                                                    
under the Alaska  Constitution. He asked how  a dividend can                                                                    
legally be  paid if principal of  the fund can be  used only                                                                    
for  investments  as stated  in  the  constitution, and  the                                                                    
current value  of the principal  is less than the  amount of                                                                    
money  deposited into  it. Mr.  Erickson  answered that  the                                                                    
question should be answered by the Department of Law (LAW).                                                                     
                                                                                                                                
Representative Crawford understood that  this year there was                                                                    
a possibility  that there would  not be money  available for                                                                    
the PFD. He wanted to know  what happens to the money in the                                                                    
fund if dividends  are not paid out.  Mr. Erickson responded                                                                    
that if  the court  blocked the transfer  of money  from the                                                                    
permanent fund  to the dividend  fund, or put  conditions on                                                                    
transfer that had  the same effect, the money  would stay in                                                                    
the permanent fund.                                                                                                             
                                                                                                                                
Representative Gara  did not understand  how the  fund could                                                                    
have principle  that is  worth more  than the  market value.                                                                    
Mr. Erickson  answered that the  definition of  principal as                                                                    
Representative Gara understood it  in this situation differs                                                                    
from  that of  Attorney General  Renkes as  laid out  in his                                                                    
2003 legal opinion.                                                                                                             
                                                                                                                                
Representative Gara asked  if there was a  definition of the                                                                    
word principal  in the constitution. Mr.  Gregg asserted the                                                                    
word was used but not  defined. Representative Gara asked if                                                                    
there  was  another  definition   of  the  word  other  than                                                                    
Attorney  General  Renkes'  opinion. Mr.  Erickson  answered                                                                    
that  it was  interpreted in  the 1999  Morrison &  Foerster                                                                    
opinion and that  opinion held the opposite  view of Renkes'                                                                    
opinion.                                                                                                                        
                                                                                                                                
MICHAEL BARNHILL, ASSISTANT  ATTORNEY GENERAL, DEPARTMENT OF                                                                    
LAW, pointed out that there  is valid appropriation in place                                                                    
to pay out the 2009  dividend. He stressed the 2009 dividend                                                                    
must  be  paid  out  by  law.  Co-Chair  Hawker  added  that                                                                    
although the value  of the fund is less than  the money that                                                                    
has been deposited into it, money  can still be taken out in                                                                    
order to pay dividends.                                                                                                         
                                                                                                                                
Mr. Barnhill responded that  Mr. Erickson's presentation was                                                                    
premised  upon a  definition of  principal without  basis in                                                                    
the  state   constitution  or  statutes.  If   there  is  no                                                                    
definition  of   principal  in   the  constitution,   it  is                                                                    
necessary to  turn to the statutes.  The applicable statutes                                                                    
are  AS.37.13.140  and  AS.37.13.145, which  stipulate  that                                                                    
income is to be deposited  into the earnings reserve when it                                                                    
is received.  He referred  to Article 9,  Section 15  of the                                                                    
Alaska  constitution, which  requires that  income from  the                                                                    
permanent  fund be  deposited into  the general  fund unless                                                                    
otherwise provided  by law.  In order for  the income  to be                                                                    
income  it has  to  be realized  and  cannot be  unrealized.                                                                    
Language in  the statutes also  says that net income  of the                                                                    
fund   shall   be   calculated  under   general   accounting                                                                    
principles excluding unrealized  gains and losses. Principle                                                                    
must  be everything  that income  is  not and  can rise  and                                                                    
fall.                                                                                                                           
                                                                                                                                
Co-Chair  Hawker stated  that  the original  concept of  the                                                                    
permanent  fund  was  make investments  that  would  produce                                                                    
income. A  netting requirement was necessary  if losses were                                                                    
being produced and only income could be moved.                                                                                  
                                                                                                                                
2:38:08 PM                                                                                                                    
                                                                                                                                
Mr.  Barnhill divulged  that when  the fund  was established                                                                    
there were three viewpoints on how it should be used:                                                                           
                                                                                                                                
     1. social welfare programs                                                                                                 
     2. economic development                                                                                                    
     3. savings                                                                                                                 
                                                                                                                                
Mr.  Barnhill added  that  income  producing investments  by                                                                    
definition  leave out  social welfare  programs. He  pointed                                                                    
out  that  investments  are  never  guaranteed.  The  income                                                                    
producing investments in the fund have lost value.                                                                              
                                                                                                                                
Representative   Crawford   asked   if  the   principle   is                                                                    
permanent.                                                                                                                      
Mr. Barnhill  replied that money  could not  be appropriated                                                                    
from  the  principal  but could  be  appropriated  from  the                                                                    
earnings reserve.  The value  of the  principal could  go to                                                                    
zero but  that that would  be a  result of the  market going                                                                    
down.                                                                                                                           
                                                                                                                                
Co-Chair Hawker  opined that if  the market value  was going                                                                    
down dividends  should not be  paid in order to  protect the                                                                    
principal. Representative Crawford added  that it would seem                                                                    
that this made the permanent fund not so permanent.                                                                             
                                                                                                                                
Mr.   Barnhill  reiterated   that  the   state  constitution                                                                    
protects the principal from appropriation.                                                                                      
                                                                                                                                
2:42:43 PM                                                                                                                    
                                                                                                                                
Co-Chair  Hawker asked  could  the question  be remedied  if                                                                    
income  going  into  the permanent  fund  earnings  reserve,                                                                    
which is managed by the  principal, had been left going into                                                                    
the  general  fund,  which can  be  appropriated  from.  Mr.                                                                    
Erickson qualified  that would  solve some legal  issues but                                                                    
would not be  consistent with his understanding  if the 1976                                                                    
constitutional amendment.                                                                                                       
                                                                                                                                
Mr.Barnhill  thought that  had all  of the  income from  the                                                                    
permanent  fund been  deposited  into the  general fund  the                                                                    
value of the fund would currently  be $12 or $13 billion. He                                                                    
surmised the notional value that  Mr. Erickson spoke of is a                                                                    
product  of  inflation-proofing.   That  means  taking  some                                                                    
permanent fund  income that is  in the earnings  reserve and                                                                    
dedicating  it  back  to   the  principal.  Co-Chair  Hawker                                                                    
communicated that  the notional value had  been a judgmental                                                                    
decision made  by the legislative  body to make  deposits to                                                                    
the permanent fund principal as  well as the 25 percent that                                                                    
is constitutionally mandated.                                                                                                   
                                                                                                                                
SENATOR   CON  BUNDE   asked  if   the  legislature   should                                                                    
appropriate from  the earning reserve  back into  the corpus                                                                    
of the fund to make it  whole. Mr. Erickson  replied that it                                                                    
would be an option.                                                                                                             
                                                                                                                                
MIKE BURNS, EXECUTIVE  DIRECTOR, PERMANENT FUND CORPORATION,                                                                    
DEPARTMENT  OF   REVENUE,  addressed  an   earlier  question                                                                    
regarding   whether  the   fund   could  disappear   through                                                                    
continually accessing  the earnings reserve. He  warned that                                                                    
there was less than $4  billion in the earnings reserve, and                                                                    
if   the   country's   financial  situation   continued   to                                                                    
deteriorate,  the  earnings  reserve would  dissolve  itself                                                                    
long before the fund.                                                                                                           
                                                                                                                                
2:47:18 PM                                                                                                                    
                                                                                                                                
Mr.  Burns stated  that APFC  accounting has  operated under                                                                    
the Renkes Opinion  for six years and in  the interim period                                                                    
their auditors  have approved  of APFC  financial statements                                                                    
using  the   opinion.  He  added  that   the  auditors  give                                                                    
deference, not  reverence, in the legal  opinion handed down                                                                    
by  Renkes.  Co-Chair  Hawker communicated  that  it  is  an                                                                    
example   statutory  accounting   versus  General   Accepted                                                                    
Accounting  Principles (GAAP).  He  parlayed that  statutory                                                                    
accounting principles,  however different from  GAAP, comply                                                                    
with the legal authority.                                                                                                       
                                                                                                                                
2:49:12 PM                                                                                                                    
                                                                                                                                
Mr. Burns  deferred to Co-Chair Hawker's  interpretation but                                                                    
wanted to add that if issue  had been taken with the opinion                                                                    
it  would  have  been  noted in  a  footnote  or  management                                                                    
letter.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  MIKE  DOOGAN  commented  on  Mr.  Barnhill's                                                                    
statement  about  the   use  of  the  PFD   as  an  economic                                                                    
development and  savings vehicle and  not to pay  for social                                                                    
programs.  Mr. Barnhill  retorted that  was correct  and had                                                                    
been in  the 2003 opinion. Representative  Doogan disagreed.                                                                    
He informed the committee that he  was the aide to the House                                                                    
permanent  fund  committee  that wrote  the  permanent  fund                                                                    
bill. After three years of  debate the question of using the                                                                    
permanent fund  as an economic  vehicle was answered  in the                                                                    
negative.  He felt  that it  would behoove  Mr. Barnhill  to                                                                    
review the history of the fund.                                                                                                 
                                                                                                                                
Co-Chair  Hawker concurred  with  Representative Doogan.  He                                                                    
reminded the  committee that the  PFD was designed to  be an                                                                    
ongoing source of revenue.                                                                                                      
                                                                                                                                
2:53:32 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:54:04 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Hawker  stated that the question  of the definition                                                                    
of  principal and  how  it  determines the  pay  out of  the                                                                    
dividend needed to be resolved  sooner rather than later. He                                                                    
pointed out that although LAW  has currently determined that                                                                    
there is no danger to the  legal authority to have a PFD for                                                                    
2009,  there are  still  serious  intellectual questions  to                                                                    
interpret.                                                                                                                      
                                                                                                                                
2:56:02 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 2:56 PM.                                                                                           
                                                                                                                                

Document Name Date/Time Subjects
1999 TransferOfSecurities MorrisonFoerster.pdf HFIN 1/23/2009 1:30:00 PM
2003_0618_ClarifyingAcctgProcedures_Renkes.pdf HFIN 1/23/2009 1:30:00 PM
Erickson column 11-2008.pdf HFIN 1/23/2009 1:30:00 PM
Rehfeld to Burns 11-5-2008.pdf HFIN 1/23/2009 1:30:00 PM
Alaska Constitution and Statute.doc HFIN 1/23/2009 1:30:00 PM
APFC200811.pdf HFIN 1/23/2009 1:30:00 PM
Rehfeld to Burns 11-5-2008.pdf HFIN 1/23/2009 1:30:00 PM
How the PFD came to be at risk.pdf HFIN 1/23/2009 1:30:00 PM